Release of exposure draft legislation for major reforms to Australia’s Foreign Investment Framework
Many governments around the world have been strengthening their laws relating to foreign investment. Australia is no exception to this development and has just released proposed sweeping reforms to its foreign investment regime. In many respects, Australia is coming-of-age in relation to its ability to more carefully screen proposed foreign investments into Australia not only from a national interest perspective but also with a more focused national security approach. It is also strengthening its hand in relation to enforcing compliance with Australia's investment regime and its taxation policies. Ongoing reporting obligations are all part and parcel of the proposed new laws.
- A new national security test has been proposed that is to be applied in addition to the existing national interest test.
- New ‘notifiable national security actions’ not subject to monetary screening thresholds, together with call in powers and last resort powers for the Treasurer to review foreign investments on national security grounds.
- Treasurer to be given new and extensive investigatory and enforcement powers in order to detect, prevent and enforce non-compliance by foreign investors.
- New registration obligations requiring notification of foreign investments and changes in character or status of foreign ownership over time.
The proposed amendments are comprehensive and will impact a broad range of foreign investors and industry sectors in which they invest. In this article, we provide a high level overview of the key proposed amendments and our thoughts on how some of those proposals are likely to affect foreign investment into Australia. Specifically, we consider and comment on the following key matters:
- Status and rationale for proposed reforms
- National security reviews and proposed new call in and last resort powers
- Improving compliance and additional enforcement tools
- New register of foreign ownerships
- Integrity amendments focusing on closing certain gaps in the current regime
- New simplified fee framework
- Australian tax considerations
Please contact any of the authors or your usual DLA Piper contact if you would like to discuss any of the proposed amendments and how they could impact on foreign investment in Australia.
On 31 July 2020, the Treasurer announced the release of an exposure draft of the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 (Bill) to give effect to proposed major reforms to Australia’s foreign investment regime.
The Bill follows the release of the Foreign Investment Reform Paper by Treasury on 5 June 2020 which outlined a proposal for the most comprehensive reforms to Australia’s foreign investment review framework in more than 20 years. For further details on this paper, please read our previous article.
The proposed amendments set out in the Bill are focused on introducing measures to address national security risks for Australia, strengthening compliance and enforcement powers for the Australian Foreign Investment Review Board (FIRB) and streamlining investment protocols for non-sensitive businesses.
The amendments are proposed to be introduced through a series of amendments to the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Foreign Acquisitions and Takeovers Regulations 2015 (Cth) (Regulations). The amendments to the Regulations are being issued in two parts – with the first set of amendments having been released at the same time as the Bill and the remainder of the changes scheduled for release in September 2020.
The Treasury is undertaking a consultation process on the Bill with submissions due before 5:00pm on 31 August 2020. The proposed amendments are otherwise intended to apply on and from 1 January 2021 as part of a proposed transition away from the current temporary changes to Australia’s foreign investment regime which were implemented on 29 March 2020 in response to the COVID-19 pandemic. For further details on these temporary measures please read our previous article.
National security test
The Bill introduces a new national security test into Australia’s foreign investment regime which is proposed to sit alongside the current national interest test. It will be used to assess foreign investments into Australia on the basis of factors that may give rise to national security concerns.
The national security test is proposed to be narrower than the existing national interest test focusing on whether a proposed foreign investment gives rise to matters related to Australia’s defence, security, political, military and economic relations with foreign persons and international organisations or law enforcement interests. In contrast, the current national interest test, in addition to national security considerations, also takes into account the character of the proposed investor, competition implications, impact on the Australian economy and community and other Government policies (including tax).
New ‘notifiable national security actions’
The Bill introduces a new category of ‘notifiable national security actions’ which must be notified to FIRB for review regardless of the value of the investment, the nature of the investor (i.e. private, government or whether from a free trade agreement country) or whether those actions are otherwise significant or notifiable actions under the existing regime.
‘Notifiable national security actions’ involve a foreign person acquiring:
- an interest in ‘national security land’; or
- a direct interest (being, generally, an interest of 10% or more or where it provides the investor with a position of control) in an existing ‘national security business’ or commencing such a business.
