In brief - an overview of the key changes in part two of the government's proposed reforms to Australia's foreign investment framework
On 18 September 2020, the Treasury released the second tranche of exposure drafts for the Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 and the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020 as part of its foreign investment reform package. This follows the exposure draft of the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 released on 31 July 2020.
Individual investments will continue to be reviewed on a case by case basis to ensure Australia's national interest and national security are protected, and to maintain public confidence in Australia's foreign investment regime.
As discussed in Part 1 of our article, a new national security test is being proposed which amongst other things will:
require mandatory notification of ‘notifiable national security actions’ regardless of the value of the investment; and
allow certain actions named ‘reviewable national security actions’ to be ‘called in’ for screening on national security grounds.
Time limit on call in power
The draft Regulations provide a time limit of 10 years for the Treasurer's use of its call in power. This means that if the Treasurer has not commenced a review of an action before this 10 year period lapses, the Treasurer will not be able to subsequently call in the action for review, even if a national security risk emerges.
The explanatory memorandum for the draft Regulations explains that the time limit will provide foreign persons with greater certainty as to the Treasurer’s powers and to assist with a foreign person’s decision as to whether to voluntarily notify.
To reduce the regulatory burden for foreign persons, the draft Regulations introduce two new types of exemption certificates. These exemption certificates will allow a foreign person to apply for an upfront approval for a program of investments without the need to seek separate approvals.
The two new types of exemption certificates will be for:
A foreign person will be able to seek an exemption certificate to undertake a program of actions or kinds of actions that would otherwise be a ‘notifiable national security action’ or ‘reviewable national security action’.
The certificate will specify the foreign person that the certificate is issued to and the actions or kinds of actions covered by the certificate.
Applications can be made for these new types of exemption certificates on and from 1 January 2021.
Streamlining less sensitive investments
Treasury has identified that the broadness of the definition of 'foreign government investor' has meant that private institutional investors who manage funds with foreign government investors are currently subject to mandatory notification for most investments.
The draft Regulations have narrowed the definition of 'foreign government investor' to allow certain private institutional investors that manage funds with foreign government investors to access higher monetary thresholds. In order to access these thresholds, the foreign government investors in the fund must not be able to influence investment decisions or have access to sensitive information about the fund's investments.
The effect of these amendments is that funds with foreign government investors as passive investors will not automatically be deemed to be foreign government investors for the purposes of the foreign investment regime.
Reinstatement of pre-COVID-19 monetary thresholds
In our March 2020 article, we commented on the temporary reduction of the existing monetary thresholds to zero. These reductions were implemented in response to COVID-19. In essence, most foreign investment into Australia since these changes were implemented have required notification to FIRB.
The draft Regulations propose to reinstate the pre-COVID-19 monetary thresholds on and from 1 January 2021, indexed at the rates the thresholds would have been subjected to had the amendments in response to COVID-19 not been made.
A final decision on whether the monetary thresholds will be reinstated will depend on the impact that COVID-19 has on the economy and whether there is an ongoing risk that foreign investment in Australia could occur in ways that would be contrary to the national interest.
The draft Regulations have also proposed several amendments to simplify, and improve the clarity and integrity of the foreign investment regime.
The key amendments include:
narrowing the scope of the moneylending exemption where an interest in a national security business or national security land is obtained under a moneylending agreement
excluding an interest in a mining or production tenement where the interest acquired is a revenue stream in a mining or production tenement without any proprietary rights unless the land is national security land
expanding the definition of 'Australia media business' to capture the operation of an electronic service that delivers or allows access to content that is similar to a newspaper, radio, or television broadcast (i.e. Australian businesses that only publish or broadcast such content through the internet)
removing the exception applying to interests transferred by a will to a foreign person
capturing interests in national security land or the assets of a national security business which are acquired from the Commonwealth, a state or territory government or local government body
amending tracing provisions so that they can be applied to unincorporated limited partnerships.
A new fee regime has been outlined in the exposure draft for the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020. This new fee regime will apply to application fees payable on and from 1 January 2021.
In essence, a new concept is introduced which calculates the fee payable for a notification by taking into account the type of interest and the consideration for the acquisition of the interest. For each proposed type of interest, there is a baseline dollar amount called the 'fee constant'.
For example, the fee constant for:
acquiring an interest in residential land is $1 million
acquiring an interest in agricultural land is $2 million
acquiring an interest in commercial land, a mining or production tenement, or in certain businesses and entities is $50 million.
If the consideration for the acquisition is less than or equal to the fee constant, the application fee will be a flat $6,600.
If the consideration is more than the applicable fee constant, the fee payable will be determined by applying another formula which increases the fee payable based on how many multiples the consideration is compared to the applicable fee constant.
The explanatory memorandum has provided calculated examples of fees payable under the new fee regime.
For example, the fees payable for an acquisition of commercial land on and from 1 January 2021 will be:
$6,600 for consideration of $50 million or less
$13,200 for consideration of $100 million or less
$26,400 for consideration of $150 million or less
$92,400 for consideration of $400 million or less
$250,800 for consideration of $1 billion or less
capped at $500,000 for consideration of more than $1.9 billion.
By comparison, the fees payable under the current fee structure is:
$2,100 for consideration of $10 million or less
$26,700 for consideration of more than $10 million but less than $1 billion
$107,000 for consideration of more than $1 billion.
The fees payable under the new fee regime are likely to be significantly higher. Commentary on this new fee regime has been mixed with some commentators noting that higher fees may make bidders more hesitant especially if there is a chance that these bids may not be successful.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.