Section 2 of Doing Business in Australia
Australia generally welcomes foreign investment. The Australian government screens certain foreign investment proposals on a case-by-case basis to determine whether a particular proposal is contrary to the national interest or, in certain circumstances, national security only. This brochure explains some of the rules governing the screening process. However, Australia’s foreign investment rules are complex, and this brochure is not exhaustive. Legal advice should always be sought.
For more detailed information, please see our publication “Navigating Australia’s Foreign Investment Regime”.
Key Foreign Investment Legislation
The main laws that regulate foreign investment in Australia are:
- the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and the Foreign Acquisition and Takeovers Regulation 2015 (Cth) (FATR). Together these give the Australian Treasurer the power to review foreign investment proposals that meet certain criteria and to block such proposals that are contrary to the national interest (or national security, as applicable), or apply conditions to the way such proposals are implemented, to ensure they are not contrary to the national interest (or national security, as applicable); and
- the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth) and its associated regulations. These set the fees for the various kinds of applications that may be made.
Separate legislation imposes other requirements in respect of foreign ownership in certain industries. This brochure does not cover these industry specific requirements.
Who is a foreign person for FIRB purposes?
The legislation generally regulates foreign investment proposals by a ‘foreign person’. A foreign person means:
- an individual not ordinarily resident in Australia;
- a corporation in which, or the trustee of a trust where in relation to the trust:
- an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
- 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
- the general partner of a limited partnership where in relation to the limited partnership:
- an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest; or
- 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation, or a foreign government, hold an interest of 40% or more;
- a foreign government or foreign government investor.
A substantial interest is generally an interest of 20% or more, and an aggregate substantial interest is generally an interest of 40% or more. An interest of a specified percentage looks at ownership of shares, control of voting power and ownership or voting power that would exist if rights like options were exercised. In relation to trusts and unincorporated limited partnerships, the legislation also considers rights to distributions of property. Finally, the possession of certain veto powers can mean a person is deemed to have an interest of 20% or more.
What types of foreign investment transactions are regulated?
There are four types of action which are regulated under FATA:
- Significant actions: The Treasurer has the power to make orders in relation to these kinds of transactions (including to block them, or to order divestments) if he considers the transaction to be contrary to the national interest. Significant actions only have to be notified if they are also notifiable actions or notifiable national security actions, but doing so and obtaining a notice of no objection cuts off the Treasurer’s powers (subject to the last resort powers described below). Once notified, a significant action cannot proceed until a notice of no objection is obtained. Seeking approval is strongly advised, as these transactions are above a high monetary threshold and are therefore by definition material.
- Notifiable actions: These are a category of transactions which must be notified and cannot proceed until a notice of no objection is obtained. Most notifiable actions are also significant actions.
- Notifiable national security actions: The Treasurer has the power to make orders in relation to these kinds of transactions (including to block them, or to order divestments) if he considers the transaction to be contrary to national security. These actions must be notified and cannot proceed until a notice of no objection is obtained.
- Reviewable national security actions: These are transactions with an Australian nexus that are not significant actions, notifiable actions or notifiable national security actions. These transactions, together with significant actions for which approval is not sought, are subject to the Treasurer’s “call in” powers, as described below, for a period of 10 years. Like significant actions, reviewable national security actions do not have to be notified, but doing so and obtaining a notice of no objection cuts off the Treasurer’s powers (subject to the last resort powers described below). Once notified, a reviewable national security action cannot proceed until a notice of no objection is obtained. The Australian government encourages seeking approval for certain kinds of reviewable national security actions and significant actions.
Significant and notifiable actions
The key actions that are both significant and notifiable actions are as follows:
- the acquisition by a foreign person of a substantial interest in an Australian company or unit trust valued above the then current monetary thresholds;
- the acquisition by a foreign person of an interest in Australian land valued above the then current monetary thresholds;
- the acquisition by a foreign person of an interest of 10% or more (and in some cases interests below 10%) in an Australian company or unit trust or Australian business that is an agribusiness, where the value of the acquirer’s past and current investments in the target exceed the then current monetary thresholds;
- the acquisition by a foreign person of an interest of 5% or more in a company, unit trust or business that wholly or partly carries on an Australian media business, regardless of value; and
- certain acquisitions by foreign government investors, as described below.
