Mergers & Acquisitions: changes to Australia's foreign investment framework

In brief

The Australian Government has announced wide reaching changes to Australia's foreign investment framework that will apply from 1 December 2015. Partner Wendy Rae reports on the potential impacts of the changes, which include new fees, stricter enforcement and penalties, and increased scrutiny around foreign investment in agriculture.

In early May, the Australian Government announced reforms to foreign investment rules it claims will 'strengthen the integrity of the foreign investment framework'. These include the introduction of fees for all foreign investment applications, stricter penalties and enforcement of the foreign investment rules, and increased scrutiny around foreign investment in agriculture. While the Australian Government claims it continues to welcome foreign investment, it is focusing on ensuring the rules are properly enforced.

New fees

Currently there are no fees for foreign investment applications, and the costs of administering the foreign investment rules are funded through consolidated government revenue. The Government is now moving to a 'user pays' system with the following fee levels:

• A$5000 for residential and rural land acquisitions with a value less than A$1 million;
• A$10,000 for acquisitions of vacant commercial land, internal reorganisations and new business proposals;
• A$10,000 (with a A$10,000 incremental fee increase for each additional A$1 million in property value in excess of A$1 million) for residential land and rural land acquisitions (with a cap of A$100,000 for rural land acquisitions);
• A$25,000 for annual programs, advanced off the plan certificates, developed commercial real estate acquisitions and heritage land acquisitions; and
• A$25,000 (or A$100,000 where the value of the transaction is greater than A$1 billion) for business and corporate acquisitions, including agribusiness acquisitions.

Impacts of the new fees

These fees are greater than the A$500-A$1500 fee that was suggested by the House of Representatives Standing Committee on Economics (the Parliamentary Committee) for foreign property purchases¹. We are concerned that the level of these fees may deter future foreign investment in Australia.

Other countries, such as the United States, Canada and Japan, do not charge such fees for business and commercial real estate applications. Also, unlike many other countries, Australia has zero dollar thresholds for direct investment and real estate acquisitions by foreign government investors so the imposition of these fees may put Australia at a comparative disadvantage.

We urge the Government to confer discretionary power on the Foreign Investment Review Board (FIRB) or the Treasurer to waive all or part of the fee in certain circumstances, including acquisitions resulting from the following:

• offshore foreign-to-foreign transactions;
• pro-rata capital raisings; and
• dividend reinvestment plans.

The approach to multiple applications also needs to be further considered. We suggest that:

• unsuccessful bidders in competitive sale processes should not be subject to fees;
• regular investors or foreign persons whose existing business operations require multiple applications should have a capped annual fee; and
• only one fee should be payable for an acquisition by a consortium of investors or by a fund and its upstream investors.

Without discretionary powers to deal with such matters, there will be some unfair and anomalous outcomes.

Agribusiness threshold and definition

The Government announcement confirmed that a A$55 million screening threshold would apply to all investments in the agribusiness sector from 1 December 2015. What has not been made clear is how that A$55 million threshold will operate in practice. Will the usual 15 per cent substantial interest threshold be applied to agribusiness investments? There will be anomalous impacts if the 15 per cent test is not applied. To take GrainCorp as an example, the acquisition of a very small percentage stake in that company would equate to A$55 million, and require a filing if the 15 per cent substantial interest threshold is not applied.

The definition of 'agribusiness' has also been the subject of much debate within the Government and the business community. The Government has finally opted for a definition that includes primary production businesses (generally those within Division A of the Australian and New Zealand Standard Industrial Classification Codes (the ANZSIC Code)) and certain first stage downstream manufacturing businesses, including meat, poultry, seafood, dairy, fruit and vegetable processing and sugar, grain and oil and fat manufacturing.

The adoption of Division A of the ANZSIC Code as the basis for the definition should be well received given industry is familiar with this code. We are also encouraged by the use of the word 'generally', as it would be inappropriate to include all groups and classes within Division A. However, before finalising the regulatory framework, a careful review of all groups and classes within Division A should be undertaken.
We also have some concerns about the extension of the definition to 'certain' first stage manufacturing businesses. The definition should not extend to cover businesses that do not deal directly with the primary producer. The final definition also needs to be clearly articulated so there is no room for doubt as to which businesses fall within the definition. It is inappropriate for applicants to be exposed to the risk of penalties resulting from uncertainties as to the application of the regime.

New penalties

The Government has announced a range of tougher penalties to make it easier to pursue foreign investors who breach the rules.
For criminal penalties, the maximum penalties for most offences will be:

• Individuals – 750 penalty units ($127,500) or three years imprisonment; and
• Company – 3750 penalty units ($637,500).

Civil penalties will also be introduced, with maximum penalties of:

• Individuals – 250 penalty units ($42,500); and
• Company – 1250 penalty units ($212,500) for business and agricultural investments.

In the residential real estate space, the civil penalties are more severe and extend to capital gains made on divestment, or percentages of the purchase price or market value of the property. In addition, infringement notices will also be introduced for certain residential property breaches.

The Government will also introduce increased criminal penalties and new civil penalties for third parties who knowingly assist foreign investors to breach the rules.

What are the impacts of the new penalties?

Currently the only penalties under the FATA are divestment orders and criminal penalties, so these new penalties constitute significant changes. The Parliamentary Committee Report recommended that such penalties be introduced for breaches of the foreign investment framework as it applies to residential real estate. However, the Government has chosen to apply these penalties more broadly.

We are concerned about the extension of the proposed penalties outside of residential real estate, given the complexity of some of the concepts in FATA (including the urban land rules, the foreign government investor definition and potentially the new agribusiness definition). The combination of these complexities and the poor drafting of the FATA means there can often be a range of views as to the correct application of the rules, and genuine mistakes can be made. We also note that a number of investors have needed to lodge retrospective applications to remain compliant with the foreign investment rules, and that the submission of these retrospective applications has been encouraged by FIRB. The introduction of a penalties regime may deter investors from coming forward, which would defeat the policy objectives of the government.

Land register and role of ATO

The Government has announced that it 'will ensure stronger enforcement of new and existing foreign investment rules by transferring all residential real estate functions to the Australian Tax Office' (ATO). We take this to mean that the Government will transfer the enforcement function to the ATO but that FIRB will maintain responsibility for applications. This remains to be clarified.

The Government also announced that from 1 July 2015, the ATO will start collecting agricultural land data, with a stocktake occurring between 1 July 2015 and 31 December 2015, and aggregate data to be published in the first half of 2016.

As a follow up to this announcement, the Commissioner of Taxation has gazetted a notice of a data matching program that will acquire details of foreign investors who apply to purchase residential or agricultural land in Australia for the 2010-11 to 2015-16 financial years. The Commissioner has explained that these records will be electronically matched with ATO data holdings to 'identify non-compliance with registration, lodgement, reporting and payment obligations under taxation laws' .

These are the first steps towards a comprehensive land register. The Government is also in negotiations with the States and Territories to use their land title data so that the land register can be expanded to include all land.