Foreign Investment Update

Changes to the foreign investment regime – application fees and increased penalties

What You Need To Know

The Australian Government has announced the introduction of measures to strengthen Australia's foreign investment framework. From 1 December 2015:

• application fees will be payable on all foreign investment applications; and
• an enhanced penalty regime in relation to investments in residential real estate will apply in an effort to increase compliance with foreign investment rules.

Background

In a joint media release on 2 May 2015 by the Prime Minister, Tony Abbott, and the Treasurer, Joe Hockey, the Australian Government announced changes to the foreign investment framework.¹ The changes reflect an effort to strengthen this framework by introducing fees payable on all foreign investment applications and higher penalties for breaches of the foreign investment rules in relation to residential real estate.

This recent announcement follows the Government's review of the responses it received to its Options Paper titled "Strengthening Australia's Foreign Investment Framework" (the Consultation Paper).² In the Consultation Paper, the Government sets out its proposals to strengthen Australia's foreign investment framework by introducing new compliance, enforcement and information collection measures. Further information on this can be found in our previous Foreign Investment Update.³

Application Fees

Currently, no fees apply to applications for the approval of investments under Australia's foreign investment regime. This will change from 1 December 2015, when application fees will be payable on all foreign investment applications submitted to the Foreign Investment Review Board (FIRB).

The Government has stated that the application fees will assist in financing the increased administrative costs arising from the new foreign investment screening, compliance, enforcement and data collection measures that are being introduced.⁴

Relevantly, the fees to be levied on foreign investment applications for business acquisitions or agribusiness investments will be $25,000 (or $100,000 where the value of the transaction is greater than $1 billion). A fee of $10,000 will be levied for applications for internal reorganisations.

The fees levied on all other foreign investment applications will be as follows:

• acquisition of residential property valued at $1 million or less - $5,000;
• acquisition of residential property valued at greater than $1 million - $10,000 (with a $10,000 incremental fee increase per additional $1 million in property value);
• acquisition of developed commercial real estate (including heritage listed property) - $25,000;
• acquisition of rural land valued at $1 million or less - $5,000; and
• acquisition of rural land equal to or greater than $1 million - $10,000 (then a $10,000 incremental fee per additional $1 million in rural land value, capped at $100,000).

The application fees will be indexed annually on 1 July by reference to the consumer price index. Interestingly, the Government's announcement of the introduction of these fees did not specify a fee payable for an application for the acquisition of agricultural land. As explained below, a new definition of "agricultural land" will be introduced and when these changes are made, we expect an application fee to be specified for such acquisitions.

Although they are subject to more stringent foreign investment rules, foreign government investors will be subject to the same application fees outlined above except for an application for a new business proposal, which will incur a $10,000 application fee. The same application fees will also apply to investors from free trade agreement partner countries, although the higher thresholds for submitting the application will remain.⁵

Penalty regime for residential real estate

Compliance with and enforcement of foreign investment rules in the residential real estate sector have received much recent attention in Australia. In the joint media release on 2 May 2015, the Australian Government announced that to assist with the enforcement of these rules, there will be a transfer of all residential real estate functions from FIRB to the Australian Taxation Office (ATO). This is to commence immediately and should be completed by 1 December 2015.

The ATO will be responsible for detecting any noncompliance with foreign investment rules and will be equipped with data-matching systems and specialised staff with compliance expertise.

Higher penalties will also be introduced for breaches of foreign investment rules in the residential real estate sector:

• for individuals - the maximum criminal penalty will be 750 units ($127,500) or 3 years imprisonment; and
• for companies - the maximum penalty will be 3,750 units ($637,500).

A civil pecuniary penalty and infringement notice regime will also be introduced to supplement divestment orders. A civil penalty will be introduced to capture any capital gain made on divestment of a property to ensure that foreign investors who breach the foreign investment rules do not benefit as a result. Under the proposed regime, either an infringement notice or civil penalty will be sought, but not both.

Third parties who knowingly assist a foreign investor to breach the foreign investment rules will also be subject to civil and criminal penalties under the new regime:

• for individuals – the maximum civil penalty is 250 penalty units ($42,500);
• for companies – the maximum civil penalty is 1,250 penalty units ($212,500); and
• knowingly assisting another person to commit a criminal office is an offence under section 11.2 of the Criminal Code Act 1995 (Cth) - the maximum penalty is the same as the primary offence.

