Foreign investment under Australia's new government

Articles Written by David Colenso (Partner)

Australia's new Federal Government was elected on 7 September 2013 and this paper looks at the likely effect of the new government's foreign investment policy on the inflow of capital into Australia.

National interest test

The national interest test underpins all foreign investment applications. It is unlikely that the new government will make any significant changes to the national interest test which, while undefined, still permits proposals to be assessed on a case by case basis. There has been speculation that the new government may delineate some factors which must be considered when assessing whether an application is contrary to the national interest but this remains to be seen.

Importantly, successive governments have stated that foreign investment is welcome in Australia and the Coalition's Policy Discussion Paper on Foreign Investment strongly commits to the continuation of this approach. This is consistent with new Prime Minister Tony Abbott's comment during his election victory speech that Australia was now "open for business". However, some National party members of the Coalition have emphasised that "the national interest is different in each section of the economy".

The reduction of thresholds in the agribusiness sector discussed below will mean that FIRB will be able to more closely scrutinise proposals to ensure that the national interest is protected. In doing so, it will ensure that the new government recognises community and industry concerns in assessing investment proposals, particularly in sensitive industry sectors.

New agribusiness thresholds

 New measures outlined in the Policy Discussion Paper include:

  • A reduction to $15 million in the FIRB threshold for foreign investment in agricultural land (from $1,078 million for US and NZ investors and $248 million for investors from other countries).
  • Once cumulative purchases of agricultural land reach $15 million, a zero dollar threshold will apply for further acquisitions.
  • A new threshold for foreign investment in agribusiness where:
    • investment exceeds 15% in an agribusiness valued at $248 million; or
    • investment in an agribusiness exceeds $54 million.
  • The establishment of a register of foreign ownership of rural land. The rationale behind this is that all foreign investment in rural land should be reported to make certain that all foreign investment in this sector is captured on the register. Queensland has its own Foreign Ownership of Land Register which could serve as a model for the proposed Federal register.
  • Changing the make up of the FIRB to include representatives of small business and members with agricultural backgrounds and expertise.

The previous high threshold of $248 million effectively removed all rural land and agribusiness from scrutiny by FIRB, making it virtually unregulated.

Evidence given to the Senate committee inquiring into the national interest test demonstrated that the vast majority of rural acquisitions would fall under a $15 million threshold. The high thresholds drew media, public and industry attention to the rural sector, making it appear a "no-go" zone for foreign interests to invest.

This sent the wrong message to foreign investors and the new lower thresholds will seek to reverse that perception overseas.

We query why the threshold of $15 million has been set. A more logical threshold would be $54 million - to align it with the current threshold for developed non-residential commercial real estate.

A current application before FIRB is the proposed acquisition of Graincorp by US commodities trader and food processor, Archer Daniels Midland. This pending ruling will highlight tensions within the Coalition - the Nationals who have staunchly protected the interests of its largely farming based supporters, and the Liberals who adopt a more open-market, economic pragmatist approach to foreign investment.

Register of foreign ownership of rural land

While the register has been part of the Coalition's Policy Discussion Paper, few details are available. For example, it is unknown which Commonwealth department will operate the register and whether public access will be allowed. It is also unknown which State or Federal departments or agencies will have access to the data base such as State land titles registries. Whatever form the register takes, it will be important that it is not used as a tool by state and federal governments and their respective agencies as a disincentive to foreign investment. If the register itself becomes an unnecessary administrative burden on investors, Australia's reputation as a welcoming foreign investment environment may be disparaged.

Investment by foreign governments

The new government has signalled that it does not intend to change the current requirement for all foreign government investors to notify FIRB of proposals to invest in Australia, regardless of value. That policy position will not change, so all foreign governments and their agencies will still be required to notify FIRB of any acquisitions. 

Chinese investment

After the election the Nationals announced that they will object to the current proposal by China to lift the investment threshold on Chinese investment to $1 billion as part of a free trade agreement. This sets up another possible conflict within the Coalition on foreign investment policy. The Chinese Government has asked for the same treatment as in Australia's Free Trade Agreement with the United States, for which the business investment threshold is $1 billion compared with the usual $248 million threshold for other countries, including China.

FIRB and urban land trusts

On 1 August 2013, FIRB issued a press release entitled "Treatment of Foreign Passive Investors in Public (Real Estate) Unit Trusts" which set out the circumstances in which acquisitions of units in Australian urban land trusts will no longer need to be notified to FIRB. The press release will apply as an interim measure pending the Treasurer's announcement of exceptions in the Foreign Acquisitions and Takeovers Regulations 1989 (Cth) for acquisitions of interests in urban land trusts after public consultation.

Briefly, the practical effect of the FIRB release is that 'passive' retail and institutional investment in listed and some widely held unlisted A-REITs will not need to be notified to FIRB so long as their stake remains below the relevant threshold percentages: 

  • 10 per cent in a listed trust, with a predominantly non-residential property portfolio of office, retail, industrial, or specialised properties, or a mix of these; or
  • 5 per cent in other public trusts with at least 100 unit holders and whose developed residential real estate assets that have been acquired from non associates are less than 10 per cent of the target trust's real estate assets. Investors will only need to notify FIRB and obtain approval where they seek to exceed that percentage. The positive changes provide certainty for foreign investors.

Moving forward

Foreign investment presents some of the greatest opportunities for the Australian economy. But it's a double edged sword - where there is opportunity there are also risks and challenges. Australian commentators are trusting the new government to continue to welcome foreign investment, which plays an enormous role in ensuring businesses remain competitive, grow and become more efficient, and meet aspirations to be "world class".

Australia's new government will enjoy broad community support for welcoming foreign investment if it continues to exercise oversight, and respond to community and industry concerns without being unduly restrictive.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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