Upcoming Reforms to Australia's Foreign Investment Regime Seeking to Refocus and Streamline Approvals
Key takeaways
The Australian Treasurer has announced upcoming changes to Australia’s foreign investment regime to enhance scrutiny and monitoring of sensitive investments, streamline approval processes for low-risk investments, and make the regime more transparent overall.
It appears the reforms will be implemented via changes to the Australian Government's Foreign Investment Policy, and the Australian Treasury’s processes and resources, rather than through new laws.
The changes are targeted at ensuring supply chain resilience, onshoring capability in Australia to tie into the incoming Future Made in Australia framework, and minimising multinational tax leakage. In our view, the proposed changes are reflective of the already significant level of scrutiny that we are seeing being applied by Foreign Investment Review Board’s (FIRB) and its Australian Government consult partners throughout Australia’s foreign investment approval regime to investments in critical infrastructure, critical minerals, critical technology, and assets involving sensitive data sets or located close to Australian Government facilities (such as defence sites) (collectively, ‘sensitive investments’), including the increasingly lengthy delays in the assessment and approval process for investments of this nature.
We are hopeful that the proposed increased resourcing for Treasury and FIRB, and the establishment of the proposed application processing timeframe targets, will help relieve the current bottlenecks and extended approval wait times that we are seeing for applications related to sensitive investments. However, Australia’s foreign investment approval process, whilst led by FIRB, is heavily dependent on the approach and resourcing applied to reviewing and considering foreign investment applications by FIRB’s Australian Government consult partners. To maximise the upsides of the proposed reforms, it will be important that these consult partners approach the changes with an aligned commitment to enhancing the efficiency of the foreign investment regime. So it remains to be seen if there will be any meaningful change to the assessment of FIRB applications in practice as a result of this policy reform.
That said, we welcome the Treasurer’s objective of ensuring Australia remains an appealing jurisdiction for foreign investment and incentivising foreign investment. An important aspect of the policy update is the Treasurer’s proposal for allowing refunds of FIRB application fees for foreign investments that do not proceed because the investor is unsuccessful in a competitive bid process. In our experience, it is common for vendors in competitive sale processes (most commonly where the target business, asset or portfolio of assets is highly attractive and can draw a number of strong competitive bidders – including for assets and businesses in the energy transition, broader infrastructure and technology sectors) to require all foreign bidders to have lodged their FIRB applications, and to have paid the relevant FIRB application fee, prior to submitting their bid for the target and knowing who is ultimately awarded as the successful bidder – with the objective of maximising transaction certainty for the vendor. This practice, when coupled with the significant increases in FIRB application fees over the last couple of years, has led to foreign bidders in competitive sale processes being subject to the risk of significant sunk transaction costs where they are ultimately unsuccessful for the target business, asset or portfolio of assets.
Reforms to foreign investment review regime
On 1 May 2024, the Treasurer announced that as part of the Australian Government’s agenda to position Australia as an indispensable part of the global economy, and in conjunction with the ‘Future Made in Australia’ proposals outlined by the Australian Prime Minister in early 2024, there will be further amendments to the foreign investment review regime to (amongst other things) increase scrutiny on foreign investment in the critical infrastructure, minerals and technology sectors.
The reforms have been announced in anticipation of the upcoming 2024-2025 Federal Budget and are aimed at ensuring Australia remains an appealing jurisdiction for foreign investment whilst also protecting domestic economic and national security interests. The Australian Government maintains that it is eager to encourage investment in sectors such as clean energy and industrials as part of Australia’s push to reach net zero, as well as manufacturing, mining of non-critical minerals and commercial and new residential real estate.
The reformed foreign investment framework is expected to “work better for investors, Australia’s economy, and Australia’s national interest” in the increasingly complex economic and geostrategic environment.
The reforms include the following key changes:
- Review regime to be more robust, efficient and effective
While no fast-track application process is proposed, the reforms provide for the faster processing of ‘low-risk’ investments. That is, applications from foreign investors who are known to the Australian Government and have a good compliance record and who are making application with respect to investments in non-sensitive sectors. FIRB has also signalled that applications are more likely to be streamlined for transactions with a clear and less complex transaction structure.
- Increased resources for FIRB and Treasury
The Australian Government will provide more resources for screening sensitive investments to facilitate enhanced but efficient scrutiny of complicated or higher risk proposals.
In our experience, there is already considerable scrutiny of such investments. Further, the proposal to increase resources for Treasury is welcome, but it will also be necessary to enhance the resources available to FIRB’s Australian Government consult parties to really unlock the objectives of a streamlined review and approval process.
