Significant changes to Australia’s foreign investment regime came into effect on 1 July 2017, intended to address concerns regarding this regime raised since its introduction in December 2015. The amendments reduce the regulatory burden in a number of key ways and will impact a range of foreign investors in Australia. Partner Wendy Rae and Senior Associate Nick Kefalianos report on how these significant changes will affect you.
The changes in the Foreign Acquisitions and Takeovers Amendment (Exemption and Other Measures) Regulations 2017 (Cth) will assist a range of investors, from pension plans and sovereign wealth funds to private equity and other foreign investors, across a number of industries, including the renewable energy sector and investors in student accommodation and aged care facilities.
The amendments are a welcome addition to Australia’s foreign investment regime, responding to a number of concerns raised since the introduction of the new regime in December 2015 and reducing the regulatory burden it created.
A number of the key changes are summarised below. They are in addition to the introduction of a simplified fee regime, as flagged in our Client Update: Australia's foreign investment regime – Budget changes.
To reduce the regulatory burden on low sensitive business proposals, the Federal Government has introduced a new exemption certificate for non-sensitive acquisitions of interests in securities, which will exempt a foreign person (including a foreign government investor) from the requirement to seek the Treasurer's approval for acquisitions of securities covered by the certificate. This will be of particular assistance to private equity funds that contain passive foreign government investors, which are currently subject to a zero dollar notification threshold.
While further guidance will be provided by the Foreign Investment Review Board (FIRB) (including on the types of sectors and transactions likely to be appropriate for inclusion in an exemption certificate of this kind, together with the time and monetary limits likely to be imposed for such certificates) the introduction of these exemption certificates will hopefully provide welcome relief for foreign investors from the burden of lodging multiple applications.
The previous definition of 'commercial residential premises' was taken from the A New Tax System (Goods and Services Tax) Act 1999 (Cth) and excluded certain types of land that would otherwise be considered commercial in nature, including aged care facilities, retirement villages and certain student accommodation. The result of these exclusions was that these types of land fell within the regime applicable to residential land (as opposed to commercial land). All acquisitions of residential land require notification to the Treasurer, and such notifications attract much higher fees than commercial land notifications. The newly introduced amendments address this issue by bringing residential dwellings used as aged care facilities, retirement villages and student accommodation within the meaning of commercial residential premises. This increases the relevant monetary threshold for such investments from nil to $55 million or $252 million (as applicable), and reduces the fees payable upon applying to acquire such accommodation facilities.
Acquisitions of certain types of non-vacant commercial land, being acquisitions of 'low threshold' non-vacant commercial land, are screened at a lower threshold, of $55 million, as opposed to the standard $252 million threshold.1 Two types of 'low-threshold' non-vacant commercial land have caused particular concern for foreign investors in Australia:
- (Prescribed airspace) Previously, an acquisition of commercial land under prescribed airspace was considered low-threshold non-vacant commercial land. This caught most commercial properties in the CBDs of Australia's major cities, resulting in a number of non-sensitive acquisitions requiring notification to FIRB. Recognising this regulatory burden, the Federal Government has removed commercial land under prescribed airspace from the low-threshold category of non-vacant commercial land.
- (Federal Government lease) An acquisition of non-vacant commercial land that had a Federal Government tenant was previously considered low-threshold non-vacant commercial land. In practice, this captured any building complex, including shopping centres, that had a Federal Government tenant (eg an Australian Post shop). The meaning of low threshold commercial land has now been amended to exclude leases with 'corporate Commonwealth entities' as defined in the Public Governance, Performance and Accountability Act 2013 (Cth), subject to certain exceptions.
In addition to the new exemption certificate for acquisitions of interests in securities, a number of additional amendments specifically address the concerns of foreign government investors.
- (Small non-sensitive business transactions) The tracing provisions, which are ordinarily excluded in the context of foreign-to-foreign transactions, continue to apply for foreign government investors and necessitate, in certain circumstances, notification where a foreign government investor undertakes an overseas transaction that results in it indirectly acquiring interests in an Australian entity or Australian business. In recognition of the regulatory burden imposed by this requirement, particularly where the Australian entity represents a relatively immaterial part of the broader target group, the regime previously included a de minimis exclusion where the target's Australian assets were valued at less than $10 million and represented less than 1 per cent of the target's total assets. In practice, these thresholds were too low, and resulted in a significant regulatory burden for foreign government investors, which did not apply to other investors. In recognition of this, the Federal Government has increased these thresholds, so that the exclusion now applies where the foreign target's Australian assets are valued at less than $55 million and represent less than 5 per cent of the target's total assets.
