Under the Foreign Acquisitions and Takeovers Act, where the Treasurer has decided that the Commonwealth does not object to a particular foreign investment proposal or has granted an exemption certificate for specified foreign investments, foreign investors are required to report on compliance with any imposed conditions by certification by the investor or a periodic independent audit.
Significant penalties (including infringement notices, civil and criminal penalties) may apply for breaching conditions. A recent case highlights that pecuniary penalties must provide a sufficient deterrence to the particular foreign investor – and to others who might be tempted to contravene the foreign investment laws – and that such penalties should ensure that the contravening conduct is not profitable (Commissioner of Taxation v Balasubramaniyan  FCA 374).
Types of compliance reporting
While the reporting obligations of a foreign investor depend on the relevant no objection notification or exemption certificate received, reporting obligations can include:
- notifications about when proposed actions or transactions occur;
- reporting on acquisitions made under an exemption certificate;
- periodic reporting on compliance with tax and other conditions;
- reporting on breaches of conditions;
- reporting on remedial actions where a compliance issue has arisen.
Manner of compliance reporting
The Foreign Investment Review Board has provided the following guidance on compliance reporting:
- A report must be submitted by the applicable due date set out in the condition or, if the due date is not clear, submitted as soon as practicable following the end of the reporting period or triggering event (such as the completion of an acquisition).
- Standard tax condition compliance reports must be submitted at the same time as the submission of the foreign investor's annual tax return to the Australian Taxation Office, or if the foreign investor does not have tax obligations in Australia, submitted at the same as when the Australian target entity (if relevant) submits its tax return.
- A report needs to be signed off in accordance with the terms of the conditions (for example, by a chief executive officer of the foreign investor or an independent audit firm). The report needs to specify that it is was given on the basis of reasonable inquiries made by the person signing it and detail any elements of material non-compliance with the relevant conditions.
- A report needs to be prepared in accordance with the terms of the conditions. A report must contain necessary details regarding who the investor is, what relevant investment has been undertaken, which conditions are being complied with and who the person responsible for providing assurance of compliance is. A report should confirm that it is not false or misleading.
- Where an independent audit condition is imposed, generally this condition will require the approval by the Commonwealth to the identity of the audit firm or auditors and the scope of the audit. It is recommended that the audit firm / auditor proposals are submitted at least 120 days before the end of the relevant reporting period and subsequent scope proposals are submitted 90 days before the end of the relevant reporting period.
Offences and civil penalties for contravening conditions
A foreign investor commits an offence if their no objection notification or exemption certificate for a foreign investment includes a condition and the investor engages in conduct that contravenes that condition. The potential penalty is either or both imprisonment for 10 years or a fine of A$3.33 million for individuals or $33.3 million for corporations.
A foreign investor is liable for a civil penalty if they contravene a condition specified in a no objection notification for a significant action or a notifiable national security action that does not relate to residential land. The maximum penalty is the lesser of:
- A$555 million; and
- the greater of:
- A$1.11 million for individuals (or A$11.1 million for corporations); and
- an amount equal to 75% of the greater of the value of the consideration for the acquisition or the market value of investment acquired.
A foreign investor is liable for a civil penalty if they contravene a condition specified in a no objection notification relating to a residential land acquisition. The maximum penalty (in regards to conditions other than the requirement to give notice of the acquisition or disposal of the interest in the residential land) is the greater of:
- the amount of the capital gain that was made or would be made on the disposal of the interest in the residential land;
- 25% of the consideration for the acquisition of that interest; or
- 25% of the market value of that interest.
The Commissioner of Taxation may also issue infringement notices for engaging in conduct that contravenes a condition in a no objection notification or an exemption certificate relating to residential land. The possible penalties under such notices depend upon whether the foreign investor self-disclosed their breach and the value of the applicable residential land.
The recent Balasubramaniyan case
In the recent case of Commissioner of Taxation v Balasubramaniyan  FCA 374, a foreign investor had acquired interests in residential land without giving foreign investment notification and held an interest in established dwellings as a temporary resident. This conduct is subject to similar penalties above for the contravention of a condition specified in a no objection notification relating to a residential land acquisition, but at the time of some of the conduct by the particular foreign investor, the alternative penalty maximums were 10% of the consideration or market value.
In that case, it was noted that the paramount objective of a pecuniary penalty is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravener and by others who might be tempted to contravene the law. The overarching requirement for a penalty which achieves general deterrence will frequently limit the weight that can properly be given to a contravener’s financial position. Furthermore, as the maximum penalty formulae in this case was the greatest of alternative amounts (calculated in specified ways), they signal that general deterrence is to be achieved by ensuring that contravening conduct is not profitable.
The judge imposed an aggregate penalty on the foreign investor of A$250,000, representing no less than the foreign investor's capital gain (in net terms) on the investments.
This judgment may embolden the regulators to take enforcement actions in other cases to ensure that foreign investors do not profit from conduct in contravention of foreign investment laws, whether in regards to the acquisition itself or the conditions of any no objection to the acquisition which is obtained.