The most common transactions that are significant actions but not notifiable actions are:
- offshore transactions by private foreign investors involving an Australian subsidiary valued above the then current monetary thresholds and that is not a land entity, media business or national security business; and
- asset deals.
Notifiable national security actions
A notifiable national security action includes any of the following actions by a foreign person:
- to start a national security business;
- to acquire an interest of 10% or more (and in some cases less than 10%) in a national security business;
- to acquire an interest of 10% or more (and in some cases less than 10%) in an entity that carries on a national security business;
- to acquire an interest in Australian land that, at the time of acquisition, is national security land;
- to acquire a legal or equitable interest in an exploration tenement in respect of Australian land that, at the time of acquisition, is national security land.
Note that there are no monetary thresholds, and the tracing rules can operate to capture offshore transactions. Further, offshore entities can carry on a national security business.
A national security business is one which is carried on wholly or partly in Australia (whether or not for profit) which is publicly known, or could be known upon making reasonable enquiries, to be one or more of the following:
- it is an owner or operator of a critical infrastructure asset within the meaning of the Security of Critical Infrastructure Act 2018 (SOCI Act) – currently the SOCI Act covers certain ports, water, gas and electricity assets, but is undergoing consultation and is likely to be significantly expanded;
- it is a carrier or nominated carriage service provider to which the Telecommunications Act 1997 applies;
- it develops, manufactures or supplies critical goods or critical technology that are, or are intended to be, for a military use, or an intelligence use, by defence and intelligence personnel, the defence force of another country, or a foreign intelligence agency;
- it provides, or intends to provide, critical services to defence and intelligence personnel, the defence force of another country, or a foreign intelligence agency;
- it stores or has access to information that has a security classification;
- it stores or maintains personal information of defence and intelligence personnel collected by the Australian Defence Force, the Defence Department or an agency in the national intelligence community which, if accessed, could compromise Australia’s national security;
- it collects, as part of an arrangement with the Australian Defence Force, the Defence Department or an agency in the national intelligence community, personal information on defence and intelligence personnel which, if disclosed, could compromise Australia’s national security; or
- it stores, maintains or has access to personal information on defence and intelligence personnel which, if disclosed, could compromise Australia’s national security.
National security land is:
- certain defence premises;
- 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 enquiries.
Reviewable national security actions
The definition of reviewable national security action is broad and complex, but the action that will be most frequently caught is an acquisition of shares in a corporation that carries on an Australian business (or a holding entity of such a corporation), or units in an Australian unit trust (or a holding entity of such a unit trust), or assets in an Australian business, which has the result that a foreign person:
- acquires, or will acquire, an interest of 10% or more (and sometimes less than 10%) in the entity; or
- will be in a position (or more of a position) to influence or participate in the central management and control of the entity, or
- will be in a position (or more of a position) to influence, participate in or determine the policy of the entity,
where the action is not otherwise a significant action, a notifiable action or a notifiable national security action. Importantly, this kind of action can (through operation of the tracing rules) capture foreign corporations if they carry on business in Australia.
Treasurer's 'call in' powers
In respect of any reviewable national security action, or any significant action that is not a notifiable action or notifiable national security action and for which approval was not sought, the Treasurer retains the power for 10 years after the action is taken to “call in” the transaction for review if she or he considers that the transaction poses national security concerns. Notifying the transaction and obtaining a notice of no objection cuts off this power (subject to the last resort powers described below.
This call in power covers a broad range of transactions. The government has identified a number of categories of businesses in respect of which it encourages investors to seek advance approval (assuming the transaction is not otherwise a notifiable action or notifiable national security action). Advice should be sought as to whether your transaction falls within this guidance.
Treasurer's last resort review powers
The Treasurer can re-review actions notified after 1 January 2021 where approval has been given to determine whether a national security risk relating to the action exists, and certain conditions are satisfied, the Treasurer may impose conditions, or vary or revoke any conditions that have been imposed, and may make orders prohibiting an action or requiring the undoing of a part of whole of an action. These review powers are subject to strict protocols and are expected to be used very rarely.
