Australia: Proposed reforms to Australia’s foreign investment review framework

On 25 February 2015, the Department of Treasury released an options paper titled 'Strengthening Australia's Foreign Investment Framework' (Options Paper) which contains reform proposals to make some significant changes to Australia's foreign investment framework. These changes, if implemented, would result in an increase in compliance costs for foreign investors in Australia. Among other things, the Options Paper proposes to:

• introduce application fees for all foreign investment proposals in line with a user pays system
• amend the Foreign Acquisitions and Takeovers Act 1975 (the Act) to provide for increased criminal penalties and new civil pecuniary penalties and infringement notices
• establish a foreign ownership register that will start collecting information on existing foreign ownership and subsequent transactions of all interests in agricultural land from 1 July 2015
• introduce a new A$55 million screening threshold for foreign investment in Australian agribusiness
• increase compliance and enforcement activities around foreign investment in residential real estate through the creation of a specialised investigative enforcement area within the Australian Taxation Office (ATO).

Additionally, effective from 1 March 2015, the Australian Government has updated the Australian Foreign Investment Policy to provide that privately-owned foreign investors must obtain prior approval for a proposed acquisition of an interest in rural land where the cumulative value of rural land held by the foreign investor, including the proposed acquisition, exceeds A$15 million (reduced from A$252 million) (please read more here... ).

Costs of administration

Currently, no fees or charges apply to foreign investment applications and the cost of administering the foreign investment review framework is funded through consolidated revenue. The Options Paper proposes the introduction of application fees.

While final levels of fees are to be set following consultation, the table below outlines some of the proposed fees on certain foreign investment applications.

The proposed fees are potentially fairly high and will need to be carefully considered by foreign investors. For example, the table suggests that a foreign investor seeking Foreign Investment Review Board (FIRB) approval for the purchase of some rural land for A$100 million may need to pay an application fee of A$1 million.

If an application falls into a number of categories, the Government proposes that the highest fee would apply. Foreign investors would be required to pay the application fee before their foreign investment is processed. As a result, the 30 day statutory time period for FIRB to assess an application would begin after the payment has been received.

Penalties for non-compliance

Currently, the Courts may only apply divestment orders and criminal penalties for non-compliance with the Act. The maximum penalties that may be applied to individuals on conviction is a fine of 500 penalty units (currently $85,000), imprisonment of two years, or both. In the case of a corporation, a multiplier of five applies to the maximum fine for an individual.

The Options Paper proposes the introduction of civil pecuniary penalties (set at a significant level) and infringement notices to supplement existing enforcement mechanisms and to make it easier to pursue punishment. It also suggests that maximum criminal penalties be adjusted accordingly.

For example, where a foreign company investor acquires new property without approval and the breach is identified through compliance activities, that company may be subject to either (in addition to existing criminal penalties):

• an infringement notice, with a penalty of 300 penalty units (A$51,000) plus the relevant application fee
• a civil penalty, whereby the maximum would be the greater of the following:
• 10% of purchase price in addition to the relevant application fee
• 10% of market value of the property in addition to the relevant application fee.

While the proposed penalty regime is for breaches of the foreign investment framework as it applies to residential real estate, the Government is also considering extending the new regime to business, commercial real estate and agricultural investment applications.

Foreign Ownership Register

The Options Paper indicates that from 1 July 2015, a foreign ownership register of land (operated by the ATO) will begin to collect information on existing foreign ownership of and subsequent transactions of interests in agricultural land. The Government proposes to develop legislation requiring the notification of all existing substantial foreign interests in agricultural land (as at 1 July 2015) to an ATO register by 30 September 2015. Additionally, the legislation would require notification of any subsequent acquisitions or divestments of substantial foreign interests in agricultural land within 30 days of completing the acquisition or divestment. Concurrently, the Government will work with the States and Territories to ensure that from 1 July 2016, ongoing transaction information on land provided to the ATO register will be sourced from State and Territory land titles processes.

'Agribusiness' investments

The Government has also indicated that it will introduce a new A$55 million FIRB screening threshold (based on the value of the investment) for investments in agribusiness. It is proposed that the term 'agribusiness' will be defined with reference to the Australian and New Zealand Standard Industrial Classification (ANZSIC) codes. Additionally, the Government is considering amending the Act to replace the definition of 'rural land' with an alternative definition of 'agricultural land'. Consequently, the definitions of 'urban land' and 'other land' would also be amended.

Compliance and enforcement activities around foreign investment in residential real estate

The Government proposes creating a new specialist, dedicated compliance and enforcement unit in the ATO to support and improve the existing data collection, compliance and enforcement functions of the FIRB and the Treasury Secretariat regarding foreign investment in residential real estate. Accordingly, the Government is proposing to amend the Act and any other relevant legislation so that data can easily be shared between the agencies. It is also suggested that the associated administrative costs be offset through the introduction of application fees on foreign investment proposals (See 'Costs of administration').

Consultation process

The Options Paper invites interested stakeholders to lodge written submissions regarding the proposed changes. Submissions should be lodged electronically and include the name of your organisation and contact details, including an email address and contact telephone number where available. The closing date for submissions is Friday 20 March 2015.

Looking forward

We will keep you updated on the progress of the proposals and the final proposed amendments once the public consultation process has come to a conclusion.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.