Despite all the commentary, there is little understanding of the operation of the increased threshold and what benefits may actually be gained.
Limitations to the application of increased FIRB thresholds
Anyone interested in the issue should be aware that the beneficial threshold will only apply if:
The investment is made by an entity that is incorporated or formed in Japan, South Korea, New Zealand or the USA, or a national of those countries
This narrows the scope for the operation of the benefit. For example, if a US investor acquires an Australian target through a subsidiary registered in another jurisdiction (including Australia), the relevant threshold will be $A248 million, not $A1,078 million. There is no tracing to the ultimate ownership. The acquirer must be from a prescribed country to benefit from the higher threshold.
For many investors this means the higher threshold is of little advantage. For commercial reasons, investments are often structured in a way that would not involve a direct acquisition by an acquirer incorporated in a prescribed country.
The investment is made in a non-sensitive sector
The prescribed sensitive sectors are:
- transport, including airports, port facilities, rail infrastructure, international and domestic aviation and shipping services provided either within, or to and from, Australia;
- the supply of training or human resources or the development, manufacture or supply of military goods, equipment or technology to the Australian Defence Force or other defence forces;
- the manufacture or supply of goods, equipment or technology able to be used for a military purpose;
- the development, manufacture or supply of, or provision of services relating to, encryption and security technologies and communications systems; and
- the extraction of (or holding of rights to extract) uranium or plutonium or the operation of nuclear facilities.
Acquisitions of interests in Australian urban land (other than developed commercial property) are also sensitive and the usual land thresholds apply. For developed commercial property, however, the threshold for prescribed investors is $A1,078 million.
The sensitive sectors are reasonably broad and further reduce the benefit of the higher threshold.
Current round of FTAs and Australia’s foreign investment regime
The government has announced bilateral trade agreements with Japan and South Korea. The Korea-Australia Free Trade Agreement (“KAFTA”) was signed by both countries on 8 April 2014, and its full text has been released. Negotiations for the Japan-Australia Economic Partnership Agreement (“JAEPA”) concluded on 7 April 2014, with its full text to be released after signature (expected in July 2014).
The trade agreements will significantly reduce tariff barriers and provide more opportunity for both inbound and outbound foreign investment for Australia.
Key features of the agreements (in addition to changes to the foreign investment thresholds) include:
- elimination or significant reductions in tariffs on Australian agricultural and energy exports, particularly beef, dairy, sugar and natural gas;
- increased market access for Australian services exporters into Japan and South Korea, including law and financial services firms and telecommunications providers; and
- fewer barriers to cross-border investment, including access to the Japanese government procurement market.
Because the trade agreements are international treaties, they will only be implemented in Australia when the Federal Government tables and passes enabling legislation. The relevant legislation is generally tabled after signature, for at least 15 sitting days before binding treaty action is taken. Given this time period, it may take some months before the treaties enter into force after signature.
Increased thresholds for FIRB review
The FTAs will increase the thresholds for review by FIRB for acquisitions from Japan and South Korea to match those for the USA and New Zealand. Notice to the Treasurer (through the FIRB) for prior approval of investments in non-sensitive sectors by Japanese and South Korean private investors will not be required for proposals that do not meet the $A1,078 million threshold. This is a significant increase on the standard threshold, which for 2014 is set at $A248 million. Japan and South Korea will be added to the list of “prescribed investors” for the purposes of the foreign investment regime. Other countries, such as China, have also actively pursued the same increased threshold of $A1,078 million that the United States and New Zealand investors currently enjoy.
The increased FIRB thresholds are subject to further restrictions relating to:
- foreign government investors; and
- investment in agricultural land.
Foreign government investors
Under the KAFTA, any direct investment by foreign government investors requires notification to the Treasurer (through FIRB) for prior approval.
A direct investment is any investment, regardless of value:
- of an interest of 10% or more;
- where the government investor is building a strategic stake in the target; or
- where the government investor can use that investment to influence or control the target.
This restriction is a continuation of Australia’s Foreign Investment Policy, and we expect that the JAEPA will contain a similar restriction.
It is this aspect that is of most concern to China in its negotiations for an FTA. Reports from the Trade Minister suggest that there may be some accommodation given to Chinese SOEs with a strong commercial record. Progress in this regard will be of interest as there has been very little relaxation of Australia’s approach to requiring notification of all foreign government investment since the inception of the Policy in the late 1970s.
Investment in the agricultural sector
For some time we have been foreshadowing the introduction of lower thresholds for foreign investment in rural land. The lower thresholds were a recommendation of the Senate Rural and Regional Affairs and Transport References Committee in late June 2013 and are part of the Government’s policy platform.
It therefore comes as no surprise that the FTAs with South Korea and Japan set out lower thresholds in the rural sector.
The KAFTA states that “Australia reserves the right to adopt or maintain any measure to allow the screening of proposals by foreign persons to invest $A15 million or more in Australian agricultural land and $A53 million or more in Australian agribusinesses.”
Both the Coalition policy platform and Senate Committee report state that the review thresholds for the agricultural sector would apply for cumulative purchases by an investor. However, the KAFTA does not expressly state that the thresholds apply cumulatively. Further, the Government’s policy includes a threshold of a 15% investment in agribusinesses of $A248 million or more where the $A53 million threshold doesn’t apply; this is not included in the KAFTA. It will be interesting to see how the government will apply this policy in relation to the JAEPA and any negotiations with China on this aspect.
What is clear is that the introduction of the lower thresholds for all foreign investment in the rural sector must now only be a short period away. There will be a significant increase in FIRB applications as a result of the lower thresholds. We hope that FIRB will be adequately resourced to cope with the additional work and maintain the current 30 day timing for issue of decisions.