If a notifiable national security action is not otherwise required to be screened under the FATA (for example, because it is an action that is not a significant action), then it will be assessed by the Treasurer on national security grounds only and not national interest grounds.
What constitutes ‘national security land’ and a ‘national security business’
The amending regulations include important detail and clarifications to the proposed new definitions of ‘national security land’ and ‘national security business’. Set out below are some initial key considerations and implications arising from the proposed new definitions:
- ‘National security land’ is proposed to include Australian land in which an agency in the national intelligence community has, or will have, an interest if at the time of acquisition the foreign person could reasonably be expected to be aware of the agency’s interest or prospective interest. The inclusion of a prospective interest test may impose additional diligence requirements for potential acquirers of Australian land in order to make this assessment.
- A ‘national security business’, in the context of telecommunications, electricity, water and port infrastructure, is limited to businesses regulated under the Telecommunications Acts 1997 (Cth) or the Security of Critical Infrastructure Act 2018 (Cth) – the latter which applies to specific assets in the electricity, gas, water and port sectors which are characterised by a lack of diversity and disaggregation of operators and/or existing regulatory regimes designed to manage national security risks. This limitation will be welcomed by foreign investors who invest in individual or disaggregated assets, or portfolios of assets, in these sectors but which are not of themselves of significant size or nature to be classified as critical infrastructure for Australia. This limitation appears to strike a balance between encouraging foreign investment in these sectors (having regard to the benefits foreign investment can bring) and seeking to protect Australia’s core critical infrastructure.
- A ‘national security business’ includes a business carried on wholly or partly in Australia and which stores or has access to information that has a security classification or other otherwise stores or maintains personal information collected by the Australian Defence Force, the Defence Department or an agency in the national intelligence community. Data centre businesses with government related customers are likely to be classified as a national security business given the definition includes any business that stores or has access to information that has a security classification. However, in practice, data centre owners (whether they have government related customers or not) typically do not have access to, or know the content of, data that is stored in their facilities and therefore will not be able to identify whether they are storing security classified information. Further guidance will likely be needed as to how foreign investments into data centre businesses are classified under the proposed reforms.
- A ‘national security business’ also includes a business that develops, manufactures or supplies ‘critical’ goods, technology or services for (or intended for) a military end use by ‘defence and intelligence personnel’ or the defence force of another country in activities that may affect Australia’s national security. There are numerous considerations to determine whether a business will satisfy this definition. In particular, parties will need to understand and consider that:
- references to businesses that ‘develop’, ‘manufacture’, or ‘supply’ are intended to cover the entire lifecycle of a product from initial idea generation and design, through testing and development, to production and supply to the final end-user. This potentially captures a broad range of businesses that may have a connection with critical goods and services, ranging from R&D through to supply and logistics;
- the definition of ‘defence and intelligence personnel’ also includes contractors to defence and agencies in the national intelligence community;
- the definition of ‘intended for military end-use’ also extends to goods that are not considered military in nature, but are used by defence and intelligence personnel and may nevertheless be critical to Australia’s national security;
- a ‘critical’ good or service is a non-exhaustive and broad concept and includes goods, technology or services that are vital to Australia’s national security and that may be detrimental to Australia’s national security if not available or if misused; and
- the requirement that goods or technology be related to Australia’s national security is broad and includes both inputs without which Australian activities may be interrupted with adverse consequences for national security and those that, while not essential for Australia’s activities, could cause harm to Australia’s national security if accessed by others. While the definition of ‘national security business’ is more prescriptive than the existing definition of sensitive business in Australia’s current foreign investment regime, there may be additional complications for investors in analysing whether a business will fall under the prescribed requirements described above. When assessing what a national security purpose is, investors may well need to assess whether a particular good, technology or service has been identified as an investment priority for Australian defence or has otherwise been identified as sensitive.
“Call in” Powers
The proposed new call-in powers provide the Treasurer with the power to review certain ‘reviewable national security actions’ and significant actions (that are not notifiable actions or ‘notifiable national security actions’) which are not voluntarily notified if the Treasurer considers the action (regardless whether they are proposed or already taken) may pose a national security concern.
