Australia’s FIRB regime: an overview for foreign investors

The regulatory framework that governs foreign investment in Australia is complex and often requires expert assistance to navigate. Known as the ‘FIRB’ regime, this article provides an overview of the:

• policy, legislation and regulatory instruments that govern foreign ownership of Australian businesses
• decision-making roles and powers of the federal Treasurer and the Foreign Investment Review Board (Board)
• potential impacts the FIRB regime has on the planning and execution of foreign investments in Australia.

Australia’s Foreign Investment Policy

Governmental regulation of foreign investment in Australia aims to strike a balance between ensuring Australia remains an attractive destination for foreign investment and retaining the Australian Government’s ability to protect the national interest as it judges necessary and appropriate.

The principles underpinning the FIRB regime are set out in Australia’s Foreign Investment Policy (Policy), published by the Board on behalf of the federal department of Treasury. The Policy provides an overview of the regime and aims of the legislation and can aid in interpreting the law and providing certainty around policy intentions.

The legislative framework of the FIRB regime

The FIRB regime is made up of the following main legislative instruments:

• the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA)
• the Foreign Acquisitions and Takeovers Regulations 2015 (Cth) (FATR)
• the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Cth) and associated regulations.

Foreign investment decisions under the FIRB regime are made by the Treasurer, who is advised by the Board. The Board is an administrative advisory body that examines foreign investment proposals and advises the Treasurer on relevant national interest implications. The Board’s advice is not binding on the Treasurer, who retains the ultimate decision-making power, however the Board’s recommendations will always be considered.

The FATA and FATR are supported by the Policy and Guidance Notes on the specific application of the law. While neither of the latter have the force of law, they provide a helpful aid to interpreting and understanding the FIRB regime. They are updated by Treasury from time to time to take account of changes in the Government’s policy position and legislative updates.

Who is a foreign person?

The FIRB regime applies to ‘foreign persons’ seeking to invest in Australian land or entities. The FATA and FATR provide that a foreign person is:

• an individual not ordinarily resident in Australia
• a foreign government or foreign government investor
• a corporation, trustee of a trust or general partner of a limited partnership in which:
  • an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a ‘substantial interest’ (generally an interest of 20% or more); or
  • two or more persons, each of whom is either an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest (generally an interest of 40% or more).

The FIRB regime incorporates ‘tracing rules’. These tracing rules operate so that any foreign person that holds a substantial interest in a corporation or trust (the higher entity) will be taken to hold the same interest in any entity in which the higher entity holds a substantial interest. For example, if a foreign person holds 30% in Company 1 and Company 1 holds 100% in Company 2, the foreign person is taken to have a substantial interest in Company 2. This process can be applied multiple times so that a person’s interest can be traced through many entities.

Which entities are foreign government investors?

Any of the following entities will be classified as a foreign government investor under the FIRB regime:

• a foreign government
• a separate government entity[1]
• a corporation, trustee of a trust or general partner of a limited partnership in which:
  • a foreign government, separate government entity or foreign government investor from one country holds an interest of 20% or more; or
  • foreign governments, separate government entities or foreign government investors from more than one country hold an interest of 40% or more.

The tracing rules mean that an entity can be considered a foreign government investor due to ownership well upstream of the entity.

What transactions are covered by the FIRB regime?

There are a number of categories of transactions that are covered by the FIRB regime:

Notifiable actions

A notifiable action must be notified under the FIRB regime by the foreign person proposing to take that action. It is an offence to proceed with the transaction until a statement of no objection is received from FIRB or the Treasurer’s power to make a decision in relation to the transaction expires. Failing to notify FIRB of a notifiable action can attract civil and criminal penalties. Where approval is required under the FIRB regime, it is important the transaction documents are made conditional on a no objection notice being issued. If approval is obtained for a transaction, investors should complete the transaction in a timely manner (generally 12 months); otherwise further approval will need to be sought.

