From 1 July 2017, a suite of changes came into effect to streamline Australia’s foreign investment (FIRB) regime.
The new changes to the FIRB regulations are mostly incremental, but will nevertheless assist foreign investors investing in residential land, commercial real estate in CBD areas, student accommodation, aged care and retirement villages, and wind or solar farms. The streamlined fee structure, which is now calculated on consideration payable by the foreign investor, should also reduce the application fee for some of the small to medium-sized investments.
The key changes, which were announced in the Federal Budget 2017-18, are summarised below:
- New exemption certificates: Several new exemption certificates have been introduced. One is a business exemption certificate that allows foreign investors to apply for pre-approval for a program of business investments over a specific period of time. The other exemption certificates relate to the acquisition of residential property by foreign persons, including a certificate which allows foreign persons to seek pre-approval to purchase new dwellings or vacant land without having to specify details of any particular property. This remedies the previous situation where foreign persons needed to apply to FIRB in respect of each individual property they were considering purchasing, even if they only wanted to make one purchase.
- Definition of commercial land: The definition of ‘commercial residential premises’1 excludes commercial residential premises such as student accommodation, retirement villages and aged care facilities, even where they are used for a commercial purpose. The effect of this was that these types of land were treated as residential land and were subject to a $0 monetary threshold, rather than the $55/$252 million thresholds applicable to commercial developments. The notification of acquisitions in respect of these types of land also attracted much higher fees than other commercial land notifications. In recognition of this, the amendments have applied the higher monetary thresholds of $55/$252 million to these types of acquisitions.
- Removal of some ‘low threshold’ categories of commercial land: Acquisitions of ‘low threshold’ non-vacant commercial land (being ‘sensitive land’) are subject to the lower monetary threshold of $55 million, rather than the standard $252 million threshold (except for agreement country investors subject to the $1094 million threshold). The previous ‘low threshold’ categories captured a broad range of commercial land that was not sensitive in practice. The amendments have removed the category of ‘prescribed airspace’, on the basis that over time this had come to cover most of the commercial properties in the CBD of Australia’s major cities. The application of the ‘government leases’ category has also been significantly narrowed.
- Global transactions: Prior to the amendments, a foreign government investor acquiring a target group company that held Australian interests (thereby resulting in an indirect acquisition of the Australian interests) was a notifiable action where the total value of the Australian assets of the foreign entity was at least 1% of the total value of its assets, and the total value of the Australian assets was at least $10 million. These thresholds therefore captured transactions where the Australian target was merely an immaterial part of the broader target group. To alleviate this inadvertent burden, the amendments have increased the notification thresholds to acquisitions where the total value of the Australian assets of the foreign entity is at least 5% of the target’s total assets and where the foreign target’s Australian assets are valued at $55 million or more.
- Custodian holders: The 1 December 2015 amendments to Australia’s foreign investment regime inadvertently resulted in ASX companies with foreign custodian holders being treated as foreign persons and subject to notification and land and water registration requirements. The new amendments reverse this position, exempting companies who only become foreign persons by virtue of their foreign custodian holders.
- Consortia: Consortia that contained foreign government investors were previously required to make multiple notifications (for the action to establish the initial investment entity or consortium vehicle, then again when the entity/vehicle proposed to make an acquisition). The amendments have removed this requirement, by excluding consortia from the meaning of ‘starts an Australia business’ where the relevant foreign government investor already carried on such a business in Australia.
- Solar and wind farms: The amendments have introduced a new exemption for foreign investors that already operate or own a wind or solar farm in Australia seeking to make further investments in that sector. They have also clarified the treatment of relevant land for greenfield and brownfield projects – we have prepared a separate, more detailed article on this topic which can be accessed here.
Changes to fees
The amendments have introduced a welcome simplification of the fees payable for the notification of business transactions, with the introduction of a three-tier fee structure.
