Most significant changes since Australia's foreign investment laws began in 1975
The Australian Government has finalised and released legislation to make major changes to Australia's foreign investment laws – commonly known as the 'FIRB regime' – with effect from 1 January 2021.
The legislation comprises:
- Foreign Investment Reform (Protecting Australia's National Security) Act 2020 (Cth) to amend the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA); and
- Foreign Investment Reform (Protecting Australia's National Security) Regulations 2020 (Cth) to amend the Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (FATR).
There is also legislation to replace the current FIRB fee regime.
The Government proposes to release various guidance notes on the changes, which will be made available on the FIRB website.1
Related to this are changes proposed to be made to the Security of Critical Infrastructure Act 2018 (Cth) by the Security Legislation Amendment (Critical Infrastructure) Bill 2020 (Cth). These changes, if passed by Federal Parliament, are not expected to come into effect until a date after 1 January 2021.
This Insight summarises the key changes to the FIRB regime. Allens will release separate publications on the impact of these changes to particular transactions and businesses, and on the new FIRB fee regime. Ensure you're subscribed to receive these updates.
Summary of changes to the FIRB regime from 1 January 2021
- Since 29 March 2020, there has been a $0 monetary screening threshold on all acquisitions subject to the FIRB regime.
- From 1 January 2021, the pre-29 March 2020 monetary thresholds for 'notifiable actions' and 'significant actions' will be reinstated. Note that the $0 monetary screening threshold remains for the new category of 'notifiable national security actions'.
- Also, for acquisitions of interests in an Australian land entity, the value of mining or production tenements held by the land entity is to be included alongside the value of residential land and vacant commercial land held by the land entity in determining whether the 10% of total asset value threshold is met – if the threshold is met then there will be a $0 monetary screening threshold for the acquisition of an interest in the land entity.
- Under the current FIRB regime, a mandatory FIRB approval requirement arises for each action  taken by a foreign person that constitutes both a 'notifiable action' and 'significant action'.
- From 1 January 2021, there will be an additional mandatory FIRB approval requirement, which arises for each action taken by a foreign person that constitutes a 'notifiable national security action'.
- Each of the following constitutes a 'notifiable national security action':
- to start a 'national security business';
- to acquire a 'direct interest' (usually 10%+) in a 'national security business' or in an entity that carries on a 'national security business'; and
- to acquire an interest in 'national security land'.
- Existing exemptions from 'notifiable actions' and 'significant actions' will also apply to 'notifiable national security actions', but there will not be a full moneylending exemption for 'notifiable national security actions' and there will be some changes to the existing exemptions (see below under 'Changes to exemptions (including moneylending exemption)').
National security business
- 'National security business' is generally one which is involved in or connected with a 'critical infrastructure asset', telecommunications, defence or a national intelligence community (of either Australia or a foreign country), or their supply chains.
- However, a business is only a 'national security business' if it is publicly known, or could be known upon the making of reasonable inquiries, that the business meets the criteria for being a national security business.
- ‘Critical infrastructure asset’ has the meaning given in the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act) – currently defined to cover critical assets in electricity, gas, water and ports sectors. It is proposed that the SOCI Act will be amended to cover critical assets in 11 additional sectors: communications, data storage and processing, defence industry, financial services and markets, food and grocery, higher education and research, healthcare and medical, transport, energy, space technology, and water and sewerage.
National security land
- 'National security land' is generally land which is defence premises or where it is publicly known (or could be known upon the making of reasonable enquiries) that a national intelligence agency has an interest in the land.
- Under the current FIRB regime, in respect of each 'significant action', the Treasurer can:
- grant 'FIRB approval' by issuing a no objection notice in respect of the action or an exemption certificate which covers the action; or
- if the action is considered contrary to national interest, prohibit the transaction or – if the action has already occurred - make divestment orders.
- Under the current FIRB regime, once the Treasurer has granted FIRB approval for an action, he/she:
- cannot make any divestment orders in respect of the action except where the applicant has been convicted of breaching a condition in the FIRB approval; and
- cannot unilaterally impose a new condition to the FIRB approval or vary an existing condition, except with the applicant's consent or where the Treasurer is satisfied there would not be disadvantage to the person.
- From 1 January 2021, the Treasurer will be given a 'last resort power' to make divestment orders and unilaterally impose a new condition or vary existing conditions after a FIRB approval has been granted in respect of an action.
- The power is exercisable in respect of:
- any no objection notice given on or after 1 January 2021, unless given in respect of a significant action notified to the Treasurer, or taken, before 1 January 2021 (in other words – the last resort power does not apply where a FIRB application in relation to a significant action was submitted before 1 January 2021); and
- any action taken on or after 1 January 2021 in reliance on an exemption certificate, irrespective of whether the certificate was given before, on or after 1 January 2021.
