Cutting through the new red tape

Recent additions to the foreign investment regulatory framework

What you need to know

• The Government has published a set of standard conditions which will be imposed on all foreign investment approvals. These conditions are set out at the end of this Update.
• The standard conditions are designed to ensure multinational companies investing in Australia pay tax in Australia on their earnings. However the conditions are widely drafted and potentially burdensome. It is hoped that FIRB will provide guidance on the meaning and enforcement of these conditions in due course.
• Current foreign owners of Australian agricultural land must be recorded on the new national agricultural land register by 29 February 2016. Any new interests must be registered within 30 days of purchase.
• The Government has released a consultation paper regarding its proposed implementation of a national register of foreign ownership of water access entitlements.

What you need to do

• The focus of the Government on tax revenue means that all future applications to the Foreign Investment Review Board (FIRB) will need to include substantial information on the likely tax effects of the transaction.
• Include sufficient time in any transaction timetable to properly engage with FIRB (who will liaise with the Australian Taxation Office (ATO)) on these issues, particularly in the coming months while FIRB and industry advisers develop an understanding of the new conditions.
• Foreign investors should obtain legal and tax advice before discussing any of the new conditions with FIRB.
• Foreign investors will need to ensure that they have systems in place to ensure ongoing compliance with the new foreign investment approval conditions.
• Foreign investors need to ensure all existing Australian agricultural land holdings have been registered by 29 February 2016 to avoid penalties.

Tax conditions in summary

The Treasurer has announced that "standard conditions" will be imposed on foreign investment approvals to ensure multinational companies investing in Australia pay tax in Australia on their Australian earnings. The conditions are very broad (a breach may arise from even minor acts) and potentially burdensome. Refer to the end of this Update for the full set of the tax-related conditions.

In essence, the conditions will require compliance with Australian taxation law and with ATO directions to provide information in relation to the investment. Investors must advise the ATO if they are entering into any transactions with non-residents to which transfer pricing or anti avoidance measures of Australian tax law may potentially apply. There is also a condition requiring annual reporting on their compliance with the conditions. Additional conditions may also be applied where a significant tax risk is identified in a particular case. These may include requiring the investor to enter into advance pricing arrangements with or to seek rulings from the ATO or requiring investors to provide periodic forecasts of tax payable or to comply with other directions from the ATO that are specific to their circumstances.

A breach of conditions applying to a foreign investment approval could result in prosecution, fines and potentially compulsory disposal of the asset. Accordingly, foreign investors will need to ensure that they have systems in place to ensure ongoing compliance with foreign investment approval conditions. In addition, foreign investors who are asked to agree to the conditions will need to consider whether it is a requirement to disclose documents and information which attract legal professional privilege. For this reason, and due to the broad nature of the conditions, we strongly recommend foreign investors obtain legal advice before discussing and finalising the conditions with FIRB.

Foreign investors who agree to these conditions will have reporting obligations similar to those taxpayers who are in "active compliance" arrangements with the ATO, a higher level of engagement usually reserved for only the most significant taxpayers in Australia

The Treasurer may of course still impose conditions additional to these tax related standard conditions where he is satisfied that doing so is necessary to ensure the investment is not contrary to Australia's national interest.

Acquisition of Tasmanian Land Company – the first approval to include the new tax conditions

On 23 February the Treasurer announced that the acquisition of the Tasmanian Land Company, including Van Diemen's Land Company (VDL) by Moon Lake Investments (Moon Lake) had been approved subject to a number of tax conditions. VDL is one of Australia's biggest dairy farming businesses and Moon Lake is owned by Chinese billionaire Lu Xianfeng. The application of the national interest test as applied by the Treasurer in this case included an assessment of the impact on tax revenue of the transaction, the likely impact on local jobs and any increase in investment to support economic growth in the region

The approval for Moon Lake’s foreign investment application is the first to be subject to new conditions requiring it to comply with Australian taxation law, ATO directions to provide information in relation to the investment and an ongoing obligation to advise the ATO if it enters into any transactions with non-residents to which the transfer pricing or anti-avoidance measures of the tax law may potentially apply.

In addition, Moon Lake has given employment guarantees and commitments to undertake a number of investment projects at the VDL farms. Moon Lake has also committed to honour the terms of all environmental and cultural agreements entered into by VDL, including those with the local Aboriginal community.

Proposed water access entitlement register

The Treasurer has announced that legislation to establish a register of foreign owned water access entitlements will be introduced by 1 December 2016. A consultation paper has been released on 22 February 2016 to gauge stakeholder interest and feedback on the proposal. The period for making submissions closes on 11 March 2016. The register will apply to water access entitlements, which are a perpetual or ongoing entitlement, by or under a law of a state or territory, to exclusive access to a share of the water resources of a water resource plan area.

Currently, foreign acquisitions of interests in water are not directly screened under the FIRB framework, but may be part of screening other types of investments. As interests in water can be associated with land, or are assets of Australian businesses, such acquisitions may be screened through the agricultural land screening requirements, or through the acquisition of securities or business assets. Once the Water Access Entitlement Register has been established (the current thinking is that this will become part of the agricultural land register) and there is data available, the Government is committed to reviewing the treatment of water entitlement assets under Australia’s foreign investment framework.

Currently the only official source of national data on foreign investment in water resources is the ABS Agricultural Land and Water Ownership Survey.

Standard conditions

The standard conditions to be met for an application not to be found to be against the national interest are:

• The applicant must comply with Australia’s taxation laws in relation to the action, and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the action.
• The applicant must use their best endeavours to ensure, and within their powers must ensure, that its associates* comply with Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the action.
• The applicant must provide any documents or informationˆ requested by the ATO in connection with the application or potential application of Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
• The applicant must use their best endeavours to ensure, and within their powers must ensure, that its associates provide any documents or informationˆ requested by the ATO in connection with the application or potential application of Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
• The applicant must notify the ATO if it enters or has entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997 or the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may potentially apply, where such transactions or dealings have not been previously notified to the Commissioner.
• The applicant must use its best endeavours to ensure, and within its powers must ensure, that its associates must notify the ATO if they enter or have entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997 or the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may potentially apply, where such transactions, dealings, operations or assets have not been previously notified to the Commissioner.
• The applicant must pay any outstanding taxation debt, and must use their best endeavours to ensure, and within their powers must ensure, that its associates pay any outstanding taxation debt, which is due and payable at the time of the proposed action.
• The applicant must provide an annual report to FIRB on compliance with these conditions. The first report must cover the first 12 month period commencing on the date of this notice. All subsequent reports must cover a 12 month period beginning on each anniversary of the date of this notice. Each report must be provided within 30 days after the end of the 12 month period to which it relates.

_{* Associates has the meaning in section 318 of the Income Tax Assessment Act 1936.}

_{ˆ This includes documents or information held, possessed or stored outside Australia}

Possible additional conditions for cases where a significant tax risk is identified

• The applicant must engage in good faith with the ATO to resolve any tax issues in relation to this transaction and its holding of the investment.*
• The applicant must provide information as specified by the ATO on a periodic basis including at a minimum a forecast of tax payable.^

_{* Depending on the issues raised by the ATO this might include entering into the negotiation of an advance pricing arrangement or the obtaining of a private ruling with the ATO within a certain timeframe, or compliance with thin capitalisation requirements or changes to the structure of the takeover.}

_{^ This could include a requirement to advise the ATO, and provide an explanation, of significant variations from the forecast of tax payable.}