- New processing timeframe targets
As a result of the increased resources available for FIRB, from 1 January 2025, Treasury will target processing 50% of applications within 30 days of lodgement. Treasury anticipates that most foreign investors will see a general improvement in the speed of processing from 1 July 2024.
Alongside streamlining assessment, Treasury will improve transparency in communicating to foreign investors when they can expect longer timeframes in the assessment of investment proposals. Again, while this is a positive reform, we consider that Treasury already frequently adopts this practice – the issue, rather, is that they are not regularly able to provide clear decision timeframes to investors, often because Treasury cannot control when they receive inputs from consult partners.
- Continued increase in enforcement and compliance activities
Treasury’s compliance team will focus on enhanced monitoring and enforcement of FIRB conditions – including via implementing measures to undertake site visits. The Treasurer has also flagged utilisation of its call-in powers. These powers may be used to regulate foreign investments that have not previously been notified to FIRB, but which come to pose national security concerns. We are not aware of the Treasurer having previously exercised this call-in power.
Pleasingly, the Australian Government has also reiterated its commitment to early engagement with investors, which has been a positive feature of the regime that our clients frequently rely on.
- Updated tax guidance
Treasury has indicated its intention to increase scrutiny of tax arrangements disclosed as part of FIRB applications which are considered to pose a risk of tax avoidance or risk to revenue, to ensure that multinational companies are adhering to Australia’s taxation laws.
The Australian Government’s attention to these higher-risk tax areas has already been reflected in the more expansive additional tax conditions we are now seeing being applied to a range of FIRB approvals – noting that Treasury will release public guidance on its approach to foreign investment and tax integrity later in 2024.
- New incentives to encourage foreign investment
Other positive aspects of the proposed reforms aimed at incentivising foreign investment include:
- Treasury refunding application fees in relation to proposed foreign investments that do not proceed because the investor is unsuccessful in a competitive bid process. As noted above, we welcome this proposal but also we expect that this reform will lead to vendors who are running a competitive sale process more frequently requiring that FIRB applications be submitted, and application fees be paid, as part of the binding bid phase of the process.
- Releasing draft regulations to exempt interfunding transactions from requiring FIRB approval, as well as clarifying the application of the important “rights issue” and “foreign custodian corporation” exemptions under Australia’s foreign investment laws. Consultation on the exposure draft regulations is open until 31 May 2024.
Next steps
While the updated Foreign Investment Policy provides a high-level overview of the Australian Government's regulatory focuses, Treasury is yet to provide guidance regarding the practical implementation of the reforms nor the implications of the changed policy settings on current FIRB applications or FIRB applications to be lodged before 1 July 2024. Foreign investors should therefore keep an eye on the upcoming Budget and stay alert for further details regarding the reforms.
The Australian Government has also suggested that it will streamline the assessment of competition issues in the FIRB review process, following the recent announcement of significant merger reforms. Although the merger reforms will not be implemented until January 2026, foreign investors should closely monitor further developments in this space.
Relatedly, the alignment of the Australian foreign investment regime with other regulatory settings (such as Australia’s critical infrastructure security framework) appears to be an area of future focus for the Treasurer. Accordingly, reforms to, for example, strengthen energy network security, or regulate critical minerals and critical technologies as critical infrastructure assets, may be likely.
An increasingly complex area
These changes are the latest in a series of reforms to Australia’s foreign investment settings that have been made in recent years, including the following significant and sweeping changes:
- In 2020, the Australian Government significantly expanded Australia’s foreign investment regime and introduced numerous amendments to Australia’s foreign investment laws to address national security concerns, including the introduction of the mandatory reporting regime for certain national security actions (for further details refer here Major reforms to Australia Foreign Investment and Critical Infrastructure Frameworks).
- In 2021, the Australian Government enacted the major amendments to Australia’s critical infrastructure security laws to expand the scope of the existing framework to protect certain critical infrastructure in a wide range of sectors that forms part of or is viewed as critical to the essential services to which Australia relies on (for further details refer here Significant Expansion of the Notifiable National Security Actions Test).
- In 2023, the Register of Foreign Ownership of Australian Assets was established, requiring foreign persons to give notice of certain actions relating to investments in Australian land, water, entities, businesses and other assets to the Commissioner of Taxation and the ATO.
- In April 2024, the Treasurer announced an overhaul to Australia’s merger laws which will apply from 1 January 2026 (noting that exposure draft legislation to implement the changes will be consulted on by Treasury in 2024) – many key elements of the reforms, such as the notification thresholds, the up-front information requirements, and the fees for ACCC notification are yet to be determined.
Please contact any of the authors or your usual DLA Piper contact if you would like to discuss any of the amendments and how they could impact on foreign investment in Australia.