- Various requirements must be satisfied before this power can be exercised in respect of an action, including:
- that, after having reviewed the action and taken into account national intelligence agency advice, the Treasurer is satisfied that a national security risk exists in relation to the action;
- that one or more of the following applies:
- the applicant made a false or misleading statement and the Treasurer is reasonably satisfied that the misstatement directly relates to the national security risk;
- the business, structure or organisation of the person has materially changed since the FIRB approval was granted, and the Treasurer is reasonably satisfied that the national security risk that has emerged as a result of this change could not have been reasonably foreseen at the time of the FIRB approval or that the likelihood of the risk arising was remote; and
- the market in which the action is taken has materially changed since the FIRB approval was granted, and the Treasurer is reasonably satisfied that the change altered the nature of the national security risk posed at the time the decision was made;
- that the Treasurer has taken reasonable steps to negotiate in good faith with the applicant to achieve an outcome of eliminating or reducing the national security risk;
- that that existing regulatory systems would not adequately eliminate or reduce the national security risk;
- if a divestment order is to be made – the action must have been taken and the result of the action is contrary to national security; and
- for the imposition of a new condition or the variation of an existing condition – the Treasurer must be satisfied it is reasonably necessary for purposes relating to eliminating or reducing the national security risk relating to the action.
- It will be possible to apply to the Administrative Appeals Tribunal for review of a decision by the Treasurer that a national security risk exists. But it will not be possible to seek review of orders made by the Treasurer (such as a divestment order or the imposition of a new condition or the variation of an existing condition).
- From 1 January 2021, the Treasurer will be given a new 'call-in power' to review any action which:
- is taken or proposed to be taken on or after 1 January 2021;
- was not previously notified to FIRB;
- is a ‘significant action’ or a 'reviewable national security action' (the latter encompassing a broader range of transactions than 'significant actions’, eg acquiring a 10%+ interest in any Australian entity irrespective of value); and
- may pose a national security concern.
- Following such a review, the Treasurer can make orders (such as prohibition or divestment orders) where he/she is satisfied that the action would be, or that the result of it is, contrary to national security.
- The Treasurer can initiate a review at any time within 10 years after the action occurs.
- Many of the existing exemptions from 'notifiable actions' and 'significant actions' will not also apply to 'reviewable national security actions'.
- The risk of the call-in power being exercised in respect of an action can be removed by voluntarily applying for FIRB approval.
- Under the current FIRB regime, one of the ways a person is taken to be a 'foreign government investor' (FGI) is where:
- the person is a corporation, trustee of a unit trust or general partner of a limited partnership; and
- FGIs from more than one foreign country collectively have a 40% or greater interest in the corporation, unit trust or limited partnership.
- From 1 January 2021, a corporation, trustee of a unit trust or general partner of an unincorporated limited partnership will no longer be considered an FGI under this '40% test' if they operate a passive investment fund or scheme where (in broad terms) individual investors in the fund are not able to influence any individual investment decisions, or the management of any individual investments, of the corporation, trustee or general partner under the investment fund or scheme. The intention behind the reference to 'individual' investment decisions and investments is so that the streamlined FGI definition may still be available where investors have representatives on advisory committees and/or where investors can influence broad investment strategy.
- Under the current FIRB regime, offshore transactions (such as where the foreign target has an Australian subsidiary) by FGI acquirers trigger mandatory FIRB approval requirement unless the de minimis exemption applies. The exemption currently applies where, among other things, Australian assets are <$55m and are not part of a sensitive business.
- From 1 January 2021, the Australian asset threshold will be increased to <$60m (and subject to annual indexation), and there will be an additional requirement that assets not be part of a national security business.
- The current FIRB regime does not capture increases in a foreign person's percentage interest in an entity where that does not result from the person acquiring an interest in securities. These are known as 'passive increases' and can arise in various ways, such as non-participation in a capital reduction or buy-back.
- From 1 January 2021, passive increases in certain circumstances can constitute the acquisition of an interest in securities of an entity and therefore can constitute a notifiable action, significant action, notifiable national security action or reviewable national security action if the other conditions to such types of actions are met, except in relation to:
- passive increases of an existing substantial interest or direct interest;
- the FGI 'direct interest' rules; and
- the rules regarding Australian land entities.
- Where a passive increase constitutes a notifiable action or notifiable significant action, the relevant foreign person must make a notification to FIRB within 30 calendar days after the increase.
- From 1 January 2021 there will be modifications to certain of the existing exemptions from the 'notifiable action' and 'significant action' concepts under the current regime:
- the acquisition from government exemption is to be expanded to cover acquisitions from bodies corporate established by the Federal Government, or a state or territory government, for a public purpose;
- the acquisition from government exemption will not apply to acquisitions of interests in national security businesses or national security land;
- acquisitions under wills will no longer be exempt; and
- the acquisition by way of devolution of law and compulsory acquisition exemptions will not apply to 'passive increases'.
