Foreign Investment & FIRB Update – Bills to amend Foreign Acquisitions and Takeovers Act

On 20 August 2015, the Australian government introduced three bills (Bills) into Parliament to amend the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA). The changes are proposed to take effect on 1 December 2015 and will result in all substantive provisions in the FATA being repealed and replaced.

The key changes to the FATA include:

1. incorporating the existing rules relating to foreign government investors and acquisitions of interests in land currently set out in Australia’s Foreign Investment Policy (2015) (Policy) into the FATA so they have legislative force;
2. increasing the substantial interest threshold from 15% to 20%, so that it aligns with the threshold set out in Australia’s corporate takeover rules;
3. simplifying the structure of the FATA so that relevant transactions are broadly grouped into two categories: significant actions which are subject to voluntary notifications, and notifiable actions which are subject to mandatory notifications;
4. extending the current rules which require prior approval for acquisitions of interests in Australian urban land to all land in Australia, including agricultural land, unless an exemption applies;
5. introducing civil penalties and stronger criminal penalties for serious offences, as well as providing for the issue of infringement notices for less serious offences; and
6. introducing fees for applications under the FATA.

The definition of “foreign person” is central to the FATA as the Act only applies to the acquisition of interests in Australian entities, businesses or assets by foreign persons. The main changes to the definition of “foreign person” under the Bills are:

• that “foreign person” now captures Australian citizens who are not ordinarily resident in Australia (defined as being in Australia for 200 days or more in any 12 month period). However, only business acquisitions by expatriate Australians are regulated as the Bills exclude the application of the FATA to land acquisitions by Australian citizens not ordinarily resident in Australia;
• that an Australian entity will now be deemed to be a “foreign person” if a foreign individual, foreign corporation or foreign government holds at least a 20% interest in the entity (increased from the previous 15%). This brings the FATA in line with the Australian corporate takeover rules, meaning that an acquisition of 20% of the shares in an Australian entity will trigger both the application of the FATA and the takeover rules; and
• the inclusion of a new “foreign government” definition. An entity will be a foreign government if it is a body politic of a foreign country, being an entity established by and acting on behalf of the state of a foreign country.

Other sections of the “foreign person” definition are largely unchanged, including retaining the aggregate substantial interest threshold of at least 40% where two or more “foreign persons” are the holders.

The proposed amendments to the FATA categorise transactions which are subject to Australia’s foreign investment framework into two broad groups:

• “significant actions” – these capture transactions of a kind which trigger the power of the Treasurer to make certain orders under the FATA. Notification to or approval by the Treasurer of significant actions is voluntary (except where the action is a notifiable action – discussed below). Significant actions include:
  • the acquisition of interests in Australian entities or businesses;
  • the acquisition of interests in Australian land;
  • the acquisition of assets of an Australian business;
  • entering into certain agreements relating to the affairs of an entity or altering the constituent documents of an entity which gives one or more foreign persons certain abilities to control senior officers of the entity; and
  • entering into or terminating significant agreements with an Australian business; and
• “notifiable actions” – these actions are a subset of “significant actions”. A foreign person who proposes to enter into an agreement to take a notifiable action must notify the Treasurer before entering into the agreement. Notifiable actions include:
  • the acquisition of a direct interest in an agribusiness;
  • the acquisition of substantial interests in Australian entities; and
  • the acquisition of an interest in Australian land.

Various thresholds will apply to both significant actions and notifiable actions which will be set out in the regulations to the FATA.

Although notification of significant actions is not mandatory under the revised FATA, it is expected that (as with the practice under the existing FATA) most foreign persons will choose to notify the Treasurer voluntarily because they will want the certainty offered by a “no objection” response which generally prevents the Treasurer from making a disposal order, especially in connection with a significant transaction.

Australian land

The proposed changes to the FATA introduce a new concept of “Australian land”, which captures the existing “Australian rural land” concept and expands on the existing “Australian urban land” concept. Australian land now means agricultural land, commercial land, residential land or a mining or production tenement. These types of land are not intended to be mutually exclusive, so an area of land could fall under several types of Australian land.

