On 31 July 2020, Treasury released the first tranche of exposure draft legislation for comprehensive changes to Australia’s foreign investment regime, which are expected to come into effect on 1 January 2021. The first tranche of reforms, which are contained in 7 separate Bills and some initial regulations plus a lengthy explanatory memorandum, update the foreign investment framework in 2 main ways: addressing national security risks and strengthening compliance and enforcement powers. The changes were all foreshadowed in the summary paper released when the reforms were announced on 5 June 2020 (see our previous Insight on the announcement).

Under Australia’s foreign investment rules, the Treasurer has powers in relation to certain transactions (eg, to block them or order a divestment) that he considers to be contrary to the national interest.  The transactions over which the Treasurer has this power are called “significant actions”.  A subset of these, called “notifiable actions”, must be notified (failure to do so is an offence).  Other significant actions don’t strictly speaking have to be notified but doing so and obtaining a notice of no objection cuts off the Treasurer’s powers.

The purpose of this Insight is to highlight the key changes which include:

  • There will be a new category of actions that have to be notified (with $0 thresholds for all foreign persons) – these are called “notifiable national security actions” and they will have their own separate regime under the legislation (and may or may not also be significant / notifiable actions). Broadly speaking, a notifiable national security action means an action by a foreign person:
    • to acquire a “direct interest” in a national security business (which it appears can reach offshore transactions) – the definition of “national security business” includes:[1]
      • businesses that are direct interest holders in, or responsible entities for, assets under the Security of Critical Infrastructure Act 2018 (e.g. electricity, ports, water, gas) or subject to the Telecommunications Act 1997;
      • businesses that develop, manufacture or supply critical goods or technology for (or intended for) a military end-use by defence and intelligence personnel or the defence force of another country in activities that relate to or may affect Australia’s national security;
      • businesses that provide (or intend to provide) critical services to defence and intelligence personnel or the defence force of another country in activities that relate to or may affect Australia’s national security;
      • businesses that store, maintain or have access to certain types of information (e.g. security classified information, or personal information of defence or intelligence personnel that if disclosed could compromise Australia’s national security);
    • to acquire an interest in certain kinds of land; and
    • to start a national security business.

When notified (and when they don’t also constitute significant / notifiable actions), these notifiable national security actions will be assessed in terms of whether they would be contrary to Australian national security.

  • The Treasurer will have new “call in” powers which will give him the ability, unilaterally, to review:
    • a significant action that is not a notifiable action and that was not notified; or
    • a new category of actions called “reviewable national security actions” (not to be confused with “notifiable national security actions” described above), which is a category of transactions that are not otherwise caught by the legislation.  The Treasurer may review these if he considers that the action may pose a national security concern.  If the action is determined to be contrary to national security, the Treasurer can make the usual array of orders in relation to the action.   Obviously, a party can choose to notify a significant action, and a party can also choose to notify these new “reviewable national security actions”, if they have some doubt about whether their transaction would have a national security impact, in order to cut off this power (but see the new last resort power described below). 
  • The Treasurer will also have a new “last resort” power, which will allow the Treasurer to review an action that was previously approved where:
    • the person in notifying the action made a statement (including verbally) that was false or misleading in a material particular, or that omitted a matter or thing without which the statement was misleading in a material particular; or
    • the business, structure or organisation of the person has, or the person’s activities have, materially changed since the time the approval was given; or
    • the circumstances or market in which the action was taken have materially changed since the time the approval was given.

If the Treasurer reviews the action and decides it does pose a national security risk, then:

  • the Treasurer must give notice, but can redact anything that is sensitive and specifically the notice is deemed validly given even if the entire notice is redacted; and 
  • the Treasurer can make the usual array of orders. 
  • The Treasurer will have a variety of new enforcement powers, including:
    • revoking a no objection notice,
    • being able to give directions to people that he considers are breaching the legislation (and if a consequence of the relevant breach is that the composition of the group of senior officers of a corporation is a composition that the Treasurer is satisfied is contrary to the national interest, he can require changes). 
  • The penalties for breach will substantially increase:
    • the maximum criminal penalties would go up to 10 years imprisonment or 15,000 penalty units for an individual / 150,000 penalty units for a corporation; and
    • the maximum civil penalties would go up to the greater of:
      • 5000 penalty units for an individual / 50,000 for a corporation; or
      • 75% of the value of the consideration or the market value of the interest or benefit obtained capped at 2.5 million penalty units.
  • There are a number of other miscellaneous changes (in addition to other minor tidy-ups and clarifications), including:
    • Passive increases resulting from non-participation in a share buyback will be more clearly caught as potentially significant / notifiable actions;
    • The tracing rules will trace through unincorporated limited partnerships as well as corporations and trusts;
    • Foreign persons who provide money to Australian relatives to buy a house will be caught as having an interest in the house, unless they can prove the provision of the money is a gift;
    • The Treasurer will have the ability to unilaterally extend the decision period by up to 90 days without issuing an interim order (although the old method of “voluntarily” requesting an extension is still available); 
    •  The Australian government will be able to share information with foreign governments in certain circumstances.

It is also expected, but by no means certain, that the temporary change effective from 29 March 2020 to reduce the monetary screening threshold to $0 for all foreign investments will cease to apply (and the thresholds will go back to normal) on 1 January 2020, the same day that the reforms to the legislation are due to come into effect. 

This first tranche of amendments is open for consultation and feedback until 31 August 2020. A second tranche of amendments, which will cover the remainder of changes, including the time limit for the “call in power”, streamlining measures (including investor exemption certificates) and other technical amendments (including the much anticipated change to the definition of “foreign government investor” will apparently come in a second tranche of amendments which are expected to be released in September 2020 (see Treasury’s implementation roadmap).

[1] In either case irrespective of whether the business is carried on wholly or partly in Australia, whether or not in anticipation of profit or gain and whether or not it is carried on by the Commonwealth, State, Territory, local government body, or an entity wholly owned by them.


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