This article was written by Malcolm Brennan, Caitlin Rodgers, Katie Haywood and Lily Shen.
Late on 9 December 2020, the Treasurer announced that the current $0 monetary screening thresholds for FIRB applications will be lifted on 1 January 2021, resulting for the most part in the standard monetary thresholds being reinstated.
At the commencement of the New Year, foreign investors will be subject to the pre-COVID notification thresholds which they were previously familiar with (indexed for 2021). However, investors should not get too comfortable or become overly complacent as the foreign investment landscape will continue to change after 1 January 2021.
On the same day the Treasurer announced the removal of the $0 thresholds, Federal Parliament passed the most significant reforms to Australia’s foreign investment regime in over 45 years, with the Foreign Investment Reform (Protecting Australia's National Security) Bill 2020.
The changes reflect the Australian Government’s continued focus on national security, and echo similar legislative changes in New Zealand, US and UK. The amendments will come into effect on 1 January 2021, with the primary changes relating to a mandatory pre-investment notification process for acquisitions of national security land and businesses, increased penalties for non-compliance and greater powers for the Treasurer including a call-in power as well as power to give directions.
With national security at the forefront of political debate, Australia’s foreign investment regime is becoming increasingly difficult to navigate.
What does the lifting of the $0 threshold mean for investors?
The reinstatement of the pre-coronavirus monetary thresholds from 1 January 2021 will be welcomed by many foreign investors whose investments not usually subject to FIRB approval have been delayed during the temporary measures.
Certain non-foreign government investors who currently have applications before FIRB may look to withdraw non-urgent applications and postpone deals to take advantage of the return to thresholds. We expect that the reintroduction of the thresholds will see a number of proposals which are currently waiting on approval being withdrawn and hopefully freeing up FIRB and the Treasurer to attend to other ongoing applications. Alternatively, investors could continue with the application and obtain approval. However, given the current significant delays that are being experienced by foreign investors awaiting FIRB approval for their investments, this is unlikely to be an attractive option.
Importantly, investors seeking to invest in sensitive and national security sectors should brace themselves for the continuance of the $0 threshold and heightened scrutiny. Furthermore, foreign government investors will continue to be subject to the $0 threshold for all investments, as they did prior to the introduction of the temporary measures.
The implementation of the new national security test, which is accompanied by a $0 threshold, allows the Treasurer “to impose conditions or block investment by a foreign person on national security grounds regardless of the value of investment”.
Importantly, national security land and businesses will be carved out of the moneylending exemption. Further detail on the moneylending exemption will not be available until the regulations are released. We are expecting this to occur in the final weeks of December. It is hoped that the significant negative feedback in respect of the proposed changes to the moneylending exemption has gained traction and the regulation when released will reflect that feedback.
The national security amendments grant enhanced monitoring and investigation powers to the Treasurer, alongside stronger enforcement options and harsher penalties for non-compliance.
The Treasurer will also have the power to ‘call-in’ non-notifiable investments for review, if the Treasurer believes the action could pose a national security concern. Investors may make voluntary filings to require the Treasurer to decide whether to exercise the call-in power within a certain period of time.
Uncharted waters ahead
Whilst the definitions of national security land and businesses are yet to be finalised in the accompanying regulations, national security land will include Defence premises, land where the national intelligence community holds a determinable interest, and land declared by the Treasurer or Parliament to be national security land. National security businesses will include activities involved in or connected with critical infrastructure, telecommunications, Defence, the national intelligence community and their supply chains.
As it is currently understood, critical infrastructure comprises critical assets in water, electricity, gas and ports. However, proposed amendments to the Security of Critical Infrastructure Act 2018 (SOCI Act), which are expected to pass early- to mid-2021, could expand the definition to include assets in areas as broad as banking and finance, health, food, data, education and transport.
This will likely prove to be problematic for investors considering investing in sectors that are included in, or incidental to, the new scope of “critical infrastructure”, particularly in the early months of the reforms where precedent will be lacking.
We strongly encourage investors to take advantage of the voluntary process offered by FIRB to check if a proposal is caught by the national security reforms. With these amendments, foreign investors will need to take care if they are investing in sensitive national security land or businesses. Investors should err on the side of caution by choosing to make voluntary filings before they make investments. FIRB says time spent on the voluntary assessment will be credited against the processing of the application if notification is required. However, it is hard to see a national security matter being dealt with in the minimum 30 day decision period. So continue to expect extensions of decision periods as the norm.
The FIRB amendments also promised a reformed fee framework that is “fairer and simpler for foreign investors”. Unfortunately, though unsurprisingly, fees have been increased across the board, with higher value deals and agricultural investments particularly hard hit.
In these unprecedented times…
The scope of national security land and businesses remain unclear, and this uncertainty is further exacerbated by critical infrastructure reforms currently being undertaken by the Department of Home Affairs.
In light of these changes, we recommend that all foreign investors promptly familiarise themselves with the new regime. Where possible, commercial deadlines should take into consideration the need to obtain FIRB approval and the likelihood for delay.
The happy news of course is that if the proposal is not within the national security net and below the reinstated value thresholds, a FIRB application will no longer be required.