The Australian Government has released an updated foreign investment policy document (Policy), setting out a strengthened risk based approach to Australia's foreign investment regime.
These changes will not apply to applications currently before the Foreign Investment Review Board (FIRB). However, as discussed below, most of these changes already reflect FIRB’s current procedural practice, meaning that the announced changes should not materially impact outcomes or timelines for currently filed applications.
A streamlined approach for lower-risk foreign investments
The processing of applications will be streamlined to provide faster approvals for known investors with a good compliance record who are proposing to undertake investments in non-sensitive sectors.
Treasury will assess whether an application is 'low-risk' based on the profile of the investor, the target of their proposed investment (i.e. the industry sector and specific nature of the underlying asset) and the structure of their transaction.
While each investment will be considered on a case-by case-basis, the Policy states the following types of investment proposals are likely to receive faster approvals:
- Profile of investor: Investors with a strong track record of compliance with the foreign investment framework and other Australian laws. Repeat investors who are well known to Treasury, investing alone and not in a consortium with unknown investors. Investors who are genuinely passive in nature and can demonstrate no control or influence over an asset.
- Proposed investment: Investments in non-sensitive sectors, such as manufacturing, professional services, commercial real estate, new housing and mining of non-critical minerals. Investments not near sensitive Australian Government facilities.
- Transaction structure: Transactions where the ownership structure is clear, including a clear articulation of who will ultimately control the asset, land or entity once the proposed transaction is complete. Transactions where the transaction structure is less complex and not convoluted.
The Policy also reveals the Government is particularly focussed on attracting investment in key-areas, including those that:
- help to deliver the net zero transformation alongside domestic private and government capital;
- increase Australia’s housing supply by supporting investment in new housing stock consistent with the Government’s housing agenda, including through investment in Build to Rent developments;
- support the objectives of Australia’s Critical Minerals Strategy to grow the sector, create jobs and downstream industries, diversify global supply chains, help Australia to become a renewable energy superpower, and contribute to global efforts to achieve net zero; and
- harness the potential of critical technologies to encourage competition and diversify industries, accelerate the development and uptake of new innovations and frontier technologies, and help Australian businesses commercialise new critical technology ideas.
Investments in these key-areas can therefore expect the greatest benefits of a strengthened risk based approach.
To expedite approval times and reduce compliance costs generally, low-risk applications will have the benefit of shortened consultation timeframes. To reduce administrative burden, red tape will also be reduced for repeat investors where their ownership structure has not changed since their previous investment.
These changes are designed to help FIRB meet a new target of processing 50% of applications within the initial statutory timeframe of 30 days. This would represent a significant improvement on current processing times, with only 33% of applications approved within 30 days in 2022-23. Based on our observations and recent experience, for higher value, higher profile transactions (especially where the target is ASX-listed), the processing time for applications is taking 123-167 days – even if the target is in a non-sensitive sector. This creates significant uncertainty for market participants and also for broader stakeholders including employees, customers and suppliers of the target.
Increased scrutiny for complicated and high-risk investments
Conversely, the strengthened risk based approach means more complicated or higher-risk investment applications will face more robust scrutiny. In particular, the potential economic benefits of proposed investments in critical and sensitive sectors of Australia's economy will be weighed carefully against national interest (and national security) risks.
This is simply an embodiment of FIRB's current practice. For example, FIRB approval for the $A1.7 billion takeover of ASX-listed Azure Minerals by a joint bid vehicle controlled equally by Chilean company Sociedad Quimica y Minera and Gina Rinehart was only received on 30 April 2024 (one day before the updated Policy was released). This represented a timeframe of 130 days from the date their joint takeover was first announced. This extended timeframe reflects the fact that Azure's main asset is a 60% interest in the highly prospective Andover lithium project in Western Australia, noting that lithium is designated as a critical mineral. In 2023, the Treasurer rejected two proposed critical minerals acquisitions by Chinese investors.
Additional FIRB resources will be dedicated to reviewing applications concerning sensitive sectors. The Policy confirms the sensitive sectors that will be subject to greater scrutiny include:
- critical infrastructure;
- critical minerals;
- critical technology;
- investments which involve holding or having access to sensitive data sets; and
- investments in proximity to sensitive Australian Government facilities.
Other factors may also increase the scrutiny applied to investments, including the profile (character) of the foreign investor, the structure of the transaction, and sectors with a high concentration of foreign ownership. Greater scrutiny may also be applied to investment proposals for reasons other than national security.
The nature and scope of conditions placed on foreign investment approvals will also be more actively considered and, where appropriate, strengthened, to mitigate perceived national interest concerns. Again, this embodies FIRB's current practice, especially around elevated tax conditions that we have been seeing FIRB impose over the past year where the foreign person's acquisition and/or funding structure is complex and/or opaque. These tax conditions can include the requirement to disclose any contractual agreements related to the transfer of intellectual property offshore, irrespective of whether this relates to an inter-company transfer or divestment to a third party, whether before or after closing. We have seen these bespoke tax conditions applied to a range of investors, not just PE firms. The rationale is that these conditions address potential tax revenue leakage, which is a matter of national interest.
Encouraging competition and investment
To encourage competition and investment, refunds will be provided for application fees paid by unsuccessful foreign bidders in a competitive bid process, where a target either requires or encourages prospective foreign bidders to have lodged their FIRB application as part of their participation in the bid process. Although we have in the past seen FIRB provide fee credits and, in some cases, fee refunds to unsuccessful bidders, this has always been at FIRB's discretion. Therefore, having a consistent and publicly stated Policy position is welcomed. This is especially the case where a fee credit (as opposed to a fee refund) may be of little value if an unsuccessful foreign bidder is unlikely to be transacting in the Australian market in the foreseeable future.
Other recalibrations to the regime will be made to encourage foreign investment, including:
- permitting foreign investors to purchase established 'Build to Rent' properties and applying lower application fees to this type of investment - this will encourage investment in Build to Rent developments and ultimately contribute to Australia’s housing stock; and
- releasing draft regulations to exempt interfunding transactions from the foreign investment regime.
Unfortunately, the Policy does not address the long-called for reform to exempt internal reorganisations that do not encompass any upstream change of control. To the contrary, the Policy confirms that additional scrutiny will be applied to foreign investment proposals with certain tax characteristics likely to be considered higher risk (such as internal reorganisations or other intragroup transactions which may represent initial steps of a planned broader arrangement resulting in avoidance of Australian tax).
An increased focus on compliance and enforcement
FIRB's compliance team will also receive additional resources. This reflects an increased focus on the monitoring and enforcement of the conditions placed on foreign investment approvals.
This new focus will be supported by enhancing Treasury's ability to undertake site visits, a strategy that has not typically been utilised to date. Treasury states that this will support the use of the Treasurer's call-in power to review investments that may come to pose a national security concern in time.
The reforms foreshadowed in the Policy are welcome and overdue. Although many of these reforms simply embody FIRB's recent practice, it is important for these changes to be publicly documented. Doing so provides greater certainty, transparency, predictability and confidence for foreign investors and market participants generally, which in turn should encourage foreign investment into Australia.
In the current global climate, there is a lot to navigate and be excited about in terms of opportunities available to clients across a number of industry sectors. Our national FIRB team remains dedicated to working with clients globally to tailor solutions for their business goals. We look forward to connecting with you throughout the remainder of 2024.
For further information or assistance with navigating Australia's FDI regime, please contact MinterEllison's team of FIRB specialists.