Yesterday the Treasurer announced broad policy reforms designed to ‘strengthen’ and ‘streamline’ Australia’s foreign investment framework. The reforms centre around a renewed risk-based approach to be adopted by Treasury when screening proposals. Under this approach, ‘high risk’ proposals will now be subject to enhanced screening measures whereas ‘low-risk’ proposals (including those by known investors with a strong compliance record and who are investing in non‑sensitive sectors) may be eligible for faster screening.
Reforms at a glance
- Enhanced screening of foreign investments in sensitive sectors: Investors can expect enhanced scrutiny of “complicated or higher risk proposals”, which will be determined having regard to factors such as the identity of the investor, the target sector and the complexity of the transaction structure (essentially, the tax structure). The following sectors have been flagged as being particularly sensitive and therefore subject to greater scrutiny going forward:
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- critical infrastructure;
- critical minerals;
- investments in proximity to sensitive Australian Government facilities and defence sites; and
- investments which involve holding or having access to sensitive data sets.
- Focus on tax in the screening process: It was announced yesterday that as part of the application screening process, Treasury will increase its consideration of the tax implications of a proposed investment to ensure investors “pay their fair share of tax”. Proposals with the following higher risk tax features will attract heightened scrutiny:
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- internal reorganisations being implemented as a precursor to a broader arrangement which may result in Australian tax avoidance;
- pre-sale structuring of Australian assets that will minimise tax revenue on disposal by PE or other investors;
- the use of related party financing arrangements to reduce Australian income tax or avoid withholding tax;
- migration of assets (e.g. IP) to offshore related parties in tax effective jurisdictions; and
- investments structured through effective low or no tax jurisdictions where there is limited relevant economic activity taking place.
Treasury is expected to publish updated guidance on its approach to foreign investment and tax integrity over the coming months.
- Streamlining of lower risk investments: Treasury has promised to streamline the approval process for low-risk investments, including by accelerating approval processing times and requiring less information from repeat investors where their ownership details have not changed since their last foreign investment application. Although there are still no guarantees on timeframes, Treasury has indicated that faster approval times may be expected in the following circumstances:
- Who: (1) Where the investor has as strong track record of compliance with Australia’s foreign investment framework and other laws; (2) investments by repeat investors who are well known to Treasury (investing alone and not in a consortium with unknown investors); or (3) passive investors who can demonstrate no control or influence over an asset.
- What: Investments in non-sensitive sectors, such as manufacturing, professional services, commercial real estate, new housing and mining of non-critical minerals.
- How: Investments involving simple (tax) transaction structures.
To support faster assessments, Treasury has also committed to processing 50% of applications received within the initial statutory timeframe of 30 days from 1 January 2025.
- Greater focus on compliance and enforcement: Treasury will commit greater resources to bolster its compliance and enforcement function, to allow for increased monitoring and enforcement of compliance with approval conditions. Treasury intends to increase its capacity to undertake site visits for this purpose and has also flagged there will be an increased use of the Treasurer’s call-in power.
- Fee refunds: Fees paid in respect of applications submitted by unsuccessful bidders in competitive auction processes will be refunded. Treasury hopes this change will encourage investors to submit their application early in a process. This is good news for vendors keen to maintain competitive tension amongst rival bidders, but who have recently faced increased pushback from those reluctant to kick start the FIRB process without certainty of their preferred bidder status and a signed deal.
- Allowing foreign investors to acquire Build to Rent properties: In an effort to ease the current housing crisis, Treasury has lifted the prohibition on foreign investors acquiring established ‘build to rent’ properties. There is no guidance yet on precisely what will be captured by an established ‘build to rent’ property for this purpose.
- Exemptions for interfunding transactions: As has previously been foreshadowed by the Government, interfunding transactions between investment entities (such as unit trusts) that are managed by the same responsible entity or a related responsible entity will also be exempt from requiring approval, the rationale being to make it easier for institutional investors to manage their portfolios. Draft regulations have been released for consultation to give effect to this change.
Reception to the reforms
Ultimately, time will tell whether Treasury’s renewed risk-based approach for assessing foreign investment proposals will attract new and sought-after foreign investors. By and large however, the reforms are welcome and should positively impact the current FIRB processing times which have continued to blow out in recent years (there are numerous reports of approval times extending beyond six months, including for relatively benign proposals).
Investors from ‘friendly’ (e.g. Five Eyes) countries and repeat investors in non-sensitive sectors will no doubt welcome the policy shift with open arms. However, notwithstanding that the Government has said it will continue to welcome investment from all over the world, it is uncertain how these changes will impact investors from non-strategic partner countries. Concerns have already been raised that the reforms could see investors from ‘less friendly’ countries face even lengthier delays or possibly struggle to secure approval altogether. There’s also a concern that by enhancing scrutiny of proposals in the identified sensitive sectors, the reforms may actually dissuade investors and ultimately stagnate dealmaking and foreign investment in those sectors.
Next steps
Importantly, the announcement is not expected to materially impact FIRB’s approach to screening proposals which are currently before it – these will by and large continue to be screened in accordance with the former policy. However, the reforms are now live and will apply to submissions filed from now on, with Treasury releasing a substantial rewrite of its published Foreign Investment Policy to coincide with its announcement yesterday.
Although the commitment to accelerated processing times will come into effect next year, Treasury has indicated that applicants should start to receive faster approvals from 1 July 2024.
If you’re wondering how these policy reforms will impact future investments into Australia, please contact Clementyne Rawlyk.