The acquisition of an interest in Australian land is a significant action and also a notifiable action which enlivens the powers of the Treasurer to make orders under the FATA. An interest in Australian land is broadly defined, and includes:

• a legal or equitable interest in Australian land (subject to certain exceptions, such as an interest under a lease, a licence, a unit in a unit trust, an interest in a profit à prendre or certain other profit sharing arrangements);
• an interest in certain types of securities of the entity that owns the land which entitles the holder to occupy a dwelling;
• an interest as lessee or licensee in a lease or licence that exceeds 5 years;
• a profit à prendre if the term of the agreement exceeds 5 years;
• an interest in a share in an Australian land corporation or agricultural land corporation (similar to the concept of “urban land corporation” under the current law); and
• an interest in a unit in an Australian land trust or agricultural land trust, or an interest in the share of the trustee of such a trust.

Interest in agricultural land

Agricultural land is defined under the Bills as land in Australia that is used, or could reasonably be used, for a primary production business within Australia’s taxation laws. This includes land which is partially used for a primary production business, or land where only part of the land could reasonably be used for a primary production business.

The acquisition of an interest in Australian land (including agricultural land) also captures the acquisition of any interest in the shares of an agricultural land corporation, which will be defined in the regulations and is expected to include any corporation where the value of its eligible agricultural land assets exceeds 50% of the value of its total assets.

The Australian government now requires all foreign persons to notify the Australian Taxation Office (ATO) of existing interests in agricultural land before 31 December 2015. Foreign persons are required to notify new acquisitions of interests in agricultural land to the ATO within 30 days.

Interest in mining or production tenement

A mining or production tenement is defined under the Bills as a right under a law of the Commonwealth, a State or a Territory to recover minerals, oil or gas in Australia (including offshore). It includes a right to preserve such a right (eg retention titles), but does not include a right to recover minerals, oil or gas for the purposes of prospecting or exploring for minerals, oil or gas. Minerals includes coal or ore.

This definition reverts to the position under earlier versions of the Policy where only the acquisition of an interest in producing tenements or licences required notification.

No fees or charges are currently payable when making an application or giving a notice under the FATA.

Under the new regime, a fee must be paid in respect of a notice or application:

• by a person who applies for an exemption certificate;
• by a person who gives notice of a notifiable action;
• by a person who gives a notice in relation to a proposal to take a significant action that is not a notifiable action; or
• when the Treasurer makes a decision or order under the new Part 3 of the FATA relating to a significant action and the person affected has not notified the Treasurer.

The proposed fees for giving notice of notifiable actions are set out in the table below.

The Treasurer may waive or remit the whole or part of a fee that is payable if the Treasurer is satisfied that it is not contrary to the national interest to do so.

The Bills introduce civil penalties and stronger criminal penalties for serious offences, as well as providing for the issue of infringement notices for less serious offences under the FATA.

Under the Bills, a person may be liable if the person:

• fails to notify the Treasurer before taking a notifiable action;
• gives notice to the Treasurer stating that a significant action (including a significant action that is a notifiable action) is proposed to be taken and takes the action before the end of the applicable time limit;
• contravenes an order made by the Treasurer which prohibits a proposed significant action, is related to a prohibition order, is an interim order or is a disposal order; or
• contravenes a condition in a no objection notification imposing conditions or an exemption certificate.

The maximum penalty for the most serious offences in the FATA will increase to:

• imprisonment for three years (currently two years), a fine equivalent to 750 penalty units (currently 500 penalty units), or both, for individuals; and
• 3,750 penalty units for a body corporate (currently 2,500 penalty units).

The Bills also introduce a number of new civil penalty provisions and an infringement notices regime, which relate mainly to residential land.

As mentioned, the regulations will set out various thresholds for both significant actions and notifiable actions. We expect that they will be comparable to the current relevant monetary thresholds for non-government foreign investors, which are summarised in the table below.

* Not yet in effect, likely to be introduced on 1 December 2015.