Thresholds on foreign investment
The system of monetary thresholds is complex – thresholds differ depending on the action being taken and the origin and characterisation (as foreign government investor or not) of the person taking the action. The thresholds also are indexed annually. For 2021, the main thresholds are:
- for acquisitions by private investors, in each case not covered by other special heads of approval – A$281m;
- for acquisitions by private investors in agribusiness – A$61m, taking into account all prior investments in the relevant target (private investors from Chile, New Zealand and the US are exempt from the special agribusiness rules);
- for acquisitions by private investors in developed commercial land – A$281m (A$61m for sensitive land);
- for acquisitions by private investors in agricultural land – A$15m taking into account all priority investments in agricultural land;
- for acquisitions by foreign government investors in any land, or private investors in vacant commercial land, residential land or national security land – $0;
- for acquisition by any person of a media business or national security business – $0.
Treaty country investors are in some cases subject to a higher thresholds (A$1216m for general business acquisitions and developed commercial land), but the treaties vary in respect of carve-outs. In addition, the treaty threshold is only available if the acquirer is an operating entity incorporated in the relevant jurisdiction (or a subsidiary of such an entity incorporated in that jurisdiction).
The way that the threshold is measured also varies, depending on the type of acquisition.
Special rules for foreign government investors
A “foreign government investor” includes:
- a foreign government;
- an individual, corporation or corporation sole that is an agency or instrumentality of a foreign country but is not part of the body politic of that foreign country (referred to below as a “separate government entity”);
- a corporation in which, or trustee of a trust where in relation to the trust, or general partner of a limited partnership where in relation to the limited partnership, (1) a foreign government, separate government entities or foreign government investors from one country hold a 20% or more interest, or (2) foreign governments, separate government entities or foreign government investors from multiple countries hold a 40% or more interest.
The definition of foreign government investor captures not only state-owned enterprises and sovereign wealth funds, but also things like public sector pension funds, the investment funds into which state-owned enterprises, sovereign wealth funds and public sector pension funds invest and, due to tracing rules, portfolio companies for such investment funds.
There is now a carve out for investment funds in respect of the 40% test where the investors meet specific passivity requirements.
The following transactions by foreign government investors are both significant actions and notifiable actions:
- the acquisition of an interest of 10% or more (and in some cases interests below 10%) in any Australian company, unit trust or business (including offshore businesses that have an Australian nexus), subject to limited exceptions, including where:
- a foreign government investor is acquiring securities in an offshore entity that has an Australian subsidiary;
- the assets of the Australian subsidiary are worth less than A$61m;
- those assets constitute less than 5% of the total assets of the target group; and
- none of those assets are used in a sensitive business or a national security business);
- the acquisition of an interest in Australian land, regardless of value;
- the starting of an Australian business; and
- acquiring a legal or equitable interest in a tenement (including tenements that would not be classified as land) or an interest of at least 10% in securities in an entity where the value of the tenements exceeds 50% of the total asset value of the entity.
Determining if a foreign investment proposal is contrary to the national interest
In determining whether a foreign investment proposal is contrary to the national interest, the Australian Government is able to examine any factors that it considers appropriate. Typically, these factors include the impact of the foreign investment proposal on: national security, competition (noting that this is a different test to the test applied by the Australian Competition and Consumer Commission in examining merger clearances), the economy and the community (such as the investor’s plans to restructure the business in Australia after the acquisition) and other government policies such as tax and the environment, as well as the character of the investor.
Note that notifiable national security actions and reviewable national security actions are reviewed against a narrower national security test only.
Penalties for breaching foreign investment acts
Breaches of the act are subject to significant criminal and civil penalties. Criminal penalties include up to 10 years imprisonment or monetary penalties of up to $3.33 million for individuals and up to $33.3 million for corporations.
The FATA also contains significant civil penalties for certain breaches of the Act. The maximum civil penalty for breaches such as failure to give notice to the Treasurer before taking a notifiable action, taking a significant action in certain circumstances without having first obtained a no objection notification, or breaching conditions contained in a no objection notification, is the lesser of:
- $555 million; or
- the greater of:
- $1.1 million for individuals ($11.1 million for corporations);
- an amount determined by reference to the value for the action.
This guide is current as of April 2021.