FIRB: impact of national security changes and return of monetary thresholds
Objective: To provide APREA members with a summary of the key changes to Australia's foreign investment rules that came into force on 1 January 2021. This note sets out a high level overview of the impact of the rule changes as at [6 May 2021].
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Australia's new foreign investment rules took effect on 1 January 2021, bringing the most significant changes to the regulation of foreign investment since the introduction of the rules in 1975.
Key changes
There are a broad range of changes under the new foreign investment rules, including:
National security test
- A new national security test has been introduced alongside the concepts of 'national security land' and 'national security business'.
- Any acquisition of 10% or more in a national security business, or of any national security land requires approval from the Treasurer, who is advised by the Foreign Investment and Review Board (FIRB). This is regardless of value or the characterisation of the investor. Previously, only foreign government investors had $0 thresholds for non-real estate transactions.
- National security land includes any land which is defence land or land in which the Commonwealth, as represented by an agency in the national intelligence community, has an interest that is publicly known or could be known upon the making of reasonable inquiries. The national intelligence community includes agencies such as AUSTRAC, the Australian Federal Police, the Department of Home Affairs, ASIS, ASIO, ACIC, AGO, DIO and ONI. This includes land used or occupied by the Department of Defence and armed forces of Australia and the agencies in the national intelligence community. The explanatory statement to the regulations confirms that in the future the Treasurer may declare land as national security land – for example - by prescribing land that is in proximity to existing national security land.
- ‘National security business’ is a broad concept that is proposed to cover:
- critical infrastructure under the Security of Critical Infrastructure Act 2018 (Cth) (SOCI Act);
- carriers or carriage service providers under the Telecommunications Act 1997 (Cth);
- critical goods, technology or services used for or which are intended for military or intelligence end use;
- businesses that store or access security classified information; and
- businesses that store or maintain, or have access to personal information collected by defence or national security agencies.
- The Government has also proposed changes to expand the application of the SOCI Act which could impact the scope of the 'national security business' definition. The impact of this remains to be seen but has the potential to be very broad.
- Call in and last resort powers
- Under the current rules the Treasurer is able to call in and review transactions that have not been cleared by FIRB for a period of up to 10 years, even after they have completed. The effect of this call in period is that investors will, in practice, need to make 'voluntary' applications to exclude the risk of a transaction being called in and subsequently being subject of orders to impose conditions or for divestment.
- The Treasurer will also have new last resort powers to deal with national security risks even where a transaction has been given clearance in the event that:
- false or misleading information was provided to FIRB;
- there has been a material change to the business, structure or organisation of an applicant; or
- there has been a material change to the market since the transaction occurred.
Return of monetary thresholds
Following the temporary COVID rules in 2020, the new legislation has resulted in the return of monetary thresholds for private foreign investors for certain transactions. However, there are a number of matters that must be considered before relying on the monetary thresholds - each can give rise to a mandatory FIRB clearance requirement (noting this is not an exhaustive list):
- the buyer must not be a foreign government investor;
- the target must not be a national security business (in whole or in part)
- the target, to the extent it is an Australian land entity, must not have national security land (noting residential land, vacant land, agricultural land, sensitive commercial land carry nil or lowered monetary thresholds)
- the target must not be a media business which has an expanded definition
- to the extent there are exploration tenements, these can now be subject of clearance to the extent the area covers national security land.
If FIRB clearance is not obtained, foreign investors may be in breach of the FIRB rules which carry significant increased penalties. Even if mandatory FIRB clearance is not required, consider whether a 10 year call in risk is acceptable for the transaction – if not a voluntary application and clearance process may be prudent.
Please also note that passive increases through share buy backs as well as starting new national security businesses are now caught by the new FIRB rules, in addition to acquisitions of shares, units, limited partnership interests, freehold interests and leasehold / licence interests.
Application fees
A new fee scale applies – from $2,000 to $500,000, which differs based on the nature of the asset (residential land, agricultural land, commercial land and commercial transactions) and the consideration payable for a transaction. Due to the disproportionate impacts for lease consideration calculations, a discount applies for long term leases. In addition, a flat fee applies to internal reorganisation applications and discounts are available for certain types of voluntary applications.
Exemptions
Exemption certificates remain available – though note that application fees are no longer a flat fee and will depend on the scope of the request made for coverage under the certificate.
The moneylending exemption remains intact. Provided lenders otherwise met the existing conditions for the exemption, to the extent the secured assets cover assets of a national security business or national security land then FIRB clearance will not be required on enforcement if that enforcement is done by way of appointment of a receiver or receiver and manager. However, note that there are existing limits to the moneylending exemption that apply in respect of residential land (affecting in particular smaller, non traditional lenders) and foreign government investors.
