Foreign direct investment in Australia

Foreign investment into Australia is regulated by the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and associated acts and regulations, and is administered by the Foreign Investment Review Board (FIRB).

Australian law on FDI has been updated and refined in recent years. Perhaps the most prominent change has been the introduction of the Foreign Investment Reform (Protecting Australia's National Security) Act 2020 and Foreign Investment Reform (Protecting Australia's National Security) Regulations 2020 ('national security amendments') from 1 January 2021. These introduced into the foreign investment review framework a new FIRB approval trigger for "notifiable national security actions", including new national security tests and fresh powers for the treasurer to unwind transactions on national security grounds.

Temporary changes to the foreign investment review framework which existed between 29 March and 31 December 2020, reducing monetary screening thresholds to zero and extending the time for FIRB to consider applications to six months, have been removed. As of 1 January 2021, the previous position has generally been reintroduced with the screening threshold for business acquisitions now A$281 million (approx. US$200m) for investors from most countries and A$1.216 billion for investors from certain countries which have free trade arrangements with Australia (Chile, China, Hong Kong, Japan, New Zealand, Peru, Singapore, South Korea and the US). Different, generally lower, monetary thresholds apply for land investments and investments into certain industries such as media, for national security related investments (see below), and where the investor is deemed to be a foreign government investor. In addition, the time for FIRB to consider applications has been brought back to 30 days, subject to powers to extend this period under the FATA.

It is now more important than ever to carefully consider the need of your business to seek FDI approval before undertaking investments into Australia. From 1 January 2021, the severity of criminal and civil penalties for non-compliance have increased in magnitude, including for failure to give FIRB notice of a 'notifiable action' or of a 'notifiable national security action'.

Foreign investment regime

Foreign person

The term 'foreign person' is defined broadly in the FATA. A foreign person is:

• any individual who does not ordinarily reside in Australia; or
• a corporation or trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds a substantial interest (at least 20%); or two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate interest of at least 40%; or
• a foreign government.

More stringent rules apply to investments by 'foreign government investors' (FGIs) compared to private foreign investors. For example, an FGI needs FIRB approval simply to commence business in Australia, whereas a foreign person generally needs FIRB approval only if the acquisition exceeds the screening threshold. Any entity is an FGI if 20% or more is owned directly or indirectly by a foreign government (which can include, for example, sovereign wealth funds or state-backed pension funds).

However, the national security amendments have also provided relief to passive investors by relaxing the definition of FGI under FATA so that entities which have more than 40% foreign government ownership but less than 20% from any single foreign government will no longer be an FGI. Additionally, entities will not be deemed an FGI where the FGI does not have management rights or where the FGI investors do not have influence or control over the investment or operational decisions of the entity or any of its underlying assets. This will enable investment funds to more quickly close deals or acquire sizeable pre-bid stakes below the threshold for private investors without the cost and delay of the FIRB process.

Notifiable national security actions

The national security amendments introduced a new mandatory FIRB approval requirement with effect from 1 January 2021 for foreign persons who take 'notifiable national security actions', irrespective of the value of the investment. Foreign persons must now additionally consider not only whether their investment will exceed FIRB monetary screening thresholds, but also the nature of the target of their investment and of any associated national security implications.

These actions include:

• starting a 'national security business';
• acquiring a 'direct interest' (typically 10% or greater) in a 'national security business' or an entity that carries on a 'national security business'; or
• acquiring an interest in 'national security land'.

‘National security businesses’ generally include companies that operate in critical infrastructure sectors such as gas, electricity, water, ports, public transport, freight services, aviation, hospitals, data processing and financial services, telecommunications, defence or national intelligence sectors, or their supply chains.  Given the scope for severe penalties if FIRB approval is not but should have been obtained under the FATA, the question of whether an investment is proposed to be made in a ‘national security business’ can require of a foreign investor an in-depth review of a target’s Australian customer base.

‘National security land’ is largely land which is defence premises or whether it is known on reasonable enquiries that a national intelligence agency has an interest in the land.

Notifiable actions

There are likewise mandatory triggers for FIRB approval where foreign persons propose to take a 'notifiable action', including:

• acquiring a direct interest (typically 10% or greater) in an agribusiness;
• acquiring a substantial interest (at least 20%) in an Australian entity; or
• acquiring any interest in 'Australian land' - this itself has various thresholds and requirements depending on whether the land interest is in agricultural, commercial or residential land or a mining or production tenement.

With the re-introduction of monetary screening thresholds from 1 January 2021, the proposed investment must again generally exceed the screening threshold of A$281m, although this can vary based on the nature of the investments and country of origin of the investor.

