Significant reforms proposed for Australia’s foreign investment framework

On Friday, 5 June 2020 the Federal Treasurer announced sweeping changes to Australia’s foreign investment framework. The proposed reforms are being touted as the most comprehensive reforms to Australia’s foreign investment review framework since the introduction of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and are intended to address national security risks, bolster the existing review framework, and streamline investments in non-sensitive businesses. 

When will the reforms take effect?

Treasury anticipates the reforms will be introduced into law on 1 January 2021. Accordingly, the proposed reforms will not affect the temporary measures introduced by the Government in response to the coronavirus crisis on 29 March 2020, which temporarily reduce the monetary screening thresholds for all foreign investments subject to the FATA to $0. 

Our views on the proposed reforms

We welcome the Government’s review of Australia’s foreign investment framework (acknowledging that such a review is due), but note that great care must be taken with the final form of the reforms. Australia’s foreign investment framework is complex and the proposed reforms are far reaching. Given the current economic climate, it is critical that the reforms strike an appropriate balance between protecting Australia’s national interests and not unnecessarily stifling foreign investment. Foreign investment in Australia is highly important to the success of our economy.

Set out below is a broad summary of the reforms proposed and our views on each of those reforms.

Proposed reform Our view
National Security Test

A ‘national security’ test will be introduced for investments that raise national security concerns, but fallli below existing monetary thresholds in the FATA. The existing ‘national interest’ test will remain unchanged and will continue
to be applied by FIRB when assessing a particular action.

Under the proposed new national security test:

  • any foreign person that acquires a direct interest (generally 10%, or a position of control) in a ‘sensitive national security business’ or starts to carry on such a business, will need to notify FIRB prior to making the acquisition or starting the business;
  • the Treasurer will be able to ‘call in’ any investment which otherwise would not require notification where the Treasurer considers the investment raises national security concerns; and
  • a new last resort review power will allow the Treasurer to reassess previously approved foreign investments where subsequent national security risks emerge. The Treasurer’s powers under this review power will be broad and will allow the Treasurer to impose or vary existing conditions or require divestment of foreign interests in a business, entity or land.

To allow investors to obtain greater certainty around their proposed investment, it is also proposed that investors will
be able to:

  • voluntarily notify (on a per-investment basis) prior to making an acquisition to obtain greater certainty on an investment and mitigate the risk of being called in at a later time; and
  • apply for a new time-limited, investor-specific exemption certificate which will permit an investor to make eligible acquisitions without case-by-case screening.
The new national security test aims to better protect Australia’s national interests, covering a broad range of foreign investments which would otherwise not be captured under the foreign investment review framework. However, it is critical to strike an appropriate balance between protecting Australia’s national interests and not unnecessarily stifling foreign investment which has played a significant role in the strength of our economy in recent years.

The balance to be struck will largely lie in the definition of what is a ‘sensitive national security business’, as this determines whether the proposed investment will be captured under the new regime. Treasury has already indicated that the existing definition of ‘sensitive business’ in the FATA which is used for the national interest test (and includes media, transport, and telecommunication businesses and infrastructure providers to these businesses) is too broad for the new mandatory notification requirements.

Treasury has indicated that it will undertake a consultation process on the definition of a ‘sensitive national security business’, which will run in parallel with the consultation period for the exposure draft legislation.

Streamlining less sensitive acquisitions by foreign government investors

Where an entity is or is deemed to be a ‘Foreign Government Investor’ (FGI) under the Foreign Acquisitions and Takeovers Regulation 2015 (FATR), it is currently subject to $0 thresholds when investing in Australia.

Under the proposed reforms, certain entities (that is, some investment funds) will no longer be treated as FGIs under the broader national interest test where no FGI has management rights and the FGI investors have no influence or control over the investment or operational decisions of the entity or any of its underlying assets. This will be done by:

  • removing from the definition of ‘FGI’ in the FATR, entities which have more than 40 per cent foreign government ownership in aggregate but less than 20 per cent from any single foreign government; and
  • allowing remaining FGIs to apply for, on a case by case basis, broad exemption certificates which could be granted for up to the life of the entity.

The exempted FGIs would still be subject to normal screening at the thresholds for private foreign investors ($275 million, or $1,192 million for FTA partner countries), which apply when the temporary coronavirus-related measures are not in place and the new national security test would apply regardless of the value of the investment where the investment raises national security concerns.

We welcome the proposal to streamline less sensitive FGI investments which may be unnecessarily regulated and delayed under the current foreign investment framework.

As the new national security test and the national interest test will collectively provide a sufficient backstop to any FGI investments requiring review, it is entirely appropriate to relax the restrictions on other FGI investments not captured under either test.

Other proposed reforms

Various other reforms are also proposed which are aimed at:

  • introducing stronger penalties, compliance and enforcement powers;
  • introducing powers that would allow the Government to give directions to investors in order to prevent suspected
    breaches of conditions or of the foreign investment laws;
  • bolstering the integrity of the foreign investment review framework (including broadening the tracing rules to capture unincorporated limited partnerships);
  • improving information gathering and sharing capabilities (including possibly introducing a new Register of Foreign Ownership that would consolidate the existing agricultural land, water and residential registers);
  • reforming the foreign investment fees framework to increase fairness and simplicity; and
  • improving readability and rectifying inconsistencies and unintended consequences under both the FATA and FATR.
We generally support these other reforms, which are primarily aimed at refining the current processes within the foreign investment framework, rather than introducing fundamentally new practices.

Next steps

The Government will shortly release exposure draft legislation for consultation on the reforms prior to its introduction into Parliament, and provide further guidance for investors on its implementation. For a more fulsome discussion of the reforms, please visit the Treasury website by clicking here or download Treasury’s Summary Booklet outlining the proposed reforms here.