On 5 June 2020 the Treasurer of the Commonwealth of Australia announced major proposed amendments to Australia's foreign investment review regime. These amendments are planned to take effect from 1 January 2021.
The changes are intended to give the Treasurer and the Foreign Investment Review Board (FIRB) greater oversight over investment by foreign persons in sectors determined to be relevant to Australia's national security as well as generally increase the integrity of the foreign investment framework by broadening the Federal Government's powers to impose penalties and conditions.
Under the current foreign investment regime, foreign persons proposing to invest in Australia are required to seek the Treasurer's approval if their investment meets certain thresholds , which vary depending on the type of investor, the industry sector in which the investment is proposed to be made and the value of the investment.
Protecting Australia's national security
To address risks arising from foreign ownership, particularly in sensitive sectors, the Government proposes to introduce measures to ensure that investments that raise national security concerns but otherwise fall outside of existing thresholds are appropriately reviewed. These measures are described below.
- Mandatory pre-investment notification: Under the proposed changes, all foreign persons acquiring a direct interest (at least a 10 per cent interest or in a position to control) in a "sensitive national security business" will need to notify and obtain foreign investment approval prior to making the acquisition, irrespective of value.
The definition of "sensitive national security business" will be introduced in regulations and is expected to include businesses involved in critical infrastructure, the national security supply chain, telecommunications, the storage of sensitive data and the manufacture or supply of defence-related goods.
- 'Call in' power: The Government also proposes to introduce a new 'call in' power for the Treasurer. Under the proposal, any investment that is not otherwise notified to the Treasurer (and therefore not subject to screening under either the existing 'national interest' test or the new 'national security' test) will be capable of being 'called in' and reviewed if the Treasurer considers the investment raises national security concerns.
The use of the 'call in' power will be time-limited and public guidance will be issued at a later date to provide greater clarity around the type of investments that will be subject to it.
- Voluntary notification: The new changes will also provide investors with the opportunity to voluntarily notify the Treasurer to avoid the possibility of being called in for review on national security grounds at a later date.
Where voluntary notification occurs for an investment that is not subject to mandatory notification, a time-limited period will commence in which the Treasurer will need to decide whether to exercise the 'call in' power and review the investment.
- 'Last resort' power: In addition, under the proposed changes, previously approved foreign investments may now be subject to a new 'last resort' review power where subsequent national security risks emerge from the transaction.
The 'last resort' review power will allow the Treasurer to impose conditions, vary existing conditions, or require divestment of foreign interests in a business, entity or land. However, it is expected that the 'last resort' power will only be used where:
- the applicant made a material misstatement or omission to the Treasurer that directly relates to national security risks posed by the acquisition;
- the activities of the investor change substantially and pose national security risks;
- a material change occurs to the operating environment, which alters the nature of national security risks posed at the time of approval; or
- national security risks emerge which could not be reasonably foreseen at the time of approval.
Under the current foreign investment regime, certain acquisitions by foreign government investors (FGI) in an Australian business or entity require FIRB approval.
FGI investment in less sensitive sectors
Australia's foreign investment legislation defines FGI broadly. As a consequence, many foreign funds are considered to be FGIs even though the interests held by foreign governments and their agencies in such funds are purely passive. This in turn has meant that even low value investments in non-sensitive sectors by such funds have required FIRB approval.
The Government has recognised this and under the proposed changes, entities which have more than 40% foreign government ownership in aggregate but no single foreign government has a 20% or more interest and no single foreign government has, or could be perceived to have, influence or control over the investment or operational decisions of the entity or any of its underlying assets, will no longer be deemed FGIs.
Entities which have a single foreign government with at least 20% ownership (without influence or control) will still be deemed FGIs but will be able to apply for an exemption certificate. Exemption certificates will be assessed on a case-by-case basis and could be granted for a specified time period and may be subject to conditions.
The Government is to have standard monitoring and investigative powers (in line with those of other business regulators), and powers to address suspected breaches of the foreign investment laws. Further measures are intended to increase civil and criminal penalties under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) to ensure penalties act as an effective deterrent.
Stronger penalties, compliance and enforcement powers
In addition, under the proposed changes, the Treasurer is expected to be granted powers to give directions to foreign investors in order to prevent or address suspected breaches of conditions or foreign investment laws.
Further amendments are proposed to address avoidance concerns, such as increases in actual or proportional holdings through creep acquisitions and share buybacks and selective capital reductions. Additionally, the tracing rules under FATA are to be revised such that they apply to unincorporated limited partnerships as they are to corporations and trusts, so that beneficial interests can be traced.
Integrity of the framework
General amendments will also be introduced to improve readability of existing provisions, rectify inconsistencies and unintended consequences, and address feedback from investors seeking greater certainty.
Under the current regime, foreign investment data is spread across various departments and organisations. The Government has noted that at times, this can make it difficult to process foreign investment applications efficiently and consistently.
Information gathering and sharing
In order to increase Government visibility of foreign investments into Australia, a new Register of Foreign Ownership will be created. The new Register of Foreign Ownership is proposed to amalgamate existing foreign ownership registers and, subject to further consultation, will require foreign persons to register interests they acquire in Australian land, water entitlements and contractual water rights and business acquisitions that require foreign investment approval, including anything covered by the new national security regime.
The Register of Foreign Ownership is expected to be a post-acquisition recording system, thereby only capturing actual foreign direct investments into Australia. To avoid placing any additional administrative burden on foreign investors, the Government must ensure that registration requirements are simple and easy to execute.
New information sharing provisions are also expected to be introduced to enable sharing of protected information with international counterparts where national security considerations are present.
Foreign investment fees
As part of the proposed changes to Australia's foreign investment regime, the Government will also review foreign investment fees to ensure that foreign investors, rather than Australian taxpayers, are continuing to bear the cost of administering the system. The Government has also indicated that the fee framework will be reformed, making it both fairer and simpler for foreign investors.
Under the current foreign investment review process, the Treasurer is required to make a decision within 30 days of receiving notice and must notify the applicant of the outcome within a further 10 day period. The only way to extend that timeline is for the applicant to voluntarily request an extension or through an interim order.
Timely, consistent and reliable investor experience
For this reason, the Government is proposing to introduce a new measure in the legislation to extend the statutory decision-making period in certain circumstances, particularly when considering complex and sensitive applications. It is expected that under the proposed amendments, the Government will have a new power to extend, or further extend, the statutory timeframe by up to a further 90 days.
This measure will enable the Treasurer to extend the statutory timeframe of an application without the need to issue an interim order or seek consent from the applicant.
A lot will depend on the adopted definition of "national security" and "sensitive national security business". However it is likely that:
- less transactions involving FGIs will fall within Australia's foreign investment review regime – this will be good news for foreign private equity funds;
- certain transactions may become more conditional as they will need to contemplate the risk of a 'call in' (alternatively, investors may simply elect to voluntarily notify); and
- investors will need to carefully consider whether to proceed with certain transactions given the potential that they may be unwound at a later date.
 The Treasurer has temporarily reduced all monetary screening thresholds to nil for all foreign investments.