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11 Jun 2020

Significant Australian foreign investment reforms announced

By Geoff Hoffman, Megan Williams

There are a significant number of reforms proposed, including a new set of stricter controls designed to protect "national security", and loosening the rules applying to certain investment funds that have large foreign government investors.

The Government has announced very significant reforms to Australia's foreign investment review framework. Unlike the temporary COVID-19 measures announced on 29 March 2020, these reforms are proposed to be permanent.

When will the changes be made?

The reforms are proposed to come into effect on 1 January 2021. The Government has stated that it will release draft legislation for consultation in July. Clayton Utz will be participating in the consultation process when the draft legislation is produced, and would welcome any specific observations you may have at that time.

What are the changes?

There are a significant number of reforms proposed, including:

  • a new set of stricter controls designed to protect "national security";
  • loosening of the rules applying to certain investment funds that have large foreign government investors;
  • an increase in penalties and enforcement powers;
  • changes to fees; and
  • an ability for the government to extend the application review period (to up to 120 days).

New rules for protecting "national security"

The reforms will introduce new rules for investments that raise national security concerns, with a permanent $0 financial threshold. The Treasurer will be able to review any acquisition of a direct interest (at least 10%) by a foreign person on national security grounds, regardless of the value of investment, and impose conditions or block investments if this is necessary to protect national security (a "direct interest" includes an interest (normally 10% or more) in an upstream entity).

The new test will involve the following specific changes:

  • Mandatory pre-investment notification: require mandatory notification:
    • of any proposed acquisition of a direct interest (at least 10%) by a foreign person in a "sensitive national security business", regardless of the value of the investment (ie. the financial threshold is $0); or
    • where a business or entity owned by a foreign person starts to carry on a "sensitive national security business";
  • "Call-in" power: allow any investment that would not otherwise require notification under the existing national interest or new national security mandatory notification processes to be "called in" for screening (requiring the investor to submit an application for screening) on "national security" grounds. This power will be time-limited. Investors will be able to voluntarily notify to receive investor certainty from ‘call in’ and will be able to apply for a time limited investor-specific exemption certificate which enables them to make eligible acquisitions without case -by-case screening; and
  • Review power after approval: allow the Treasurer to reassess approved investments where "national security" risks emerge after approval. The Treasurer will be able to impose new conditions, vary existing conditions, or, as a last resort, require divestment where:
    • the investor's activities have changed substantially, posing "national security" risks which could not be reasonably foreseen at the time of approval;
    • a material change occurs to the operating environment, which alters the nature of "national security" risks posed at the time of approval; and/or
    • "national security" risks have emerged in relation to the acquirer or target, which could not be reasonably foreseen at the time of approval.

What is a "sensitive national security business"?

The definition of a "sensitive national security business" is subject to consultation. The Government is considering the following types of businesses:

  • a businesses regulated under the Security of Critical Infrastructure Act 2018 (Cth) (Critical Infrastructure Act) or the Telecommunications Act 1997 (Cth);
  • any business involved in the manufacture or supply of defence or national security-related goods, services and technologies, or any business that can create vulnerabilities in the security of Defence and national security supply chain, the Defence estate and/or other core Defence interests;
  • any business or land situated in or proximate to Defence or national security installations; and
  • any business that owns, stores, collects or maintains sensitive data relating to Australia’s national security and/or defence.

Significantly for the energy, resources and infrastructure industries, the Critical Infrastructure Act regulates Australia's critical electricity assets, critical ports, critical water assets and critical gas assets (see definitions below) and the reforms could result in those industries being sensitive national security businesses and subject to a financial foreign investment threshold of $0.

