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Australia's foreign investment regime - Budget changes

By Wendy Rae 23 May 2017
Foreign Investment Review Board (FIRB) Government Infrastructure & Transport Mergers & Acquisitions Private Capital Private Equity Property & Development

In brief

The Australian Government flagged a number of changes to Australia's foreign investment regime in the 2017 Budget. In a welcome development, the changes seek to simplify an otherwise complex regime and encourage foreign investment in Australia. Partner Wendy Rae and Associate Nick Kefalianos examine the most significant changes.

Jump To

  1. Introduction
  2. Simplifying the fee framework
  3. Pre-approval for business investment
  4. Treatment of residential land for commercial purposes
  5. Narrowing 'low threshold' non-vacant commercial land
  6. Treatment of solar and wind farms

Introduction

The changes to Australia's foreign investment regime, as outlined in the latest Federal Budget, include:

  • simplifying the fee framework;
  • introducing a pre-approval mechanism for certain business investments;
  • amending the treatment of residential land used for commercial purposes;
  • narrowing the scope of the ‘low threshold’ non-vacant commercial land definition; and
  • clarifying the treatment of solar and wind farms under the regime.

The exact scope of these changes will be clarified before 1 July 2017, and are subject to the introduction of legislation.

Simplifying the fee framework

The existing fee framework applicable to applications submitted to FIRB has created significant challenges for applicants, with the framework being unnecessarily complex. The fees that are payable by an applicant differ depending on the type of acquisition being undertaken and the consideration that is payable in respect of the acquisition. This complexity has also resulted in delays to applications, given the time taken by FIRB to administer the complex fee framework.

In response to this complexity, the Australian Government has sought to simplify the process by seeking to better align and standardise the application fees applicable to acquisitions in agricultural land, commercial land and business acquisitions, as summarised below.

Fees by category and value 1 2
Investments in commercial land (vacant or developed)3 Consideration $10 million or less:

$2000		 Consideration above $10 million:

$25,300		 Consideration above $1 billion:

$101,500
Investments in entities and businesses Consideration $10 million or less:

$2000		 Consideration above $10 million:

$25,300		 Consideration above $1 billion:

$101,500
Investments in agricultural land Consideration $2 million or less:

$2000		 Consideration above $2 million:

$25,300		 Consideration above $10 million:

$101,500
Flat fees
Exemption certificate $35,000
Mining and production tenements $25,300
Legal or equitable interests in mining, production or exploration tenement4 $10,100
An interest of at least 10% in securities in a mining, production or exploration entity $10,100
Stating an Australian business $10,100
Internal reorganisation $10,100
Variation5 $10,100

Pre-approval for business investment

The Australian Government has acknowledged the broad application of Australia's foreign investment regime, which in some instances has resulted in unnecessary red tape. This is particularly so in respect of foreign government investors, given the application of the regime to business proposals that are of low sensitivity (such as certain foreign-to-foreign transactions involving the acquisition of indirect interests in immaterial Australian subsidiaries). 

In response, the Australian Government proposes to introduce a new exemption certificate for non-sensitive acquisitions of interests in securities, which would exempt a foreign person (including a foreign government investor) from the requirement to seek the approval of the Treasurer for acquisitions of securities covered by the certificate.

While further guidance is required as to when such an exemption certificate will be available (particularly in respect of what the Australian Government considers 'non-sensitive' acquisitions), the introduction of such an exemption certificate will provide welcome relief for foreign investors from the burden of lodging multiple applications.

Treatment of residential land for commercial purposes

The current definition of 'commercial residential premises' is taken from the GST Act and excludes certain types of land that would otherwise be considered commercial in nature, including aged care facilities, retirement villages and certain student accommodation. The result of these exclusions is that these types of land fall within the regime applicable to residential land (as opposed to commercial land). All acquisitions of residential land require notification to the Treasurer and such notifications attract much higher fees than commercial land notifications.

The Australian Government intends to address these issues by expanding the definition of commercial residential premises to include aged care facilities, retirement villages and student accommodation.

Narrowing 'low threshold' non-vacant commercial land

Acquisitions of certain types of non-vacant commercial land, being acquisitions of 'low threshold' non-vacant commercial land, are screened at a lower threshold, being $55 million, as opposed to the standard $252 million threshold.6 The scope of non-vacant commercial land has proven too broad. For example, it includes land under prescribed airspace, which extends to most commercial properties in the CBDs of Australia's major cities. Among other things, the Australian Government proposes to remove land under prescribed airspace as low threshold commercial land.

We understand that certain other amendments will be made to address the scope of low threshold commercial land, for example, to exclude certain acquisitions of land leased to 'corporate type' Commonwealth, state or territory bodies, such as shopping centres housing an Australia Post office.

Treatment of solar and wind farms

The treatment of solar and wind farms under Australia's foreign investment regime has been subject to substantial debate. Currently, the land on which solar and wind farms are located is ordinarily considered agricultural land, attracting a monetary threshold of $15 million (satisfaction of which is calculated based on the applicant's cumulative interests in agricultural land). The debate that has arisen relates to the treatment of the solar or wind farm infrastructure, namely, whether this infrastructure is considered a chattel or a fixture. To the extent the solar or wind farm infrastructure is considered a fixture, this infrastructure contributes to the value of the land and therefore the monetary threshold is more likely to be satisfied. Whether the solar or wind farm infrastructure is considered a chattel or a fixture is a matter determined by FIRB on a case-by-case basis.

Changes to Australia's foreign investment regime are proposed in respect of the treatment of solar and wind farms, such that solar and wind farm infrastructure will be deemed to be fixtures. Furthermore, the treatment of the underlying land will depend upon the stage of the solar or wind farm project, as described below.

  • Where development approval has yet to be obtained for the construction of the solar or wind farm on the land, the land will continue to be considered agricultural land (and therefore the $15 million cumulative monetary threshold will apply).
  • Where development approval has been obtained for the construction of the solar or wind farm on the land, though construction of the solar or wind farm has not completed, the land will be considered vacant commercial land (and therefore no monetary threshold will apply).
  • Where a solar or wind farm has been constructed on the land, the land will be considered non-vacant commercial land, in which case, given that public infrastructure is located on the land, either:
    1. a $55 million threshold will apply (if the foreign person has a right to occupy the land or be involved in the central management and control of the entity that holds the land); or
    2. a $252 million threshold will apply (if the foreign person does not have a right to occupy the land or be involved in the central management and control of the entity that holds the land).

If you would like to talk to an expert about these changes, please contact one of the partners listed below.

Footnotes

  1. The lower fee rules will replace the existing de minimis rule. Other legislated lower fee rules will not be changed.
  2. Discretionary fee waivers for entities carrying on business acquiring multiple land titles under one agreement or acquiring securities in an entity that primarily holds residential land will be legislated.
  3. A $2000 fee will also apply for foreign government investors for developed commercial land acquisitions under $55 million.
  4. Only applicable to foreign government investors. A $2000 fee will apply where the fee would otherwise be more than 25 per cent of the consideration.
  5. The variation fee payable will not exceed the initial application fee.
  6. We note that a monetary threshold of $1,094 million applies to an entity that is an enterprise or national of the United States, New Zealand, Chile, Japan, the Republic of Korea or the People's Republic of China, irrespective of whether or not the land is considered low threshold commercial land.