The Australian Government has announced proposed changes to Australia’s foreign investment review framework to address existing and emerging national security risks arising from foreign ownership. The Government will shortly release exposure draft legislation for consultation prior to its introduction into Parliament. The reforms are expected to become effective on 1 January 2021.
The announcement of the reform package is unrelated to, and does not immediately affect, the temporary changes to Australia’s Foreign Investment Framework discussed in our 7 April update COVID-19 Update: What you need to know about temporary changes to Australia’s Foreign Investment Framework.
What are the reforms?
In summary the proposed reforms:
- establish a new national security test;
- streamline less sensitive investments;
- deliver stronger penalties, compliance and enforcement powers;
- strengthen the integrity of the framework;
- offer more coordinated information gathering and sharing;
- will see a fairer and simpler framework for foreign investment fees; and
- will deliver a timely, consistent and reliable investor experience.
The introduction of a new ‘national security test’
The new ‘national security test’ provides the Treasurer with wider powers to block or place conditions on foreign investments. It will apply for investments that raise ‘national security concerns’ and which fall below existing monetary thresholds. Investments which are subject to the new security test will be assessed in relation to factors that give rise to national security concerns.
The new test applies to foreign persons who start or acquire a direct interest in a ‘sensitive national security business’ regardless of the value of the acquisition. For proposed transactions that undertake investments in non-sensitive areas, the new national security test will not affect their interaction with FIRB (and the existing national interest test will remain unchanged).To avoid an overlap of the tests, if a broader national interest test should be applied, only that test will be used in the assessment.
Mandatory pre-investment notification
Foreign persons acquiring a direct interest (>10%) in a ‘sensitive national security business’ or where a foreign person starts to carry on the activities of such a business will need to notify and obtain foreign investment approval prior to making the acquisition.A definition of a ‘sensitive national security business’ for mandatory notification will be introduced, and consultation on the definition will occur alongside the release of the exposure draft legislation (and will likely include businesses within the data, defence supply chain, water, energy, telecommunications and ports sectors).
The mandatory pre-investment notification requirement will ensure foreign investments that raise national security concerns are screened irrespective of:
- the value of the investment;
- the investor’s nationality; and or
- whether the acquirer is a private foreign investor or a foreign government investor.
Call in power
Any investment not otherwise notified under the existing national interest or new national security mandatory pre-investment notification processes will be able to be called in before, during or after the investment, on a case by case basis if the Treasurer considers the investment raises national security concerns.
An investor will have the opportunity to voluntarily notify for each investment (including pre-acquisition) to avoid the possibility of being called in for a review.This, coupled with call in powers being time-limited, will provide some investor certainty.
Investor specific exemption certificates
Time limited investor specific exemption certificates (Certificates) will be introduced, which, when approved, will enable an investor to make eligible applications without case-by-case screening.Certificates may range in length and value and will be subject to conditions. These Certificates will benefit those investors making multiple investments, for example private equity funds.
Streamlining less sensitive investments
Some entities who are currently considered ‘foreign government investors’ (FGI) will no longer be treated as FGI’s to streamline less sensitive investments.
Entities which have more than 40 percent foreign government ownership in aggregate, but less than 20 percent from any single foreign government, will no longer be deemed and FGI under the FATR, and entities that have a single foreign government ownership of at least 20 percent will be able to apply for a broad exemption certificate on a case by case basis. Again, this is likely to benefit private equity funds with only passive upstream foreign government ownership.
Register of Foreign Ownership
The Government is considering merging and expanding the existing agricultural land, water and residential registers, into a new Register of Foreign Ownership in order to increase visibility of foreign investments in Australia.
Other components of the reforms
The Government will also require:
- foreign persons to seek further FIRB approval for any increase in actual or proportional holdings beyond what has previously been approved (to address creep acquisitions and proportional increases through share buybacks and selective capital reductions); and
- a foreign person who is the parent or spouse of an Australian resident to seek foreign investment approval prior to the purchase of Australian land, where they provide money to their Australian family member for the purpose (other than by way of gift).
Full details of the foreign investment reforms can be found on the Treasury website via this link.
If you require further information please contact Rohan Harris, Solomon Miller, Andrew Parlour, Rory Maguire or Jaqueline Wilson from our Corporate & Commercial Advisory and Mergers and Acquisitions teams.
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