Critical electricity assets

  • a network, system, or interconnector, for the transmission or distribution of electricity to ultimately service at least 100,000 customers; or
  • an electricity generation station that is critical to ensuring the security and reliability of electricity networks or electricity systems in a State or Territory - to satisfy this test the station must:
    • be contracted to provide a system restart ancillary service in the State or Territory (i.e. able to start without an external power supply and connect, and provide energy, to an electricity network or an electricity system for the transmission or distribution of electricity); or
    • be a synchronous electricity generator, in the State or Territory, that has an installed capacity of at least the amount specified for the State or Territory:
      • NSW: 1,400 megawatts
      • NT: 300 megawatts
      • QLD: 1,300 megawatts
      • SA: 600 megawatts
      • TAS: 700 megawatts
      • VIC: 1,200 megawatts
      • WA: 600 megawatts

(Section 10 of the Security of Critical Infrastructure Act 2018 (Cth) and rule 6 of the Security of Critical Infrastructure Rules 2018 (Cth))

Critical ports

  • Broome Port
  • Port Adelaide
  • Port of Brisbane
  • Port of Cairns
  • Port of Christmas Island
  • Port of Dampier
  • Port of Darwin
  • Port of Eden
  • Port of Fremantle
  • Port of Geelong
  • Port of Gladstone
  • Port of Hay Point
  • Port of Hobart
  • Port of Melbourne
  • Port of Newcastle
  • Port of Port Botany
  • Port of Port Hedland
  • Port of Rockhampton
  • Port of Sydney Harbour
  • Port of Townsville

(Section 11 of the Security of Critical Infrastructure Act 2018 (Cth))

Critical water assets

One or more water or sewerage systems or networks that:

  • are managed by a single water utility; and
  • ultimately deliver services to at least 100,000 water connections or 100,000 sewerage connections.

(Section 5 of the Security of Critical Infrastructure Act 2018 (Cth))

Critical gas assets

  • a gas processing facility that has a capacity of at least 300 terajoules per day;
  • a gas storage facility that has a maximum daily quantity of at least 75 terajoules per day;
  • a network or system for the distribution of gas to ultimately service at least 100,000 customers;
  • the Tasmanian Gas Pipeline; and
  • a gas transmission pipeline that is critical to ensuring the security and reliability of a gas market - to satisfy this test the pipeline must have a nameplate rating of the following amount specified for the gas market:
    • Eastern gas market – 200 terajoules per day;
    • Northern gas market – 80 terajoules per day; and
    • Western gas market – 150 terajoules per day.

(Section 12 of the Security of Critical Infrastructure Act 2018 (Cth) and rules 7 and 8 of the Security of Critical Infrastructure Rules 2018 (Cth))

Loosening of rules for investment funds with large foreign government investors

Most private equity funds and institutional investors regularly require Foreign Investment Review Board (FIRB) approval under the existing "Foreign Government Investor" (FGI) screening rules (which have lower ownership thresholds and a $0 financial threshold) due to large investments by FGIs (eg. sovereign wealth funds and state pension funds) in their funds.

Investment funds which fall under the reforms described below will no longer be classified as FGIs where no FGIs have management rights and all of their FGIs have no influence or control over the investment or operational decisions of the entity or any of its underlying assets. This passive investment model is typically adopted by most large private equity funds and institutional investors.

Under the reforms:

  • entities with more than 40% foreign government ownership in aggregate (without influence or control) but less than 20% from any single foreign government will no longer be classified as FGIs; and
  • entities that have a single foreign government with at least 20% foreign government ownership (without influence or control) will still be classified as FGIs but will be able to apply for a broad exemption certificate on a case-by-case basis which could apply for a specified time period (such as 5 or 10 years, or up to the life of the entity) and could include conditions.

Investment funds that get the benefit of these new reforms will still be subject to screening at the thresholds for private foreign investors (A$275 million, or A$1.192 billion for FTA-partner countries). The real benefit is that these investment funds may, for example, more quickly close deals or acquire sizeable pre-bid stakes below the thresholds for private investors, without the cost and delay of the FIRB process.

Stronger penalties, compliance and enforcement powers

These reforms will provide additional enforcement powers and resources to Treasury and the ATO to enforce conditions of FIRB approvals.

