New laws to replace the Foreign Acquisitions and Takeovers Act have been passed by the Australian Parliament and take effect on Dec. 1.
The reforms represent the most significant overhaul of Australia’s foreign investment regime since that legislation was introduced 40 years ago.
The government has sought to modernize the foreign investment regime, creating an investment environment that seeks to facilitate opportunities for foreign investment in Australia.
The amendments also codify within the legislation much of the Treasury’s and Foreign Investment Review Board’s current foreign investment policy, providing greater business certainty for investors.
The changes also reflect the Australian government’s approach in more rigorously reviewing and enforcing foreign investment laws to protect Australia’s national interest.
For the first time, application fees have been introduced for FIRB applications (generally ranging from A$10,000 [US$7,280] to A$100,000).
The review of FIRB applications will not commence until the appropriate fee has been paid.
The new act introduces stronger powers for the Treasurer to make disposal and other orders for breaches, as well as more onerous criminal and civil penalties that can also extend to officers of corporations who authorize or permit contraventions, and to other third parties who knowingly assist a foreign investor to breach the law.
This may apply to professional advisers assisting with foreign investment transactions.
The new act comes at the beginning of an important new era for trade and investment between China and Australia, with the China-Australia Free Trade Agreement having received Australian government ratification on Nov. 9.
The FTA now only awaits Chinese State Council approval before coming into effect.
The amendments to the act have significant implications for foreign individuals, companies and government investors, including from China and Hong Kong, when assessing investment opportunities in Australia.
We have summarized below the more significant changes and implications, firstly in relation to private (non-government) investors and then in relation to foreign government investors, such as Chinese state-owned enterprises (SOEs), which are subject to different requirements.
Investments by foreign persons (non-government)
The definition of “foreign person” has been amended so that a corporation or trust will be a foreign person if a foreign investor and its associates hold at least a 20 percent interest (previously 15 percent) in the entity.
The aggregate foreign ownership level for two or more investors and their associates remains at 40 percent.
The act introduces the concepts of “notifiable actions” (acquisitions of interests that must be notified and approved by the FIRB before they can be completed) and “significant actions” (where notification is not compulsory, but the Treasurer has the power to block or unwind the transaction if he or she is not notified and it is contrary to the national interest).
These are subject to different thresholds, depending on the type of investor and asset involved.
Applications for approval will generally be determined within 30 days.
Applications will be assessed against national interest criteria, such as national security, competition, consistency with Australian government policy (in particular, tax policy), impact on the economy and the community, and character of the investor.
Australian businesses or entities
For acquisitions of an interest in an Australian business or entity, the “substantial interest” threshold for acquisitions requiring notification has increased from 15 percent to 20 percent, in line with the threshold under the Australian takeovers regime.
Approval will be required for such acquisitions if the value of the entity or business is more than A$252 million.
Several specific new exemptions have also been introduced for certain types of corporate acquisitions, such as where a substantial interest is acquired by means of rights issues or dividend reinvestments, acquisitions through underwriting, and indirect acquisitions via offshore transactions.
This may result in the need for fewer applications for FIRB approval.
Agribusiness and agriculture land
Foreign investments in agribusiness were previously regulated in the same way as other business investments.
Now investments in Australian agribusiness are subject to lower thresholds requiring approval for an acquisition of a direct interest (generally 10 percent) where the amount of the investment is more than A$55 million.
A business or entity will be considered an agribusiness where at least 25 percent of its assets are used in, or at least 25 percent of its earnings are derived from, agribusiness activities.
The new act also encapsulates the FIRB’s existing policy requiring any foreign investor to seek FIRB approval before acquiring agricultural land, where the aggregate value of all agricultural land held by the foreign investor and/or its associates is more than A$15 million.
The new act amends the regime for investments in real estate in several key areas:
• The new act introduces a definition of “Australian land” that includes agricultural land, commercial land, residential land or a mining or production tenement, replacing the previous definitions of “Australian urban land” and “Australian rural land”.
• Previously, acquisitions of developed commercial land required approval if they were valued above A$55 million.
The new act provides that FIRB approval is only required for acquisitions valued above A$55 million if the land is developed commercial land involving sensitive uses (such as leasing to the Commonwealth or being under prescribed airspace).
The new threshold has increased to A$252 million for the acquisition of all other developed commercial land and most other types of land.
• These thresholds also apply to the acquisition of an interest in an urban land company or trust (other than an agricultural land corporation or agricultural land trust) provided that the total value of interests in residential land and vacant commercial land that are held by that company or trust is less than 10 percent of the total value of its assets.
• All acquisitions of residential real estate and vacant commercial land require approval, regardless of value.
• Foreign investors may apply to the FIRB in advance for an exemption certificate for certain types of acquisitions, allowing them to make a series of acquisitions over a period of time without the need to seek approval from the FIRB on each occasion.
• Significant new civil penalties have been introduced for breaches, which can be as much as 25 percent of the value of property acquired in breach of the act, and the Treasurer has broad powers to make disposal and other orders for breaches.
Investors from free trade agreement countries
Under the act, non-government investors from countries that have entered into free trade agreements with Australia are defined as “agreement country investors” and have the benefit of higher thresholds before needing to seek approval for investments.
For example, investors from the United States, New Zealand or Chile generally need only apply for investments valued at more than A$1.094 billion, while investors from other countries must seek approval for investments valued at over A$252 million.
Agreement country investors are still subject to the A$252 million threshold for investments in sensitive sectors like media, telecommunications, transport and defense.
Once the China-Australia Free Trade Agreement is approved by the State Council, Chinese non-government investors will generally only need to apply for FIRB approval for investments in Australian businesses (other than sensitive sectors) valued at more than A$1.094 billion.
Lower thresholds will continue to apply for residential or vacant commercial land (A$0), agricultural land (A$15 million) and agribusinesses (A$55 million).
However, investors from Hong Kong and Macau will not have the benefit of these more favorable thresholds.
Chinese SOEs and other foreign government investors also will not be able to take advantage of these favorable thresholds and will continue to be regulated as foreign government investors.
Foreign government investors
Foreign government investors are subject to separate requirements under the act.
Generally any investment by a foreign government investor, regardless of dollar value, requires prior FIRB approval.
This policy regarding foreign government investors has been codified and clarified in the new act, and in particular:
• Foreign government investors have been included within the definition of foreign persons for the purposes of the act.
• The test for determining whether an entity is a foreign government investor has changed from an entity in which a foreign government and its associates has an interest of 15 percent or more to one in which they have an interest of 20 percent or more.
• A foreign government investor making a direct investment in an Australian business or entity, acquiring an interest in land, an interest in any exploration or mining/production tenements, or establishing a new business, must seek FIRB approval.
A “direct investment” is an interest of at least 10 percent, or at least 5 percent if coupled with some control arrangement.
• Generally, all entities from the same country will be deemed associates of each other, and their ownership in Australian businesses or entities will be aggregated for the purposes of the act.
These provisions will apply to Chinese SOEs but could extend to Hong Kong-listed companies in which an SOE or other Chinese foreign government entity holds at least a 20 percent interest.
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