Under the current FIRB regime, there is a moneylending exemption which exempts many foreign debt financiers (such as banks) from the 'notifiable action' and 'significant action' concepts in respect of the acquisition and enforcement of security interests, except that FGIs have six months (or 12 months if the FGI is also an ADI) to divest assets acquired upon enforcement. The moneylending exemption will apply to acquisitions of security interests in national security land or national security businesses. However, other than where the enforcement involves a receiver, the moneylending exemption will not apply to acquisitions upon enforcement of security interests in national security land or national security businesses, eg in the rare case where a mortgagee forecloses on the mortgaged property.
For more on this, including Allens' submissions to Treasury, see: Australian foreign investment national security reforms – moneylending exemption survives, substantially intact.
- Under the current FIRB regime, FIRB approval is needed for a foreign person to acquire 5%+ of an Australian media business, irrespective of value. 'Australian media business' is currently defined to mean 'an Australian business of publishing daily newspapers, or broadcasting television or radio, in Australia (including on websites from which all or part of those newspapers or broadcasts may be accessed).'
- That requirement will continue from 1 January 2021, except that the 'Australian media business' definition will be expanded to cover:
- Australian businesses that only publish or broadcast such content via the internet;
- the operation of an 'electronic service', being a service meeting the following criteria:
- the service delivers content over the internet;
- the service is operated wholly or partly for the purposes of serving Australian audiences;
- the content delivered by the service either: (i) consists predominantly of news; or (ii) is delivered wholly or predominantly by way of programs of audio or video content; and
- it is reasonable to conclude that the average daily audience for the service exceeds 10,000 people.
- Under the current FIRB regime, FIRB approval is needed for a foreign person to acquire interests in mining or production tenements, irrespective of value. The definition is sufficiently broad to include revenue streams (such as royalties) from tenements.
- From 1 January 2021, mere rights to revenue streams will no longer be considered as a mining or production tenement, except if such rights are an asset of a national security business or the tenement is national security land.
- Under the current FIRB regime, it is unclear whether and which exploration tenements are considered to be mining or production tenements or otherwise interests in Australian land.
- From 1 January 2021, the acquisition of interests in exploration tenements will be exempt from the FIRB regime, except where the acquirer is an FGI or the exploration tenement is in respect of national security land.
- Under the current FIRB regime, it is possible to obtain business and land exemption certificates to cover actions that would otherwise be 'notifiable actions' and/or 'significant actions.
- From 1 January 2021, there will be two additional types of exemption certificates: one to cover notifiable national security actions and another to cover reviewable national security actions.
- Under the current FIRB regime, the Treasurer's power to unilaterally extend the FIRB assessment period (known as the 'decision period') is limited to making a public interim order which prohibits the applicant from undertaking the relevant transaction for up to 90 calendar days. The current regime provides that applicants can request an extension of the decision period. In practice, applicants 'request' extensions at the request of FIRB, so as to avoid a public interim order.
- From 1 January 2021, the Treasurer will have the power to unilaterally extend a decision period by up to 90 calendar days. This will be in addition to the existing power to make a public interim order which prohibits the applicant from undertaking the relevant transaction for up to 90 calendar days.
- The new extension power applies to FIRB applications submitted on or after 1 January 2021.
- The tracing rules under the current FIRB regime deem that each person who has a substantial interest in a corporation or trust (each a higher entity) is taken to have the same interest in a lower corporation or entity in which the higher entity has an interest, including as a result of multiple applications of the tracing rules.
- However, the current tracing rules do not apply where a higher entity is a person who does not have a separate legal personality, such as an unincorporated limited partnership and unincorporated general partnership, the result being that changes in interests in such unincorporated persons do not currently constitute a 'notifiable action' or 'significant action'.
- From 1 January 2021, the tracing rules will also apply where a higher entity is an unincorporated limited partnership, but will still not apply to unincorporated general partnerships.
- The Government considers this will enable the Treasurer to impose conditions on higher entities in an acquirer's ownership structure. Presumably the Government considers that higher entities – in addition to the relevant acquirer entity – are also taking actions and therefore also need to be named as applicants for a FIRB approval.
- Under the current FIRB regime, the acquisition of interests in an Australian entity constitutes a 'significant action' only if there is a change in control, in the sense that a new foreign person begins to have a substantial interest or a person ceases to have a substantial interest.
- There is a drafting anomaly in the current rules in that a person who already has a substantial interest in an Australian entity could increase that interest without that constituting a significant action. From 1 January 2021, the change in control test will no longer need to be satisfied where the acquirer already has a substantial interest in the relevant Australian entity.