The use of the “call-in” powers will be time limited in the amending Regulations. The exposure draft Regulations for these amendments are scheduled for released in September 2020.
‘Reviewable security actions’ are actions that are expected to give foreign persons potential influence and rights, such as:
- an acquisition of an interest of 10% or more by a foreign person in an Australian business;
- the ability to influence or participate in the central management or policy of an entity or business; or
- the right to occupy Australian land, but are not otherwise a significant action, a notifiable action or a ‘notifiable national security action’.
The definition also captures actions that may be indirectly related to an Australian business or entity, such as an issue of securities in an entity by a foreign person.
While any such action must be considered to pose a national security concern by the Treasurer to be called in, it does extend the Treasurer’s powers to potentially review a much broader range of actions undertaken by foreign persons.
If an investor has previously received a no objection notification about an action (or an exemption certificate), the call-in power is not available to the Treasurer. The call-in power can only also be used by the Treasurer on actions that are taken or proposed to be taken on or after 1 January 2021.
“Last Resort” Powers
The proposed ‘last resort’ powers gives the Treasurer powers to impose conditions, vary existing conditions, or, as a last resort, force the divestment of any realised investment which the Treasurer has previously approved where national security concerns are subsequently identified.
The EM makes clear that the last resort power is restricted to situations where a new national security concern has arisen. The last resort power cannot be used to revisit concerns that could have been addressed at the initial notification or application stage unless additional information becomes available or circumstances change (either of the person or market where the action occurs, or more broadly in a way that materially affects national security considerations generally).
While the Treasurer’s last resort powers have the ability to undermine foreign investor certainty when investing in Australian assets, investors should take comfort that the last resort power can only be enlivened in limited circumstances where a new national security risk emerges and, before the Treasurer can make any order under the last resort power, the Treasurer must conduct a review and be satisfied that the use of other options under existing regulatory systems would not adequately reduce the national security risk.
Where the Treasurer has made a decision using the last resort powers, the foreign person may apply to the Administrative Appeals Tribunal to seek a merits review of the decision, providing an additional safeguard for foreign investors who may become subject to the last resort powers.
The Treasurer’s last resort power is only available for actions that are notified to the Treasurer (or taken, if they were not notified) on or after 1 January 2021.
The Bill includes significant amendments to Australia’s current foreign investment compliance framework.
These changes include material increases in civil and criminal penalties which are intended to modernise the enforcement framework for a graduated and proportional response to compliance issues and to strengthen the overall effectiveness of the regime.
The EM makes clear that the proposed amendments are intended to ensure that not only the Treasurer but also the Commissioner of Taxation is given appropriate powers to administer the FATA and to also supplement the power to give directions to foreign investors in order to prevent or address breaches of investment conditions.
It is proposed that the Treasurer be given new “standard monitoring and investigative powers” – in line with those of other business regulators. These powers will include being given access to premises with consent or by warrant in order to gather information, improve the regulator’s capability to monitor investor compliance and better enable the regulator to investigate potential non-compliance. In a similar vein, the Treasurer is also likely to be given the power to accept enforceable undertakings from foreign persons to manage compliance.
Consequently, foreign investors and their advisors should expect to see the Treasurer, through FIRB, taking a more proactive approach to assessing compliance with Australia's foreign investment laws and exercising investigatory and compliance powers of enforcement going forward. These developments are consistent with the approach, powers and activities of the Australian Taxation Office which now works hand in glove with FIRB in considering Australia's national interest in the context of foreign investment.
Reporting obligations have also been reconsidered in the proposed legislation in several important respects. Firstly, penalties will be reduced in the case of self-reporting potential breaches of FATA. Secondly, and most importantly, broadened reporting obligations have been introduced where a relevant action has occurred in relation to a proposed significant action which is the subject of a no objection notification.
Notification obligations will exist when there is a change of control of the entity or business to which the significant action relates or where a foreign person ceases to have a direct interest in the Australian entity or a part of their interest in Australian land. Failure to give such notices within 30 days of the relevant action occurring may attract significant civil liability penalties or an infringement notice.
As part of the proposed package of amendments, the Treasurer is seeking to introduce a new register of foreign ownership of Australian land, water, businesses and other assets to be administered by a Commonwealth body to be appointed by the Treasurer.