The most significant change to the fee structure in connection with business acquisitions is that fees are now calculated only by reference to the consideration paid or payable by the foreign investor. This differs from the previous regime where the fee was calculated on the higher of the consideration and total asset value of the target business. In our view, the new approach produces a fairer result, such that an equity investor looking to acquire a minority interest in an Australia business will not have its fees calculated based on 100% of the asset value of the target company.
A summary of the new fee structure is set out below:
|Type of acquisition
|| $10 million or less
||Between $10 million and $1 billion
|| Above $1 billion
|Commercial land (vacant and developed)2
|Actions relating to entities and businesses
||$2 million or less
||Between $2 million and $10 million
||Above $10 million
| Exemption certificate
| Mining and production tenements
|Legal or equitable interest in mining, production or exploration tenement by foreign government investor
|Interest of at least 10% in securities in mining, production or exploration entity by foreign government investor
|Foreign government investor starting Australian business
A lower fee applies in certain circumstances to ensure, for example, that the fee payable is not higher than the consideration for the relevant transaction.
Implications for property transactions
The amendments are a welcome development for certain commercial property sector players. In particular, the removal of commercial land under ‘prescribed airspace’ from the ‘low threshold’ category of non-vacant commercial land means that transactions involving commercial property (including long-term lease transactions) within the CBD area for most capital cities in Australia will now be subject to a higher monetary threshold of $252 million.
Secondly, applying the higher monetary threshold of $55/$252 million to residential dwellings used for a commercial purpose (such as student accommodation, retirement villages and aged care facilities) should assist foreign investments in that sector.
We released a separate update on the implications of the FIRB changes for developers and foreign property investors, which can be accessed here.
Implications for wind and solar transactions
The amendments introduce a new exemption for foreign investors that already operate or own a wind or solar farm in Australia who are seeking to make further investments in that sector. The further acquisition of brownfield wind or solar farm projects will be subject to a higher monetary threshold of $55 million or $252 million, irrespective of whether the acquisition involves land that may be classified as agricultural land.
The amendments and new Guidance Note 50 also now make it clear that, subject to one exception, the acquisition of greenfield wind or solar farm projects will always require prior notification to FIRB, irrespective of the value of the land or project. The exception is that, if the land is currently being used wholly and exclusively for primary production, a screening threshold of $15 million will continue to apply.
We have released a separate more detailed update on the implications of the changes to wind and solar farm projects, which can be accessed here.
Implications for private equity
It is disappointing that private equity (PE) and infrastructure funds with passive funding from foreign government sources (such as government pension funds) have not been exempted by the amendments from the foreign government investor regime. However, there are still some welcome changes which will benefit PE investors looking at opportunities in Australia.
Firstly, the introduction of a business acquisition exemption certificate system will allow PE investors to obtain pre-approval in connection with proposed investments in a certain sector or area in Australia. This ensures that foreign investors are not disadvantaged from a timing perspective in participating in a sale process against other local investors in Australia. It remains to be seen whether FIRB will allow the new exemption certificate to apply to a broad investment program, or only investments subject to specific criteria.
The increase to the de minimis threshold for Australian businesses that are part of a global acquisition is also sensible. The previous 1%/$10 million threshold meant the exception was rarely used, as most operating businesses in Australia will account for more than 1% of the global business. The increase to 5%/$55 million threshold will ensure that, where the Australian branch or subsidiary business does not form a significant part of a global business, FIRB notification requirements in Australia will not delay the global acquisition.
Lastly, the changes to the consortium rules mean the establishment of new investment vehicle by the consortium (for example, for the purposes of a bid) will not of itself require prior notification to FIRB, even if the consortium is classified as a “foreign government investor” due to one or more PE or other funds being members of that consortium. Of course, prior notification to FIRB is still required for the consortium before completing the acquisition of the Australian business or entity.
Thank you to Sai Ma for her contribution to this post.
For further information about the issues discussed in this publication, please contact your usual Norton Rose Fulbright adviser, or one of the authors of this update.