Treasury Minister Jim Chalmers unveiled changes on 1 May 2024 which will be a key element of the forthcoming Future Made in Australia Act. He said the reforms will “make Australia a more attractive place to invest, boost economic prosperity and productivity, while strengthening our ability to protect the national interest in an increasingly complex economic and geostrategic environment”.

The federal government’s approach focuses on attracting investment in key areas outlined in a new paper Australia’s Foreign Investment Policy (the paper) being:

• Helping to deliver the net zero transformation alongside domestic private and government capital.
• Increasing Australia’s housing supply by supporting investment in new housing stock including through investment in Build-to-Rent developments.
• Supporting the objectives of Australia’s Critical Minerals Strategy https://www.industry.gov.au/publications/critical-minerals-strategy-2023-2030) to grow the sector, create jobs, diversify global supply chains and help Australia become a renewable energy superpower, whilst contributing to global efforts to achieve net zero.
• Harnessing the potential of critical technologies to encourage competition and diversify industries, helping Australian businesses commercialise new critical technology ideas.

Streamlined review for lower risk foreign investment

Investments in non-sensitive areas by passive investors and investors with a strong compliance record will benefit from a streamlined review process within the Foreign Investment Review Board (FIRB) framework.

The Treasury will adopt a performance target of processing 50 per cent of investment proposals within the 30-day statutory declaration decision period as from 1 January 2025. The government says that most foreign investors will see an improvement in the speed of processing from 1 July 2024.

The paper says the new approach will be informed by consideration of the investor (who?), the target of their investment (what?) and the structure of the transaction (how?).

For example, listed under “who”, are investors with a strong track record of compliance with the foreign investment framework and other Australian laws and repeat investors well known to the Australian Treasury, investing alone and not in a consortium with unknown investors.

“What” means non-sensitive sectors including manufacturing, professional services, mining of non-critical materials, new housing and commercial real estate.

“How” encompasses transactions where the ownership structure is clear, including a clear explanation of who will ultimately control the assets, land or entity once the proposed transaction is completed.

As part of the efforts to support streamlining, foreign investors will be allowed to purchase established Build-to-Rent developments and lower application fees will apply to this type of investment (see Hogan Lovells alerter Navigating the Australia build-to-rent boom: opportunities for investors).

The significant application fees for foreign investments that do not go ahead because the investor is unsuccessful in a competitive bid process will be refunded to encourage early compliant engagement.

The paper also aspires to improving the timeliness of decision-making by removing duplicative provision of information on competition issues between the foreign investment framework and the ACCC-led merger control system.

The foreign investment framework

Under the Foreign Acquisitions and Takeovers Act 1975 and the Foreign Acquisitions and Takeovers Fees Imposition Act 2015, foreign investors are required to notify the Australian Treasury of proposed foreign investments that meet certain criteria. The framework operates according to a “negative test” meaning there is a presumption that investment proposals should proceed unless they are found to be contrary to the national interest or national security. Foreign investors pay a meaningful fee dependent on the value and kind of investment when submitting an investment proposal.

When making decisions on whether to permit foreign investment, the Australian Treasury is advised by FIRB which examines foreign investment proposals and advises on the national interest implications.

Whether a foreign investor needs to make a notification depends on a range of factors including the type and size of the investment the investor proposes to take, the monetary thresholds relevant to the investment, whether the investor is a foreign person or foreign government investor and whether any exemptions apply.

Proposed foreign investments are assessed under a “national interest test” or a narrower “national security test”, with most investments assessed under the national interest test provided they meet the relevant monetary and control thresholds.

The paper notes the general assumption is that foreign investment is beneficial to the Australian economy. Where risks to the national interest or national security are identified, the usual approach is to approve the investment subject to conditions designed to protect the national interest or national security.

Stronger scrutiny

The paper notes that national security threats arising out of investment are becoming more challenging. The paper highlights that “foreign investment carries risks related to the potential access and control investors may obtain over sensitive organisations and assets such as critical infrastructure assets, which may provide opportunities for espionage, sabotage or other activities contrary to Australia’s national security interests.”

The paper says that additional scrutiny is also required “in sectors where there are supply chain resilience concerns, where there is a need to protect sensitive data, technology or capabilities; or where the concentration of ownership is a factor.”

Investments in sensitive sectors such as critical infrastructure, strategic minerals, defence technology, investments near key Australian government facilities and investments which involve holding or having access to important data sets, will be subjected to greater scrutiny.

The paper says that the government’s stronger risk-based assessment of investment proposals will consider the balance of economic benefits and security risks. As part of this work, monitoring and enforcement activity will be stepped up with greater resources dedicated to ensuring compliance with conditions imposed on high-risk foreign investment.

National interest

The national interest and what would be contrary to it, is not defined in the legislation. Rather, the legislation confers upon the treasury minister the power to decide in each case whether a particular investment would be contrary to the national interest. By way of example, the paper notes that investments in enterprises that are large employers or have significant market share may raise more sensitivities than investments in smaller enterprises.

The national investment test considers how much risk a potential foreign investment poses to Australia’s tax revenue. Heightened scrutiny will be applied to foreign investment proposals with tax characteristics likely to be considered higher risk, including (i) internal reorganisations or other intragroup transactions which may represent initial steps towards avoidance of Australian tax; (ii) pre-sale structuring of Australian assets that present risks to tax revenue on disposal by private equity or other investors; (iii) the use of related party financing arrangements to reduce Australian tax; or (iv) facilitation of migration of assets to offshore related parties in jurisdictions with effective low taxation. The government says the approach to tax risk “reflects the international trend to ensure that entities pay the right amount of tax in the countries in which they operate and where value creation occurs.”

The government says it considers the extent to which the investor operates on a transparent commercial basis and is subject to adequate and transparent regulation and supervision. The government will consider the investor’s record of complying with both the spirit and the letter of Australia laws.

National security

As a subset of the national interest, the national security test considers a narrower range of factors than the national interest test. The paper says that “in assessing investments under the national security test, the Government considers the extent to which the investment will affect Australia’s ability to protect its strategic and security interests”. The government relies on advance from relevant national security agencies for assessments as to whether an investment raises national security concerns.

Compliance

The paper notes that maintaining strong compliance with Australia’s foreign investment legislation “is a priority for the Government to ensure that foreign investment is in line with the national interest (or national security)”. The paper says it expects all foreign investors to be aware of, understand and comply with their obligations under Australia’s foreign investment laws. The paper reminds potential investors and others that failure to comply can result in significant penalties, including infringement notices, civil and criminal penalties.

Implications

The paper is welcome in its ambition to cut the screening times for trusted investors. These include, for example private equity firms and sovereign wealth firms who have invested in Australia repeatedly and who have a strong compliance record yet who may have to endure extended waiting times to have a new investment proposal approved.

Whilst the new policy undoubtedly has many positive features, and should help to get capital flowing into Australia more quickly (a stated ambition of the government), it does contain traps for the unwary. Preparing and tailoring an investment proposal to take advantage of the new regime and to make sure unnecessary delays are avoided, will be critical.

We have extensive experience advising parties navigating Australia’s foreign investment regime. Please contact us if you are interested in learning more.

Authored by Charles Bogle, David Holland, Bryan Paisley, and Nigel Sharman.