- (Consortiums) Australia's foreign investment regime treats the acquisition by a foreign government investor of a direct interest in an Australian entity or Australian business as a notifiable action, necessitating a compulsory notification. While the regime previously included an exclusion for the establishment of a wholly-owned subsidiary for the purposes of conducting an investment in Australia, this did not apply where the broader consortium established an investment vehicle that included a foreign government investor (given the requirement for the investment vehicle to be 'wholly-owned'). This resulted in an unacceptable burden for foreign government investors, who were screened regarding the initial investment in the consortium vehicle, and then again when the consortium vehicle undertook an investment in Australia. To address this duplication in regulatory oversight, a new exemption has been introduced regarding the acquisition by a foreign government investor of its interest in the consortium vehicle.
The treatment of solar and wind farms under Australia's foreign investment regime has been subject to substantial debate. Previously, the land on which they are located was ordinarily considered to be either:
- where the land was being used (or could reasonably be used) for primary production, agricultural land. Acquisitions of interests in such land attract a monetary threshold of $15 million (satisfaction of which is calculated based on the applicant's cumulative interests in agricultural land); or
- where the land was not being used (and could not reasonably be used) for primary production, vacant commercial land (if the view was taken that the wind and solar farm infrastructure was not a substantive permanent building that could be lawfully occupied by persons, goods or livestock). Acquisitions of interests in such land attract a zero dollar monetary threshold.
Much of the debate related to the treatment of the solar and wind farm infrastructure: ie whether these assets are considered chattels or fixtures. To the extent the solar or wind farm infrastructure was considered a fixture, this infrastructure contributed to the value of the land and therefore the monetary threshold was more likely to be satisfied.
The Federal Government has clarified the treatment of solar and wind farms by confirming that:
- land is not vacant if there is a wind or solar power station located on the surface of the land; and
- land is not agricultural land where:
- an application has been made to a government authority to establish or operate a wind or solar power station on the land;
- the whole or predominant use of the land is for a wind or solar power station;
- an approval is in place to allow the wind or solar power station to be established or operated on the land; or
- the land was acquired solely for the purpose of meeting a requirement of the government approval for the solar or wind power station, or its sole or predominant use is for this purpose.
The practical implications of these amendments are that:
- approval has yet to be obtained for the construction of the solar or wind farm on the land; or
- an application for approval has not been made to a government authority to establish the solar or wind farm,
the land will continue to be considered agricultural land (assuming the land is used, or could reasonably be used, for a primary production business) and therefore the $15 million cumulative monetary threshold will apply.
- Where the land is not used wholly or predominantly for a primary production business and:
- approval has been obtained for the construction of the solar or wind farm on the land; or
- an application for approval has been made to a government authority to establish the solar or wind farm,
though construction of the solar or wind farm is not complete, the land will be considered vacant commercial land (unless there is a substantive permanent building on the land that can lawfully be occupied by persons, goods or livestock) and therefore a zero dollar monetary threshold will apply.
- Where a solar or wind farm has been constructed on the land, the land will be considered non-vacant commercial land, in which case, given that public infrastructure is located on the land, either:
- a $55 million threshold will apply (if the foreign person has a right to occupy the land or be involved in the central management and control of the entity that holds the land); or
- a $252 million threshold will apply (if the foreign person does not have a right to occupy the land or be involved in the central management and control of the entity that holds the land).
For completeness, despite the above, it is noted that the zero dollar threshold will apply in each of the circumstances described above where the acquirer is a foreign government investor.
In addition to the amendments identified above, there will be a number of practical amendments to Australia's foreign investment regime.
- (Treatment of custodians) Before the new regime came into effect in December 2015, companies with significant foreign custodian holdings were not treated as foreign persons for the purposes of the regime (and thus not subject to the notification requirements). This position was inadvertently reversed with the new regime's introduction, resulting in many ASX companies with foreign custodian holders being treated as foreign persons and so subject to Australia's foreign investment regime. The amendments address this by specifying that the regime does not apply to persons treated as foreign persons under the Act only because of the holdings of foreign custodian corporations.
- (Investments in unlisted Australian land entities) Australia's foreign investment regime previously excluded an acquisition by a foreign person of interests in unlisted Australian land entities where the unlisted Australian land entity had at least 100 holders of securities and the foreign person's interest represented less than 5 per cent. Responding to concerns that the requirement for at least 100 holders of securities was commercially impractical, the Federal Government has removed this requirement as part of the amendment package.
If you would like to talk to an expert about these changes, please contact one of the partners listed below.
- We note that a monetary threshold of $1094 million applies to an entity that is an enterprise or national of the United States, New Zealand, Chile, Japan, the Republic of Korea or the People's Republic of China, irrespective of whether or not the land is considered low threshold commercial land.