Summary of proposed reforms to FIRB regime – Tranche 2 Regulations

In brief

On 18 September 2020 the Federal Government released exposure drafts of the 'Tranche 2 Regulations' to amend Australia's foreign investment laws. This follows the release on 31 July 2020 of the 'Tranche 1 Bill and Regulations' which included the proposed new national security test (see our previous Insight).

This insight summarises the Tranche 2 Regulations which comprise:

• the Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 - to amend the Foreign Acquisitions and Takeovers Regulation 2015; and
• the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020 – to contain a new fee regime.

Topics and summary of proposed changes

Monetary thresholds

• Since 29 March 2020, there has been $0 monetary threshold on all acquisitions subject to the FIRB regime.
• Proposed to reinstate the pre-29 March 2020 monetary thresholds (summarised in Annex 1 of FIRB's policy document).
• Also proposed in relation to monetary thresholds are:
  • provisions giving effect to Australia/HK FTA; and
  • for acquisitions of interests in a land entity, the value of mining or production tenements held by the land entity is to be included alongside value of residential land and vacant commercial land held by the land entity in determining if the 10% of total asset value threshold is met – if the threshold is met then there will be $0 monetary threshold for acquisition of interest in the land entity.

Call-in power period

• Background is that the Treasurer is to be given a new 'call-in power' to undertake the following in respect of any transaction or proposed transaction that was not previously notified to FIRB (but only where the transaction is either a 'significant action' or a 'reviewable national security action') or is not the subject of a no objection notification or exemption certificate:
  • initiate a review of the transaction or proposed transaction where the Treasurer considers it may pose a national security concern; and
  • following such a review, make orders (such as a prohibition or disposal order) in respect of the transaction or proposed transaction where the Treasurer is satisfied that it would be, or that the result of it is, contrary to national security.
• Proposed that the call-in power can be exercised at any time within 10 years after occurrence of relevant significant action or reviewable national security action.

Exemptions and call-in power

• Proposed modifications to existing exemptions to the 'notifiable action' and 'significant action' concepts under the current regime:
  • the acquisition from government exemption to be expanded to cover acquisitions from bodies corporate established by the Commonwealth Government, or a State or Territory government for a public purpose;
  • the acquisition from government exemption will not apply to acquisitions of interests in national security businesses or national security land; and
  • acquisitions under wills to no longer be exempt.
• Proposed that the various exemptions to the 'notifiable action' and 'significant action' concepts under the current regime (as modified per above, though excluding the 'moneylending exemption' (see below)) extend to the new 'notifiable national security action concept'.
• However, it is not proposed that the following categories of exemptions extend to the 'reviewable national security action' concept:
  • devolution by operation of law;
  • acquisitions by foreign custodian corporations;
  • acquisitions from government;
  • investments in financial sector companies;
  • compulsory acquisitions and buy-outs;
  • convertible instruments that include loss absorption requirement if entity becomes non-viable;
  • acquisitions of land by persons with close connection to Australia;
  • acquisitions by certain insurance companies and superannuation funds;
  • acquisitions of interests in land entities below certain percentage thresholds;
  • acquisitions of residential land in certain circumstances;
  • certain types of easements;
  • rights issues and dividend reinvestment plans; and
  • foreign persons in which foreign custodian corporations have interests.
• Consequently, an action that occurs without prior FIRB approval and which constitutes a 'reviewable national security action' can be subject to exercise of the call-in power.

Moneylending exemption

• Currently, acquisitions by foreign moneylenders of security interests are exempt from the FIRB regime. Likewise with enforcement of security interests, except that foreign government investors (FGIs) have six months (or 12 months if the FGI is also an ADI) to divest assets acquired upon enforcement.
• Proposed that the moneylending exemption will not apply to acquisitions or enforcements of security interests in national security land or national security businesses.

'Foreign government investor' definition

• Currently, one of the ways a person is taken to be a 'foreign government investor' (FGI) is where they are:
  • a corporation, trustee of a unit trust or general partner of a limited partnership; and
  • FGIs from more than one foreign country collectively have a 40% or greater interest in the corporation, unit trust or limited partnership.
• Proposed that a corporation, trustee of a unit trust or general partner of a limited partnership will no longer be considered an FGI under this '40% test' if they operate a passive investment fund or scheme where (in broad terms) investors in the fund are not able to influence any individual investment decisions, or the management of any individual investments, of the corporation, trustee or general partner under the investment fund or scheme, and provided also that no FGI investor has access to any sensitive information about investments under the investment fund or scheme (other than sensitive information that is financial information).

De minimis exception for offshore transactions by foreign government investors

• Currently, offshore transactions (such as where the foreign target has an Australian subsidiary) by FGI acquirers trigger mandatory FIRB approval requirement unless the de minimis exemption applies.
• Exemption currently applies where, among other things, Australian assets are <$55m and not part of a sensitive business. Proposed that Australian asset threshold be increased to <$60m (and subject to annual indexation), and additional requirement that assets not be part of a national security business.

'Australian media business' definition

• Currently, FIRB approval needed for foreign person to acquire 5%+ of Australian media business, irrespective of value. This will continue.
• 'Australian media business' definition to be expanded to cover electronic services (including via internet) which provide content similar to a newspaper or radio or TV broadcast, as well as producers of such content.

Revenue streams from tenements

• Currently, FIRB approval needed for foreign persons to acquire interests in mining or production tenements, irrespective of value. Definition sufficiently broad to include revenue streams (such as royalties) from tenements.
• Proposed that mere rights to revenue streams will no longer be considered as a mining or production tenement, except if such rights are an asset of a national security business or the tenement is national security land.

Exploration tenements

• Currently, it is unclear whether and which exploration tenements are considered to be mining or production tenements or otherwise interests in Australian land.
• New exemption proposed which exempts exploration tenements from FIRB regime, except where acquirer is an FGI or the exploration tenement is in respect of national security land.

Exemption certificates

• Proposed new types of exemption certificates: one to cover notifiable national security actions and another to cover reviewable national security actions.

Fee regime

• Proposed new FIRB fee regime. Detailed summary can be accessed via the button below.
• Proposed fee changes are extensive, including:
  • $500,000 fee cap to seek a no objection notification for an entity, business or commercial land acquisition, compared to current $107,100 maximum;
  • current fixed fee for an exemption certificate ($36,900) to be replaced by a formula whereby the fee is 75% of what the fee would be to obtain a no objection notification for the total value of the consideration for the actions proposed to be covered by the exemption certificate.