Significant actions that are also notifiable actions

Unless subject to a valid exemption, the following actions will be both significant and notifiable:

• a foreign person acquiring an interest of 20% or more of shares or units of an Australian company or trust valued above the FATR monetary thresholds
• a foreign person acquiring an interest in Australian land valued above the FATR monetary thresholds[2]
• a foreign person acquiring a direct interest in an Australian company, unit trust or agribusiness valued above the FATR monetary thresholds[3]
• a foreign person acquiring a direct interest in an entity or business that wholly or partly carries on an Australian media business
• a foreign government or foreign government investor acquiring a direct interest in any Australian company, unit trust or business
• the starting of an Australian business by a foreign government or foreign government investor
• a foreign government or a foreign government investor acquiring an interest in an exploration tenement or a mining or production tenement, or an interest in at least 10% in securities in a mining, production or exploration entity.

Significant actions that are not notifiable actions

Significant actions that are not notifiable actions include:

• an acquisition of securities in an entity carrying on an Australian business or entry into or termination of a significant agreement with an Australian business that results in a change of control in that entity[4]
• entry into an agreement relating to the affairs of an entity under which one or more officers of the entity will be obliged to act in accordance with the directions of a foreign person who holds a 20% or more interest in the entity, that results in a change of control in that entity
• the alteration of the constituent documents of an entity such that one or more officers of that entity will be obliged to act in accordance with the directions of a foreign person who holds a 20% or more interest in the entity, that results in a change of control in that entity
• an acquisition of an interest in Australian land by a foreign person,

in each case, where the relevant FATR monetary thresholds are exceeded.

Notwithstanding that it is not mandatory to notify FIRB of a significant action that is not a notifiable action, a foreign investor may be required to unwind the action if FIRB deems it to be contrary to the national interest at a later date. For this reason, voluntary FIRB notification is encouraged.

National security actions

Notifiable national security actions include:

• starting a national security business
• acquiring a direct interest in an entity that carries on a national security business
• acquiring a direct interest in a national security business
  • acquiring an interest in Australian land that is national security land (at the time of the acquisition)
  • acquiring an interest in an exploration tenement in respect of Australian land that is national security land (at the time of the acquisition).

The definition of a national security business is broad. It includes (but is not limited to) businesses carried on wholly or partly in Australia that:

• are direct interest holders in critical infrastructure assets
• store or have access to information that has a security clarification
• are prescribed telecommunication carriers
• develop, manufacture or supply critical goods or technologies that are intended for military or intelligence use by a domestic or foreign defence force or agency
• collect, store, maintain, or have access to personal information of defence and intelligence personnel that, if disclosed, could compromise Australia’s national security.

Reviewable national security actions are those that are not significant actions, notifiable actions or notifiable national security actions that may nonetheless pose national security concerns. For example, a foreign person acquiring or proposing to acquire any interest in Australian land.

FIRB can seek to review a reviewable national security action up to 10 years after the action has been has been taken. FIRB cannot, however, review such an action where the proponent has previously notified FIRB and received a no-objection notification or exemption certificate.

Monetary thresholds

The monetary thresholds that dictate when a foreign investment becomes a significant or notifiable action vary for different kinds of transactions.

Higher monetary thresholds apply for certain kinds of transactions by investors from countries with which Australia has a free trade agreement. The thresholds are not the same for every country party to a free trade agreement, instead depending on what has been negotiated between the nations.

Higher monetary thresholds under free trade agreements do not, however, apply to foreign government investors or to transactions involving businesses prescribed as ‘sensitive’ to national interest considerations. Such businesses include those carried on wholly or partly in the media, telecommunications or transport sectors.

The current monetary thresholds as at 1 January 2022 are:

What is the national interest test?

When a proposed foreign investment transaction is reviewed, the test applied is whether the transaction is contrary to the national interest. FIRB is able to take any factors considered appropriate into consideration. Such factors typically include:

• impacts on national security
• impacts on competition
• impacts on the economy and community
• other government policies, including tax related policies
• the character of the investor.

There are also specific matters taken into consideration when examining proposals relating to critical infrastructure, agricultural investment, residential real estate investment and those proposals involving a foreign government investor.

Following review of a proposed foreign investment transaction, FIRB may issue a statement of no objection to the transaction, issue a statement of no objection with conditions, or reject the transaction.

If a transaction that FIRB objects to has already proceeded, the Treasurer has the power to issue a range of orders, including ordering disposal.

What transactions are exempt from the FIRB regime?