- Also, from 1 January 2021, a person will no longer be taken to control an entity if the person is one of two or more persons holding an aggregate substantial interest in the entity.
- Under the current FIRB regime, there are various criminal and civil penalties for non-compliance with the FIRB regime.
- From 1 January 2021, there will be significantly increased penalties for non-compliance. For instance, for failure to give notice of a 'notifiable action' or 'notifiable national security action', or for taking an action notified to FIRB prior to receiving FIRB approval, or for contravening an order made by the Treasurer, or for contravening a FIRB approval condition:
- maximum criminal penalty of: (a) for an individual – 10 years imprisonment or 15,000 penalty units or both (compared to the current three years or 750 penalty units or both); (b) for a corporation – 150,000 penalty units (compared to the current 3,750 penalty units); and
- maximum civil penalty of the lesser of the following: (a) 2.5 million penalty units; or (b) the greater of the following: (i) 5,000 penalty units (or 50,000 penalty units if the person is a corporation); and (ii) a specified amount referable to the value of the relevant action (there will be a table setting out how to calculate the specified amount) – whereas under the current regime the maximum civil penalty is 250 penalty units for an individual and 1,250 penalty units for a corporation.
- From 1 January 2021, the giving of false or misleading information relating to a FIRB application can result in a maximum civil penalty as described above. There is no penalty under the current regime.
- There will also be new criminal and civil penalty provisions, and significant maximum penalties, for non-compliance with new provisions such as the call-in power, last resort power regime and the directions power (see below regarding directions power).
- Under the current FIRB regime, the Treasurer's enforcement powers are limited to seeking criminal prosecutions and civil penalty orders, other than in respect of the giving of infringement notices and fines for breaches of the residential real estate rules, and a general information gathering power to investigate potential breaches.
- From 1 January 2021:
- the infringement notice regime will be expanded to cover all types of foreign investments, not just residential real estate;
- the Treasurer will have monitoring and investigative powers in line with other business regulators, including access to premises with consent or as permitted by a warrant to gather information;
- the Treasurer will have the power to accept enforceable undertakings from foreign persons;
- the Treasurer will have the power to give directions to persons in order to prevent or addresses suspected breaches of the FIRB regime, and such directions may be to direct a person to comply with specified provisions in the legislation or to comply with certain FIRB approval conditions, and non-compliance with a direction will constitute an offence;
- the Treasurer will have the power to revoke a FIRB approval where relevant information provided by the applicant prior to the grant of the approval was false or misleading in a material particular; and
- foreign persons who undertake actions pursuant to a no objection notice must notify the Government within 30 days after taking the actions.
- Under the current FIRB regime, there is a Register of Foreign Ownership of Water Entitlements and a Register of Foreign Ownership of Agricultural Land. Relevant foreign owners are required to notify their interests for inclusion on those registers, which are not made public.
- This will be replaced by a Register of Foreign Ownership of Australian Assets which will record information about foreign ownership of interests in Australian land, interests in Australian water entitlements and interests in certain Australian entities or businesses. The Register will not be made public.
- From a date to be fixed by proclamation, a person will be required to notify the registrar of the new Register of Foreign Ownership of Australian Assets of the occurrence of any of various events, within 30 days after the event occurs, including:
- the person is a foreign person who acquires or ceases to hold an interest (other than an equitable interest) in Australian land or exploration tenement (in each case irrespective of whether FIRB approval was required for the acquisition of the interest);
- the person is a foreign person who acquires or ceases to hold an interest in an Australian water entitlement;
- the person is a foreign person who takes an action in relation to an entity or business where the action is: a notifiable action, a notifiable national security action, a significant action that has been notified to or called in for review by the Treasurer, or a reviewable national security action that has been notified to or called in for review by the Treasurer;
- the person is a foreign person of the type described above and ceases to be a foreign person;
- the person becomes a foreign person while holding an interest of the type, or resulting from an action of the type, described above; and
- any change of 5 percentage points or more in a previously disclosed interest in an Australian entity or business.
- Under the current FIRB regime, the Government is prohibited under FATA from providing the content of applications to third parties outside of the Australian Government unless it has permission or it is ordered to do so by a court of competent jurisdiction. However, from 1 January 2021, the Government will have greater ability to share information obtained under the FATA, both within government and also with foreign governments.
- Information can only be shared with the government of a foreign country where national security risks may exist for Australia or the foreign country, and where it is not contrary to the Australian national interest. The information can only be shared if there is an agreement in place between the Australian and the relevant foreign government.
FIRB stands for Foreign Investment Review Board – see https://firb.gov.au/.
The FATA uses the term 'action' rather than transaction, though a transaction is a common type of 'action'.