In a recent address to the Citi A50 Australian Economic Forum, Treasurer Jim Chalmers announced that the government would consult on a package of major legislative reforms to Australia's foreign investment framework. These proposed reforms build on the government's May 2024 updates to Australia's foreign investment policy, which we wrote about 'FIRB reforms: A newly strengthened 'risk-based' approach'. 

Dr Chalmers stated the goal of these reforms is 'a [Foreign Investment Review Board] regime that is much stronger where risks are high and much faster when risks are low'.

To accompany the announcement, Treasury published a discussion paper, with submissions closing on 12 December.  The paper outlines several law reform proposals that could be more far-reaching than the policy and process changes we saw in 2024. Below we unpack some of the key proposed reforms.

Automatic FIRB approval for low-risk investments by trusted investors

The government's central reform proposal is to introduce a new category of low-risk actions or minor acquisitions for which investors would be required to notify FIRB, but which would not require approval before the action could be taken. These transactions could be reviewed after completion, but investors would not need prior approval – notification alone would suffice. This change could have a major impact on deal timelines, as the need for foreign investment approval through Australia's Foreign Investment Review Board (FIRB) process can currently cause substantial delays.

Trusted investors will likely include major institutional investors like public pension funds. These are often treated as 'foreign government investors' and therefore subject to strict investment screening – even for transactions that have little, if any, impact on Australia's national interest or national security. The discussion paper gives the example of an investor increasing their stake in an Australian company from 21% to 22%. Under the current FIRB rules, such an investment may require pre-approval through FIRB. The new reforms could eliminate the need for the transaction to be pre-approved. The investor would only be required to notify FIRB and could then proceed to complete their investment without further delay.

Transactions that result in minimal or no change in control will likely be candidates for 'automatic' FIRB approval. This is a welcome development that could apply to internal reorganisations – which can currently trigger a FIRB approval requirement, holding up implementation of what are often multi-jurisdiction internal reorganisations.

Importantly, the Treasurer will retain the power to review all notified transactions, including those under automatic approval – and these powers may even be expanded.

Stricter FIRB rules for sensitive and emerging sectors

To balance the streamlining of low-risk investments, the government has signalled a range of changes that would enhance the Treasurer and FIRB's ability to manage national security risks and deter non-compliance.

Perhaps the most significant change would be the introduction of new powers for government to designate 'emerging' sensitive sectors. Designation would trigger mandatory notification and approval requirements for transactions in the specified sectors. This change is motivated by concerns that the existing law cannot respond adequately to new risks resulting from technological advances and evolving geopolitical realities. Treasury's discussion paper also introduces the possibility of additional powers to mitigate national security risks following transactions where the circumstances behind the investment change significantly over time (for example, the size of a target business greatly expands).

The paper explores several ideas to strengthen Treasury's enforcement tools. Significantly, the notion of an avoidance offence provision has been introduced. Under the current FIRB rules, the Treasurer can effectively 'look through' avoidance schemes, and either prohibit the transaction or approve it subject to conditions. However, under current rules, investors do not necessarily commit an offence by engaging in avoidance schemes (unlike failing to obtain required FIRB approval, which is an offence). If, in future, investors can be punished for designing corporate and transaction structures to avoid FIRB notification and approval requirements, this will significantly expand legal and deal risk. Treasury is also seeking stakeholder feedback on ideas to strengthen other enforcement provisions, including infringement notices for repeat breaches of the FIRB rules and failing to keep records or respond to information requests.

Additional FIRB reform proposals to watch

Some other important reforms outlined in the paper include:

• Tweaking the tracing rules – making a greater distinction between interests held directly and interests held indirectly and allowing investors to ask for the tracing rules to be disapplied in certain cases.
• Expanding the 'associates' concept – adding new categories of 'associates' and lowering thresholds for existing categories of associate relationships.
• Improving information sharing – allowing FIRB to share information gathered from investment applications with non-government entities (eg financial institutions) and foreign governments, and to publish information about non-compliance or infringement notices.
• Overhauling Exemption Certificates – eliminating the various EC types in favour of one 'combination' EC and allowing FIRB to more precisely tailor ECs to specific investors and investments.
• Conditions and undertakings – allowing for a broader range of conditions to be imposed on approvals, including conditions targeting risks associated with minority interest or upstream investors, and enabling court-enforceable voluntary undertakings to deal with commitments given to FIRB that go beyond compliance with foreign investment laws.
• Simplifying Register notifications – reducing the number of transactions reportable to the Register of Foreign Ownership of Australian Assets and enabling more parties to give notice on behalf of others.
• Enhancing No Objection Notifications – fixing various issues including extending the default validity period (currently 12 months) and providing for greater flexibility in applying and modifying conditions.

Deadline for FIRB reform submissions: 12 December

Stakeholders have just over a month to provide their submissions on the reforms to Treasury. The reforms proposed in the discussion paper would require substantial amendment to the FIRB legislation. This means any reforms will need to pass through both houses of Parliament before coming into law, which will take time. Nevertheless, investors should take the reform proposals very seriously. The Treasurer's speech underlined the government's commitment to making Australia 'the destination where global investment flows first and grows fastest'. Significant amendments to Australia's existing FIRB legislation will be required to achieve that goal.