The FATR sets out exemptions from the operation of FATA for certain acquisitions, interests, Australian businesses and foreign persons. Many of the exemptions set out in FATR are highly technical and conditional, requiring careful consideration of the transaction in question before being relied upon. Some examples of exemptions from the FIRB regime include:

• interests acquired as security for moneylending arrangements, except foreign governments in certain circumstances (regulation 27)
• interests acquired by Will or devolution with certain exceptions (regulation 29)
• interests held for the purpose of providing custodian services (regulation 30)
• an acquisition of an interest in shares of a financial sector company within the meaning of the Financial Sector (Shareholdings) Act 1998 (Cth), except by foreign governments (regulation 32)
• an acquisition of an interest in securities under a compulsory acquisition or a compulsory buy‑out (regulation 33)
• an acquisition of an interest in Australian land by an Australian citizen not ordinarily resident in Australia or by their spouse or de facto partner (where the interest is jointly held), and certain Australian corporations, trustees and charities (regulation 35).

Exemption certificates

The Treasurer has the power to grant exemption certificates in respect of certain transactions that would otherwise be significant or significant and notifiable actions. They must be satisfied that the transaction would not be contrary to the national interest before granting an exemption certificate. Exemption certificates can be varied or revoked and may name multiple persons, specify conditions or a period, or deal with more than one interest.

Standing categories of exemption certificate exist under the FATR to simplify the screening process for the FIRB regime. These include:

• exemption certificates where a foreign person proposes to acquire one or more kinds of interests in an Australian business or securities of an entity (regulation 42)
• exemption certificates where a foreign person proposes to acquire one or more kinds of interests in a tenement, or in securities in a mining, production or exploration entity (regulation 43)
• a range of exemption certificates for various types of investment in Australian land or that concern national security actions.

How do I apply for a decision in relation to a foreign investment transaction?

All foreign investment applications (except applications relating to residential real estate, which will be processed by the Australian Taxation Office) must be made online through FIRB’s application portal. A decision under the FIRB regime will typically take up to 40 days. However, this is commonly extended to allow additional time to examine the application.

To avoid delay in processing, applicants should ensure all necessary information in relation to the transaction is included in their application. The relevant fee for lodging an application under the FIRB regime is payable at the time of application. The fee for a single application will depend on the type of interest being acquired.

What are the consequences of non-compliance with the FIRB regime?

Civil penalties

The maximum civil penalties for failing to notify FIRB of a notifiable action or notifiable national security action (other than in respect of interests relating to residential land), is the lesser of:

• $550 million; and
• the greater of:
• $1.1 million for an individual or $11.1 million for a corporation
• the market value of the relevant interest
• 75% of the value of the consideration for the acquisition.

If the relevant action relates to an interest in residential land, the maximum civil penalty will be the greater of the following:

• the value of the capital gain that was made or would be made on the disposal of the relevant interest
• 25% of the consideration for the acquisition of the residential land
• 25% of the market value of the interest in the residential land.

Criminal penalties

The maximum criminal penalty for failing to notify FIRB when required is a $33.3 million fine for a corporation and a $3.33 million fine or imprisonment for 10 years for an individual.

Impact on deal planning and execution

The FIRB regime is a complex framework of legislation requiring careful consideration of the classification of interests, categorisation of investor, level of control, monetary thresholds and potential exemptions that relate to a foreign investment proposal.

Getting it wrong can have fundamentally adverse consequences, including prosecution and compulsory divestment risks.

If you require advice in relation to the application of the FIRB regime or expert assistance with preparing and submitting a FIRB notification, please contact Andrew Corkhill.

[1] Under section 4 of the FATA, a ‘separate government entity’ is defined as: an individual, corporation or corporate sole that is an agency or instrumentality of a foreign country or a part of a foreign country; and is not part of the body politic of a foreign country or of a part of a foreign country.

[2] Under section 4 of the FATA, land is classified as: developed or vacant commercial land; agricultural land; residential land; or mining tenements.

[3] Under regulation 16 in the FATR, ‘direct interest’ means: any investment of 10% of more; investments of 5% or more where coupled with a legal arrangement relating to the business; or any interest where the acquirer is in a position to influence or participate in the central management and control of the business.

[4] Under section 54(4) of FATA, a person controls an entity if they are in a position to determine the policy of the entity in relation to any matter or if they hold an interest of 20% or more in the securities of the entity.