Review procedure

Foreign investment notifications are filed with Australia's treasurer through the online FIRB applications portal. The role of FIRB is to review and advise the treasurer as to the national interest implications of the notified proposed foreign investment.
Once an application has been made, FIRB generally reviews the application and provides the applicant with requests for further information where required, however the final decision to grant or refuse FIRB approval for reasons of national interest rests with the treasurer.
Where the applicant has complied with the provisions of FATA, the Treasurer has 30 days from the date that the application fee is paid to review and make a decision on whether to grant FIRB approval. That timeframe can be extended by consent or if initiated by the treasurer. Extensions typically arise where FIRB makes iterative requests for further information throughout the application process. However, we are also aware of extensions to current determination periods simply due to the increased volume of FDI activity into Australia, so foreign investors should allow for a period greater than 30 days to conduct the FIRB process. FIRB approval will generally be granted unless the foreign investment is considered a threat to Australia's national interests or contrary to Australia's national security.

The term 'national interest' is not defined in the FATA. However, Australia’s Foreign Investment Policy (December 2015) provides a non-exhaustive list of factors that are typically considered:

• type of investment – whether or not the investment is in a sensitive business and its effects;
• national security – the extent to which the investment will affect Australia’s ability to protect its strategic and security interests;
• competition – whether it would promote healthy competition;
• impact on the economy and community – the extent to which the investment will develop and provide fair return for the Australian people (e.g. creation of jobs).
• character of the investor – corporate governance practice of the investor and the basis of operations and regulations.

With the introduction of the national security amendments, the treasurer now wields broad powers to reassess approved foreign investments where national security risks emerge, including to impose new conditions on approved investments or require diverstments of foreign interests in a business, entity or land even after FIRB approval has been obtained (known as the call-in power).

The Commonwealth government has also been vested with increased monitoring and investigative powers, and powers to give directions to prevent suspected breaches of conditions that may have been attached to any FIRB approval, including through the creation of information collation and sharing mechanisms such as a new Register of Foreign Ownership to enable the sharing of information across government agencies.

Legal consequences

Upon review, it is within the treasurer's power to permit a foreign investment with or without additional conditions, prohibit the foreign investment or, as the case may be, have the investment unwound. Additionally, under the national security amendments, existing civil and criminal penalties for breaches of FATA have been significantly increased.

Previously, an individual investor criminally charged with a breach of FIRB conditions could be fined up to A$166,500 with three years' imprisonment, whilst a corporation could be fined up to A$832,500. Following the national security amendments, an individual can be fined up to A$3.33m and face 10 years' imprisonment, whilst a corporation can be fined up to A$33.3m. The civil penalty provisions have also significantly increased under the national security amendments, with individuals liable to be fined between A$1.11m and A$555m and corporations liable to be fined between A$11.1m and A$555m.

In the event that an application raises national interest concerns, the treasurer will impose conditions on the FIRB approval in order to mitigate those risks and concerns. Generally, we are seeing more conditions being imposed on FIRB approvals, consistent with the tightening of the foreign investment review framework enacted by the national security amendments.

To date, the majority of the conditions imposed on non-residential applications relate to potential tax risks. However, there has been an increasing number of bespoke conditions drafted and imposed on FIRB approvals which are considered to be sensitive to national interest, such as applications in relation to Australian energy assets.

The increased imposition of conditions, together with the recent decision by the treasurer to reject a US$13bn proposed takeover bid for Australian gas pipeline company APA by Hong Kong's CKI, indicates an increase in the scrutiny of FIRB applications made by foreign investors in relation to Australian infrastructure and energy assets.

Criminal and civil penalties may apply if a foreign person:

• fails to give a notice before taking a notifiable action;
• seeks FIRB approval and takes the action before the end of the determination period;
• contravenes a condition imposed on the FIRB approval; or
• contravenes an order made by the Treasurer in relation to the action, which includes imposing conditions, prohibiting the action or requiring the action to be undone.

An officer of a corporation who authorises or permits the corporation to commit an offence or contravene a civil penalty, or who fails to prevent a contravention of a civil penalty provision, may also be found to have committed an offence or contravened a civil penalty provision. This means that the directors and officers of a corporation may be personally liable if the corporation is found to have breached the provisions of FATA.

The recent changes to the foreign investment regime have certainly had the effect of making foreign investment more scrutinised in Australia. Foreign investors must now consider not only the nature of their investment and ownership structure, including whether an investments exceeds any relevant screening thresholds, but must also scrutinise the target of any investments and the related national security risk of that investment.