With a large increase in fees proposed in the FIRB reform package, investors will be thinking twice about investing in Australia and when to make their approach to FIRB. Offshore financing for infrastructure will face FIRB delays with potential challenging outcomes.
The Australian Government has released Tranche 2 of its Foreign Investment Reform (Protecting Australia's National Security) package for consultation. This follows the announcement of the reforms in June (see our previous alert here) and completion of Tranche 1 consultation at the end of August 2020. The Tranche 2 changes provide further clarity on the national security reforms and some welcomed relief including for passive foreign government investors. However, investors will need to brace for higher application fees – investment in agricultural land is particularly targeted.
The Tranche 2 consultation is only open for 2 weeks and will close on 2 October 2020. If passed, both tranches of the new laws are expected to come into effect on 1 January 2021. Further consultation on the detailed guidance notes is expected to commence after the close of the relevant legislative consultation period. This will include the "investor-specific" exemption certificate which had been eagerly awaited under the Tranche 2 reform but is now understood it will be put as a Guidance Measure.
We outline the key Tranche 2 changes and their legal implications and the potential challenges and opportunities.
1. 10 years call-in forever after
Under the Tranche 1 changes, the Treasurer will have a new power to 'call-in' for review investments which are not required to be notified under the new mandatory pre-investment notification process for national security land and businesses. Now, a 10-year limit for this call-in power is proposed.
10 years is a lifetime in this day and age. We expect that most investors will choose to make voluntary filings to require the Treasurer to decide whether to exercise the call-in power before they make the investment.
However, an approval given pursuant to a call-in power voluntary filing next year does not protect against the Treasurer's everlasting last resort power. Under the Tranche 1 changes, the Treasurer's powers to make prohibition and disposal orders are enlivened if the circumstances of the investor or the market change materially. This continues the Australian Government's efforts to strengthen Australia's national security over the past few years. Last resort powers are also key planks in the Telecommunications Sector Security Reform and the Security of Critical Infrastructure Act (SOCI Act) which apply to all businesses, not just foreign investors. Hopefully the last resort power is really that – a last resort.
2. Challenges ahead for foreign banks
As expected, national security land and national security business are to be carved out of the moneylending exemption. Entry into and enforcement of these security agreements are no longer exempted. This is problematic, given that foreign banks provide important sources of funding to Australian businesses in the critical infrastructure sector. This issue will be exacerbated if the scope of the national security business as it is linked to the SOCI Act is expanded under the parallel critical infrastructure reforms currently undertaken by the Department of Home Affairs.
It is hoped that the impact of the removal of the exemption can be replaced by an effective process that will allow foreign commercial banks to engage in commercial lending with minimal interruption to Australian business. A FIRB process taking months to complete will prove difficult for the sector and potentially result in higher priced financing and in turn higher consumer pricing.
A clear pathway for foreign commercial banks to apply for an exemption certificate to take security over national security land or business would be helpful.
3. Limiting other exemptions
Similar national security changes are proposed to limit the exemptions relating to a land acquisition from Australian government entities and an offshore acquisition with de minimis Australian connection by a foreign government investor.
Unexpectedly, certain exemptions would no longer protect against the call-in power, including an acquisition by a foreign custodian corporation, an acquisition under a compulsory acquisition, an acquisition of an interest of less than 5% in an unlisted land entity or less than 10% in a listed land entity.
4. New exemption certificates yet to be realised
A foreign person may apply for pre-approval (an exemption certificate) for a program of investments without the need to seek separate approvals for notifiable national security actions and actions subject to the call-in power. These new exemption certificates do not appear to add much to the existing exemption certificate regime where the Australian Government has been reluctant to pre-approve sensitive acquisitions. However, the commencement of the proposed investor-specific exemption certificate under the new Guidance Measure will be welcomed. We look forward to the issue by FIRB of the criteria for this proposal.
5. Passive foreign government investor exemption not automatic
The new passive foreign government investor exemption is long overdue. An investment fund will no longer be a foreign government investor where they have more than 40% foreign government ownership in aggregate but less than 20% from any single foreign government, but only if two conditions are met.
First, no foreign government investor may access any non-financial "sensitive information". The Australian Government considers this to be non-public information about the investments that may affect the financial metrics (for example, knowledge of trial outcomes, resignations of key personnel, intellectual property, legal actions). This condition is likely to limit the usefulness of this exemption. Qualitative information that affect the financials are common information that all investors expect to receive to understand how well their funds are being managed.
Second, the investors must be truly passive and have no ability to influence any individual investment decisions or the management of any individual investments. Investors could still have a say over the broad investment strategy or serve on advisory committees, provided that they are not involved in individual investments decisions.
6. Technical improvements
The Tranche 2 changes also include a number of technical improvements.
The outdated definition of Australian media business is modernised to cover an internet-only publication or broadcast or production business.
Acquisitions of a revenue stream (royalties) in a mining or production tenement, and of an exploration tenement by a non-foreign government investor, are both exempted.
The monetary threshold in the exemption for a foreign government investor to make an offshore acquisition with de minimis Australian connection will be increased to A$60m, indexed annually.
7. Reinstatement of pre-coronavirus monetary thresholds
The eagle-eyed investors will no doubt notice that a final decision has not been made to reinstate the pre-coronavirus monetary thresholds on 1 January 2021. It is hoped that the Australian Government will commit to this timetable as messaged.
8. Fees, lots and lots of fees…
The proposed fee framework under the Tranche 2 changes will see a further increase in fees for the higher value deals.
The current fees for acquisitions of commercial land, entities and businesses are $2,100 for acquisitions below $10 million, $26,700 for acquisitions above $10 million but less than $1 billion and $107,100 for acquisition values more than $1 billion. These will be updated next year to:
- $2,000 for acquisitions below $75,000;
- $6,600 for acquisitions below $50 million;
- $13,200 per $50 million of consideration for acquisitions above $50 million; and
- capped fee of $500,000 for acquisitions above $1.9 billion.
For agricultural land deals, the existing fees are $2,100 for consideration below $2 million, $26,700 for acquisitions above $2 million and no more than $10 million and $107,100 for acquisitions over $10 million in value. The new fees next year will be:
- $2,000 for acquisitions below $75,000;
- $6,600 for acquisitions below $2 million;
- $13,200 per $2 million of consideration for acquisitions above $2 million; and
- capped fee of $500,000 for an acquisition above $76 million.
Unfortunately, the fees for agricultural land will now also be imposed on the whole consideration rather than the highest title value. This is a major shift and appears to be a very clear disincentive to invest in the agricultural sector.
Fees for acquisitions of residential properties will also go up except for those valued at above $38 million. These properties, currently subject to no cap in application fees, will be capped to a maximum of $500,000 under the proposed new fee structure next year.
Fees for voluntary filing or transactions called in will only need to pay 25% of the fee payable for an equivalent action (75% discount).
Exemption certificates currently only cost $36,900, regardless of the value of acquisitions covered. This will be changed into 75% of the fee that would have been payable if approval was sought for that single transaction (25% discount). This means that an exemption certificate covering more than $200m worth of acquisitions will cost more from next year.
The Australian Government will need to message the fee increases carefully, so as not to deter investments. The Productivity Commission recently reported that only slightly more than 10% of the fee revenue collected was used for the operational costs of FIRB and its secretariat in the Treasury and the ATO. Hopefully with the higher fees (assuming investors are still coming), FIRB and the relevant consult agencies could be better resourced to provide a better experience to investors wanting to invest in Australia.