24 July 2020

Foreign Direct Investment: Changes in Australia

Have there been any recent changes to the Foreign Investment rules in Australia?

There have been two key changes to the FDI rules in Australia.  The first is the temporary change to the application of existing Foreign Investment Review Board (FIRB) rules in response to the COVID-19 pandemic, which we discussed in our article here. The second is a more permanent change concerning national security reform, which is expected to be implemented from 1 January 2020. For a summary of the national security reforms, please see our article here.

Temporary COVID-19 changes

Temporary changes to foreign investment rules were introduced on 29 March 2020 and are expected to remain for the duration of the COVID-19 pandemic. 

The monetary threshold applying to foreign investments in Australia has been reduced to $0, however this does not affect the percentage thresholds. The additional scrutiny has also meant that the processing time for applications has been extended from thirty days to up to six months.

FIRB expects that most applications will take less than six months, particularly those which directly protect and support Australian businesses and jobs, which will be prioritised.

National security reform

The recently announced national security reform will be the most significant reform since the introduction of the Foreign Acquisitions and Takeovers Act in Australia itself in 1975 (FATA), adding a new national security test alongside the existing national interest test. The exposure draft of the legislation is expected to be available for consultation in July 2020 and, if passed, will come into effect on 1 January 2021.

The changes are set out below:

  1. the Treasurer will be allowed to impose conditions or block investment in sensitive sectors by a foreign person on national security grounds regardless of the value of investment. A mandatory pre-investment notification will be required from foreign persons who are seeking to acquire a direct interest in or start to carry on a ‘sensitive national security business’ which may include critical infrastructure, telecommunications businesses, defence-related business or land, national security supply chain as well as data.  The Treasurer will also have a ‘call-in’ power to review investments normally not notifiable under the national security mandatory pre-investment notification process.  A last resort review power will also be introduced to allow the Treasurer to reassess previously approved investments in subsequent national security concerns arise;

  2. less sensitive Foreign Government Investors (FGIs) may get more flexibility, meaning investment funds with passive FGIs may be treated as private foreign persons subject to higher monetary thresholds when their government investors have no influence or control over the decisions of the investment funds;
  3. stronger compliance and monitoring powers will be introduced to allow for site-based inspections to examine whether certain conditions are being complied with;

  4. the Treasurer will have stronger and more varied enforcement powers to proactively curtail breaches before they occur. This may mean higher compliance cost for foreign investors. The Government will also be able to impose civil penalties and infringement notices and take other actions if foreign investment approval was given based on an application that is incorrect, or omits an important piece of information; 

  5. increased penalties for breach of conditions or the law for both civil and criminal liabilities;

  6. clarification that approval is required for interest increase as a result of share buybacks or selective capital reductions;

  7. scope of the moneylending exemption is narrowed so that the potential loophole of using the exemption to avoid the strict approach to national security businesses is closed;

  8. tracing rules will be stricter to capture unincorporated limited partnerships;

  9. register of Foreign Ownership to be established and increased information sharing between government agencies and international counterparts; and

  10. the fees framework will be reviewed to be made fairer and simpler. It may also be increased in certain areas to reflect the enlarged roles and responsibilities across the government.

What was the rationale for the changes?

The temporary reduction of the monetary threshold was intended to prevent any opportunistic buyers from taking advantage of the COVID-19 pandemic and threatening Australia’s national interest. The reduction in thresholds would give FIRB and the Treasurer greater visibility on FDI and the opportunity to ensure that unscrupulous behaviour and value destruction would be dealt with appropriately.

The national security reform is intended to safeguard Australia’s national interest / national security and mitigate risk associated with investments in sensitive sectors.

Are these changes temporary and if yes, when are they likely to be reviewed again? If not, are they part of a bigger reform (ie have there been any other recent developments, and are you expecting any further changes)?

As mentioned above, the COVID-19-related changes are temporary. They are expected to remain for the duration of the pandemic and are expected to be lifted when the national security reforms are implemented.

The changes under the national security reform are scheduled to commence on 1 January 2021 and will be permanent.

Are there any particular sectors that are affected the most?

All sectors are impacted by the temporary COVID-19 changes.  The most affected sectors under the national security reform are expected to be the sensitive industries: critical infrastructure (including health), telecommunications businesses, defence-related business or land, national security supply chain as well as data and any other sectors which may give rise to national security concerns.

What is the outlook for foreign investment in Australia?

We expect that foreign investment in Australia will look very different to how it does currently.  While Australia still welcomes foreign investments, investments in sensitive sectors will likely be more challenging than investments in non-sensitive sectors in the immediate future. Investors in sensitive sectors will be assessed against two separate tests and a lower threshold. Both foreign investors currently investing in Australia and those who intend to do so in the future will need to understand the nature of the changes and how they will be impacted.

While the proposed reforms bring some welcome changes such as relief for investment funds with passive FGIs and the simplification of the fees framework, investors should be prepared for uncertainty in this unprecedented time. 

What it is your advice to foreign investors in Australia?

Foreign investors planning to invest in the Australian market should consider the delay in processing time and the potential increase in compliance costs when planning and structuring their investment strategy. In recent times, primarily as a result of the COVID-19 pandemic, we have also noticed that the FIRB timing has gotten slightly longer. Normal non-sensitive applications are now taking three to four months. For more sensitive transactions, the process may take closer to six months. This should be considered in light of the broader deal timetable.

It is important to continue to monitor the developments in this area to understand the nature of the changes and how they will impact foreign investors in Australia. 

Does FIRB coordinate with other government agencies, including the Australian Competition and Consumer Commission (ACCC)?

As part of the application process, FIRB consults with other government agencies, e.g. the Australian Taxation Office, ACCC, Critical Infrastructure Centre, Critical Minerals Facilitation Office, Department of Agriculture and other government departments and agencies.

As a practical matter, should an application to FIRB under FATA be required, FIRB will not provide a ‘no objection letter’ unless and until the ACCC has confirmed in writing to FIRB, on a confidential basis, that it does not consider the transaction would be likely to have the effect of substantially lessening competition in any market in Australia. Importantly, if an acquisition of shares or assets is notifiable to Australia’s FIRB, FIRB consults with the ACCC as a matter of course. 

The practical effect of this interaction between FIRB and the ACCC is that, for those acquisitions where it is mandatory for the acquirer to notify FIRB to obtain a notice of no objection from the Treasurer, filing with the ACCC operates as if it is mandatory and suspensory.

Explore FDI changes in other countries >

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