Foreign Investment Regime after 1 January 2021 - Exposure Draft Released (Part 1)

In brief - An overview of the key changes in part one of the government's proposed reforms to Australia's foreign investment framework

On 31 July 2020, the Treasurer released the exposure draft bill to implement its proposed reforms to Australia's foreign investment framework. These reforms are scheduled to commence on 1 January 2021, and will replace the temporary measures in response to the COVID-19 pandemic introduced in March this year. 

See our March 2020 article, COVID - 19 pandemic response: Australia dramatically tightens foreign investment rules, regarding details of those temporary pandemic measures, and our June 2020 article, Further dramatic changes to Australian foreign investment rules, regarding the announcement on the reforms foreshadowed by the Treasurer on 5 June 2020. 

The new bill, Foreign Investment Reform (Protecting Australia's National Security) Bill 2020 (Cth), will implement the proposed reforms and amend the Foreign Acquisitions and Takeovers Act 1975 (Cth) and the Foreign Acquisitions and Takeovers Regulation 2015 (Cth). 

Details of the proposed reforms are being released in two parts. The first part was released on 31 July 2020, and the second part will be released separately in September. 

We comment below on a number of key changes released in the first part of the proposed reforms.

National security test

The rationale for introducing this new national security test is set out in the explanatory memorandum for the new bill. In sum, the pace of recent technology developments, including in the international security space, has increased risks to Australia's national security.

This new national security test will apply to "national security businesses" which will be subject to a zero dollar threshold. It will assess foreign investments that may give rise to national security concerns. This new national security test will co-exist with the existing national interest test. In circumstances where the broader national interest would apply to an action, only that test will be used as the Australian national interest is already a considered factor under the national interest test.

A list of the categories under which businesses will be "national security businesses" are set out below:

• Critical infrastructure - businesses that are a "responsible entity" for an asset or a "direct interest holder" of a critical infrastructure asset under the Security of Critical Infrastructure Act 2018 (Cth). These include owners and operators of electricity, gas, ports and water infrastructure. 

• Telecommunications - telecommunication carriers to which the Telecommunications Act 1997 (Cth) applies including internet service providers and virtual network operators. Other businesses regulated by this Act including social media and video streaming providers will currently not be classified as a national security business. 

• Critical military use technologies - businesses that develop, manufacture or supply critical goods or technology used by the Australian defence force and intelligence personnel in activities relating to Australia's national security. Interestingly, this will also include critical goods or technology that may be used by a foreign defence force to affect Australia's national security. A goods or technology may be caught even where it does not have an express military purpose or a military purpose is not the primary application of the technology. 

• Critical defence services - businesses that provide critical services to Australian defence and intelligence personnel. Services may also be caught if they may be provided to a foreign defence force in a way that may affect Australia's national security.

• Information for defence - businesses that store, maintain or have access to information that has a security classification or personal information of defence and intelligence personnel which if disclosed could compromise Australia's national security. This category is restricted to only include data collected by or on behalf of defence or intelligence agencies. 

Notifiable national security actions

The new bill introduces a new subset of actions called the "notifiable national security actions". This will require foreign persons acquiring a direct interest in a national security business or start a national security business to notify FIRB regardless of the value of the investment or whether those actions would be significant actions or notifiable actions under the existing framework. 

Notifiable national security actions will also include acquisitions of an interest in "national security land". Broadly speaking, this will include Australian land that defence or an intelligence agency has or will have an interest in or land that the Treasurer declares to be national security land. 

Call in powers

Under the new bill, the Treasurer will have the power to "call in" for review a "reviewable national security action" or a "significant action" if the Treasurer considers the investment raises national security concerns. 

A "reviewable national security action" includes an action to acquire a direct interest in an entity or Australian business, acquire an interest in Australian land, start an Australian business or enter into a significant agreement with an Australian business. The term is so broadly defined that it will catch almost any significant business transactions in Australia. To avoid overlap, the concept excludes a significant action, a notifiable action or a notifiable national security action.

The Treasurer may only start a review of an action that has been taken within the prescribed time frame. This will be specified in the second part of the exposure draft bill to be released in September. 

To ensure investor certainty, there will also be the option for a foreign person to voluntarily notify in order to avoid a "call in". An investor will also be able to apply for an investor-specific exemption certificate which enables them to make eligible acquisitions without case-by-case screening. Exemption certificates may range in length and value, and will be subject to conditions.

If the Treasurer determines that an action is contrary to national security, the Treasurer can make prohibition or divestment orders or approve the action with conditions. 

Last resort power

The new bill gives the Treasurer the power to require the disposal of assets that were acquired pursuant to a previous no objection notification or an exemption certificate.

This new power is to be used only where new national security concerns have arisen. Examples of such circumstances include where there is a material change in the business, structure, organisation or activities of the relevant foreign person, or where the market in which the action was undertaken has materially changed since the previous no objection notification or exemption certificate was granted. 

This is a new power generating significant debate amongst professionals, investors, stakeholders and interested parties. While there are some thresholds to overcome before the Treasurer is able to exercise this power, there is arguably sufficient flexibility built in the drafting to allow the Treasurer to exercise the discretion.

Other amendments to improve integrity of Australia's foreign investment review framework

The bill has made other amendments to the framework to improve its integrity.

• Share buyback - Increases in actual or proportional shareholdings through share buybacks and selective capital reductions will be notifiable actions and/or significant actions.

• Presumption of advancement - Under the presumption of advance, if a foreign person gives money to his or her spouse or child to purchase Australian land, the foreign person is presumed to be providing the money as a gift. The equity interest in the land stays with the spouse and child and, if they are not foreign persons, no FIRB notification is required. The amendments remove this assumption and require a foreign person to make a FIRB notification unless he or she can verify that the consideration was provided as a genuine gift. 

• Statutory decision period - Under the current regime, the Treasurer is required to give a decision within 30 days after receipt of a FIRB application. This is now extended to 90 days under the bill. In addition to the Treasurer's power under the interim orders provisions, this effectively means a total decision period of 180 days. 

• Information sharing - the reforms authorise disclosure of protected information to a foreign government in circumstances where national security risks may exist and where there is an agreement in place between the Federal government and a foreign counterpart.

• Register of foreign owned Australian assets - currently the Australian Taxation Office administers the Register of Foreign Owned Water or Agricultural Land. The Australian Taxation Office also maintains a register of residential land where there are reporting conditions imposed on foreign persons who acquire residential land. The Australian Communications and Media Authority maintains a Register of Foreign Owners of Media Assets and the Department of Home Affairs maintains a Register of Critical Infrastructure. To ensure that there is a central register, the bill imposes an obligation on foreign investors to notify the Treasurer within 30 days of a number of notifiable events, including: 

  • acquiring or ceasing to hold an interest in land or water

  • acquiring or ceasing to hold an interest in Australia business, agribusiness or entity

  • becoming or ceasing to be a foreign person while holding an interest in Australian entity, or

  • an event that relates to a no objection notification or exemption certificate. 

The second part of the draft amendments to the foreign investment regime framework will be released in September 2020 and will include the remainder of the regulatory changes, including the time limit for the call in power and investor exemption certificates. 

Stay tuned for our update on the second part of the proposed reforms.