Major reforms to Australia's foreign investment review framework

The Australian government has announced a sweeping set of changes to its foreign investment framework, representing the most comprehensive reform of the Foreign Acquisitions and Takeovers Act 1975 (Cth) since its introduction. 

The reforms aim to address inherent risks to Australia’s national interest, particularly national security, arising from existing and emerging matters such as technological change and international security developments and strengthen compliance measures.

What you need to know

• On 5 June 2020, the Treasurer announced sweeping changes to Australia's foreign investment framework, representing the most comprehensive reform of the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FIRB Act) since its introduction.
• The reforms are intended to strengthen the Government's ability to safeguard Australia’s national interest from existing and emerging national security risks and global developments and aim to strike a balance between encouraging foreign investment and ensuring it is not contrary to the national interest.
• The changes are proposed to take effect from 1 January 2021.
• The Treasurer's announcement does not affect the temporary reduction to monetary screening thresholds for all foreign investments to A$0 introduced on 29 March 2020, which will remain in place for the duration of the coronavirus crisis. It is expected that there will be a transition from those temporary measures to the reformed framework once it has been legislated.
• The key elements of the reforms are:
  
  • A new national security test for foreign investors, who will need approval to start or acquire a direct interest in a "sensitive national security business", regardless of the value of the investment.
  • A "call in" power for the Treasurer to review foreign investment in a "sensitive national security business" that raises national security risks but would otherwise fall outside of review requirements.
  • A national security "last resort" power for the Treasurer to impose or vary conditions or, as a last resort, order disposal on national security grounds in very limited circumstances.
  • Enhanced compliance measures and enforcement powers available to the Government, including increased penalties.
  • Reduced FIRB approval requirements for foreign private equity, institutional fund and similar investors with passive foreign government investors, for investment into non-sensitive businesses.
• The changes are to be made through amendments to the FIRB Act - the exposure draft legislation is expected to be released for consultation in July 2020, with the reforms scheduled to commence on 1 January 2021.

New National Security Test

The reforms introduce a new "national security test" regime applicable to foreign investments that give rise to national security concerns. 

Under the reforms, foreign investment in a "sensitive national security business" will require notification to and approval from the Treasurer, regardless of value.

While the Government continues to assess what will constitute a "sensitive national security business" for these purposes and will consult on this alongside the release of the exposure draft legislation, it is expected that this will include businesses operating in sensitive sectors such as energy, utilities and critical infrastructure, defence, national security-related supply chain, and businesses owning, storing, collecting or maintaining sensitive data relating to Australia's defence and national security.

Other key aspects of the new "national security test" regime include:

• The Treasurer will be granted new, time-limited "call in" powers to enable them to require the assessment of any foreign investment which would not otherwise be subject to assessment under the foreign investment review framework, whether before, during or after that investment, if the Treasurer considers it raises national security concerns. 

• Foreign investors will be able to make voluntary notifications for assessment, and also obtain specific exemption certificates for eligible acquisitions once they are assessed as not posing a national security risk.

• The Treasurer will have a broad national security "last resort" power to reassess foreign investments where subsequent national security risks emerge. This will enable the Treasurer to impose new conditions or vary existing conditions or, as a last resort, require compulsory divestment in very limited circumstances, such where there has been a substantial change in a foreign investor's activities posing unforeseen national security risks. The power will only be available if the foreign investment was already subject to FIRB review, and, for reasons of certainty, will not be retrospective but only applicable to future foreign investment.

Streamlining less sensitive investments – good news for private equity and investment funds with passive foreign government investors

Under the reforms, certain privately controlled and managed institutional investors (such as private equity and investment fund investors) in which foreign government enterprises have invested will no longer be treated as "foreign government investors" for the purposes of the FIRB Act, if those foreign government enterprises have no influence or control over the investor's investment or operational decisions.

This will be welcome news and, if delivered, will significantly streamline the investment process for foreign private equity and investment fund investors with passive foreign government investment, which are currently subject to more rigorous assessment requirements applicable to "foreign government investors" as a result only of that passive investment.

Enhanced compliance measures and enforcement powers

The Government has proposed a raft of reforms intended to improve foreign investors' compliance with the foreign investment review framework, primarily through the introduction of stronger penalties and compliance measures for non-compliance and increased powers of enforcement available to the Government.

The measures proposed to be introduced through these reforms include:

• standard monitoring and investigative powers;
• powers to give directions to investors in order to prevent or address suspected breaches of conditions or of the FIRB Act; 
• increased civil and criminal penalties under the FIRB Act to ensure they act as effective deterrents to non-compliance;
• an expanded infringement notices regime to cover all types of foreign investments; 
• remedy powers where a FIRB approval or an exemption certificate is granted based on incorrect statements or omission of material information;
• powers to impose conditions or require disposal for foreign investment originally made in breach of the FIRB Act where the interest has transferred to another foreign person by will or devolution by operation of law;
• powers to accept enforceable undertakings from foreign investors to manage non compliance or ensure compliance with commitments given by them; and
• powers to require foreign investors given FIRB approval to notify the Government of certain events relating to the approved action.

Changes to the foreign investment review process

The Government has also put forward in the proposed reforms a series of changes which it says are aimed at improving the integrity of the existing foreign investment review framework, including to: 

• require further approval for increases in actual or proportionate holdings of foreign investors above those that have been previously approved; 
• remove the ability for foreign money lenders to apply the moneylending exemption in obtaining interests in a sensitive national security business;
• require FIRB approval for acquisitions of interests in Federal, State or local government entities through privatisations that raise national security risks;
• extend existing tracing rules to apply to unincorporated limited partnerships in the way they currently apply to corporations and trusts;
• establish a Register of Foreign Ownership to provide greater visibility of foreign investment in Australia;
• introduce measures to prevent the use of family and other associated structures in order to avoid the requirement to obtain FIRB approval;
• facilitate better, more co-ordinated and broader information gathering and sharing among government agencies in relation to foreign investments; and
• introduce various other improvements to improve efficiency and take better account of commercial deadlines and investor operations.

Revised fees for foreign investment review

The Government is proposing to revise the fees applicable to its foreign investment review framework in order to make the fee structure "fairer and simpler" for investors, and it says it will reduce complexity to minimise the compliance and administrative costs for foreign investors in establishing and paying the applicable fee. Inevitably, there will be winners and losers in different scenarios from these adjustments as we do not expect the Government is targeting any material reduction in overall fees.

Other technical amendments

The proposed reforms also include various other amendments to the FIRB Act and the existing foreign investment review framework which are of a more technical nature, to improve its usability and address identified inconsistencies. 

Authors: Bruce Macdonald and Michael Dearden.