The Government will introduce:

  • monitoring and investigative powers (in line with those of other business regulators), including access to premises with consent or by warrant in order to gather information;
  • powers to give directions to investors in order to prevent or address suspected breaches of conditions or of the foreign investment laws;
  • increased civil and criminal penalties to provide a more effective deterrent (see below);
  • an expanded infringement notices regime to cover all types of breaches relating to foreign investments and enable proportionate action in response to non-compliance;
  • powers (including introducing a civil penalty and triggering the Treasurer's powers under Part 3 of the Foreign Acquisitions and Takeovers Act 1976 (Cth) (FATA)) to remedy situations where foreign persons are given an approval based on an application that makes an incorrect statement or omits an important piece of information and that statement or omission was material to the approval;
  • powers with respect to an investment that was originally made in breach of the FATA where the interest has subsequently been transferred to another foreign person; and
  • the power to accept enforceable undertakings from investors to manage non-compliance or to give weight to commitments made by investors in their application; and
  • a requirement for investors who have received approval for an investment to notify the Government of certain events, including that the action has occurred or did not occur within the period of the approval.

Integrity of the foreign investment review framework

The Government will introduce the following changes to improve the integrity of the framework:

  • confirming the application of the existing regime to share buybacks and selective capital reductions;
  • narrowing the scope of the moneylending exemption so that the exemption does not apply to foreign money lenders obtaining interest in a "sensitive national security business" – the change could have a significant impact on project financing for Australia's critical infrastructure projects, including critical gas, water and electricity assets and critical ports such that foreign persons will need approval before entering into money lending arrangements that result in the acquisition of an interest, by way of a security, in securities, assets, a trust, Australian land or a tenement in a sensitive national security business;
  • requiring a foreign person to seek approval for acquisitions of interests from the Commonwealth, State or Territory Governments or local government bodies (which otherwise may have not have been subject to the FATA if the government entity was not an existing "Australian business" for the purposes of the FATA) that may raise national security risks or involve the acquisition of an interest in a "sensitive national security business";
  • amending the tracing rules to apply to unincorporated limited partnerships so that beneficial interests can be traced; and
  • requiring a foreign person, who is a parent or spouse of an Australian resident, to seek approval prior to the purchase of Australian land where they provide money to their Australian family member for the purpose, other than by way of a gift.

Changes to information gathering and sharing / new register of foreign ownership

The Government will increase the scope of the information sharing provisions under the FATA and the Tax Administration Act 1953 (the TAA) to allow greater sharing of foreign investment information across government agencies (including the ATO). The Government will also introduce new information sharing provisions to allow sharing of protected information with international counterparts in certain circumstances where there are national security considerations.

The Government is considering a new Register of Foreign Ownership that will expand the existing agricultural land, water and residential registers so that the following interest must be registered: interests in Australian land, water entitlements and contractual water rights and business acquisitions that require foreign investment approval.

Changes to fees

Fees will be reviewed to ensure they continue to cover the (increasing) costs of administering the system and with a view to updating the fees framework to make it fairer and simpler for investors.

Changes to application review periods

The reforms will include a new measure for extensions to the statutory deadline for review of applications, beyond the current 30 day review period. In certain circumstances, the Government will have the power to extend the deadline by up to another 90 days without the need to issue an interim order or for the applicant to request the extension.

Other amendments

The reforms will also include a number of technical amendments to provide greater clarity, including by improving the readability of existing provisions, rectifying inconsistencies and unintended consequences, and addressing feedback from investors seeking greater certainty. One such technical amendment is an update of the definition of "Australian media business".

To clarify a long-standing inconsistency regarding the rights to occupy land under exploration tenements in different Australian jurisdictions, a proposed amendment will exempt exploration tenements acquired by private foreign investors from the FATA. The exemption may not extend to certain investments, such as acquisitions that are subject to the new national security test, and exploration tenements acquired by Foreign Government Investors, which will continue to be subject to the FATA.

To address feedback from investors, acquisitions of revenue streams in relation to mining and production tenements will be exempted from the FATA where the revenue stream does not entail rights to occupy the land or have direct control or influence over the land. Following the amendment, a foreign person, who had already received approval to acquire a mining and production tenement, would not need to seek further approval if they wanted to on-sell their interest and receive a revenue stream as consideration. Any revenue streams that offer occupancy, control or influence over the land would still be subject to the FATA.

More information

The Government has released a booklet detailing the changes.

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.