The new regime also provides for the application of the civil penalty regime to property developers who apply for an advanced off-the-plan certificate. As mentioned in our previous Foreign Investment Update, currently, property developers selling apartments in a development of 100 or more can apply for an advanced off-the-plan certificate meaning that each investor in the development does not need to obtain separate FIRB approval.⁶ The certificate has a condition that the developer market the apartments in Australia as well as overseas. Under the new regime, if a developer fails to market the apartments in Australia, a criminal or civil penalty will be imposed. If a developer fails to comply with reporting conditions associated with the approval, a civil penalty or an infringement notice will be imposed.

Agricultural investments

What You Need To Know

The Australian Government has introduced new definitions of "agribusiness" and "agricultural land" for the purposes of Australia's foreign investment regime.

A New Definition of "Agribusiness"

In February 2015, the Australian Government advised that a new $55 million screening threshold would be introduced for investments by foreign persons (but not by foreign government investors) in Australian agribusinesses.⁷ At the time of this announcement, the concept of an agribusiness did not exist in the context of Australia's foreign investment regime.

This deficiency and the difficulty in suitably defining "agribusiness" was recognised in the Consultation Paper, under which the Government sought public submissions on the issue.

Following its review of the submissions made to it, on 2 May 2015 the Government announced that the proposed definition of "agribusiness" will include primary production businesses (generally those within Division A of the Australian and New Zealand Standard Industrial Classification Codes) and certain first stage downstream manufacturing businesses (including meat, poultry, seafood, dairy, fruit and vegetable processing and sugar, grain and oil and fat manufacturing).

A New Definition of "Agricultural Land"

As covered in our previous Foreign Investment Update, the 2015 edition of Australia's Foreign Investment Policy (Policy) contains new screening thresholds for acquiring rural land.⁸ Under the Policy, foreign persons are required to notify and get prior approval from FIRB for a proposed acquisition of an interest in rural land where the value of the acquisition, combined with the value of interests in rural land already held by the investor, exceeds or is likely to exceed $15 million.

Consistent with the Consultation Paper, in its most recent announcement the Government has recognised that the use of the concept of "rural land" is inadequate and indeed has only been temporarily used for the purposes of the lower $15 million cumulative screening threshold.⁹

To reflect in the foreign investment framework a concept more reflective of the common understanding of agricultural land, the Government has announced that it will introduce a broader definition of agricultural land that more accurately captures "productive" agricultural land. Agricultural land will be defined as "land used, or that could reasonable be used, for primary production business" in place of the previous definition which only covered land used "wholly and exclusively" for primary production.

As was the case with the definition of rural land, primary production business will continue to be defined by reference to the Income Tax Assessment Act 1997 (Cth).

The extent to which these changes are introduced as part of the legislative amendments required to implement the reforms referred to above on 1 December 2015 remains to be seen. It is hopeful that, following the review process undertaken in response to the Consultation Paper, substantial amendments are made to the legislative regime to embed the revised definitions.

Foreign Register

The Australian Government has reaffirmed its intention to establish a foreign ownership register of agricultural land.¹⁰ On 2 May 2015, the Government confirmed that that the ATO will collect agricultural land data between 1 July 2015 and 31 December 2015.¹¹ Aggregate data will be published in the first half of 2016.

The Government believes that the register will strengthen reporting requirements regarding foreign acquisitions and provide a better understanding of foreign investment in Australia's agricultural sector.

The Government has announced that the changes with respect to this aspect of the reforms will be initially implemented through changes to the Policy. Supporting legislation will be introduced by 1 December 2015 as part of the broader legislative reform package.

<sub>Notes
1. Joint Media Release dated 2 May 2015 from the Prime Minister and the Treasurer: Government strengthens the foreign investment framework
2. Options Paper titled "Strengthening Australia's Foreign Investment Framework" released by the Australian Government dated February 2015
3. Ashurst Foreign Investment Update dated 12 March 2015
4.This was confirmed in the 2015-2016 Budget Papers which estimated the introduction of application fees to raise $735 million in revenue over the "forward estimates period" (ie from 1 December 2015 until the 2018 – 2019 financial period)
5. Further information on the treatment under the foreign investment regime of countries that have entered into a free trade agreement with Australia can be found in the Ashurst Foreign Investment Update dated 16 February 2015
6. Ashurst Foreign Investment Update dated 12 March 2015
7. Joint Media Release dated 25 February 2015 from the Prime Minister and the Treasurer: Government to Strengthen Australia's foreign investment framework
8. Ashurst Foreign Investment Update dated 12 March 2015
9. Joint Media Release dated 2 May 2015 from the Prime Minister and the Treasurer: Government strengthens the foreign investment framework
10. Joint Media Release dated 11 February 2015 from the Prime Minister and the Minister for Agriculture: Government tightens rules on foreign purchases of agricultural land
11. Joint Media Release dated 2 May 2015 from the Prime Minister and the Treasurer: Government strengthens the foreign investment framework</sub>