The proposed new register builds on the existing register of foreign interests in agricultural land and water rights administered by the Australian Taxation Office.
The new register will record all foreign interests acquired in Australian land, water entitlements and contractual water rights and business acquisitions that require foreign investment approval, including acquisitions reviewed under the new national security test. Broadly, foreign persons will be required to notify the registrar if:
- the foreign person begins to hold an interest in Australian land, water or an Australian entity or business;
- the foreign person begins or ceases to be a foreign person while holding an interest in an Australian entity;
- there is a change in the nature of the interest held by the foreign person; or
- the foreign person ceases to hold the interest.
The new register and associated notification requirements are intended to provide the Treasurer with greater visibility on foreign investments in Australia, but will otherwise remain confidential and not searchable by the public. However, the register will impose a new administrative burden on all foreign investors who will need to keep the registrar updated of changes in their investment portfolios throughout investment lifecycles.
The proposed integrity amendments contemplated in the Bill focus on closing certain gaps in the FATA, including screening gaps, so as to ensure that the foreign investment framework continues to be fit for purpose and captures acquisitions which should be within the remit of Australia’s foreign investment regime but currently do not meet the conditions that apply to significant actions or notifiable actions under the FATA and the Regulations.
These reforms clarify the operation of the change in control test for significant actions which will no longer be a factor in determining if an action is a significant action once a foreign person controls an entity or business. In addition, proportional increases in a foreign person’s interest in an Australian entity through share buybacks and selective capital reductions (be it as a result of participating or not participating in a share buyback) may now also be captured under the FATA where other conditions, including monetary screening thresholds are met.
The Treasurer will also be given the power to extend the 30 day statutory decision period by up to 90 days without requesting an extension from the applicant. This amendment should be of little practical consequence for most foreign investors in the context of extensions to the FIRB review and decision period as, under the current regime, most applicants choose to either formally request an extension to the decision period on the request of FIRB or withdraw the relevant notification application to avoid the Treasurer having to make a public interim order to achieve an extension of the review period.
A new fee framework has been proposed which is intended to be fairer and simpler and reduce the administrative burden of determining the fee that is payable for a notification. The amended Regulations will set the amounts of fees that can be charged and methods for calculating fees. The exposure draft Regulations for these amendments are scheduled for release in September 2020.
The proposed amendments are likely to give rise to a range of Australian tax considerations for foreign investors. For example:
- Foreign control or influence of Australian entities or businesses – The proposed amendments impose obligations on foreign persons or investors who have or would gain influence, control or other participation rights in an Australian entity or business. Foreign investors should consider the parallel Australian tax implications arising from such influence, control or participation – such as those arising for the foreign investor (e.g. certain withholding tax exemptions, capital gains tax (CGT) on exit) and the relevant Australian entity or business (e.g. thin capitalisation gearing limits).
- Register of foreign ownership and ownership tracing for unincorporated limited partnerships – Foreign investors should be mindful of how such ownership information could be used by the ATO for assessing Australian tax risks arising for Australian target companies (e.g. in relation to dividend franking, tax losses, thin capitalisation) and foreign funds with LP structures (e.g. in relation to foreign hybrid, hybrid mismatch and tax treaty application).
- Information sharing for tax purposes – The proposed amendments will allow protected information to be disclosed to the Commissioner of Taxation (including for purposes of advising the Treasurer about FATA administration), Ministers for tax policy purposes and foreign governments and authorities where certain requirements are satisfied.
Further Australian tax considerations are also expected to arise from the additional amendments proposed to the Regulations which are expected to be released in September 2020, such as:
- the interaction of the non-portfolio and no influence requirements under the Australia’s sovereign immunity tax exemptions, with the no influence and no control requirements for the expected FIRB exemption for foreign investment investors; and
- the interaction of privatisation Australian income tax rules with the expected FIRB approval required for foreign investors in privatisation acquisitions that may give rise to national security risks.
Please contact any of the authors or your usual DLA Piper contact if you would like to discuss any of the proposed amendments and how they could impact on foreign investment in Australia.