Foreign investment in the agricultural sector
Foreign investment has always played a key role in the Australian agricultural sector. However, the December 2015 changes to Australia’s foreign investment rules have complicated the investment process and increased the scrutiny applied to all investments, making Australia’s foreign investment policy and rules a key consideration for any proposed investment.
AUSTRALIAN FOREIGN INVESTMENT APPROVALS
Foreign investment in Australia is regulated by the Australian Federal Government through the Foreign Investment Review Board (FIRB), a nonstatutory body which advises the Australian Treasurer on foreign investment policy and its administration. FIRB examines proposals by foreign investors and makes recommendations as to whether those proposals are in accordance with the Government’s foreign investment policy, which looks at whether the investment is in Australia’s national interest.
FIRB also oversees the administration of the legislation governing foreign investment law in Australia, being the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), and the Foreign Acquisitions and Takeovers Regulation 2015 (Cth). The Australian Taxation Office (ATO) has also recently taken an active role in administering certain parts of the foreign investment regulatory framework and in particular the maintenance of the registers of foreign ownership of agricultural land water under the Register of Foreign Ownership of Agricultural Water or Land Act 2015 (Cth).
As a general rule, the Federal Government, through FIRB, must be notified of all proposed foreign investment activity unless the value of the proposed investment is below the prescribed notification threshold applicable to that specific type of investment or if a specific exemption applies. The types of activities by foreign investors that may require notification to FIRB include certain acquisitions of:
- Australian land (including agricultural land, commercial land, residential land and mining or production tenements)
- Australian assets
- Australian businesses (including agribusinesses)
- shares in an Australian company
- units in an Australian trust
- certain interests in offshore entities that hold direct or indirect interests in sensitive Australian assets (such as land), and
- to establish new businesses in Australia or acquire interests in land.
The notification thresholds that trigger the requirement for foreign investors to notify FIRB of their proposed investment differ according to the type of interest they are proposing to acquire and whether they are a Trade Agreement investor or foreign government investor.
Notification of the proposed investment is made through FIRB and must be supported by appropriate documentation detailing the nature and scope of the proposed investment and details of the investor, including ultimate ownership and control. It must also address national interest considerations including national security, competition, Australian government policies (including tax), impact on the Australian economy and community and the character of the investor.
FIRB recognises the commercial-in-confidence sensitivity of all applications and will extend appropriate security to information provided to it. It is best to lodge an application or consult with FIRB before a public statement relating to the proposed transaction is made. Where FIRB approval is required, any transaction documentation should be made conditional on FIRB approval and the transaction should not complete until that approval is obtained.
The need for FIRB approval is triggered when a ‘foreign person’, as defined by the FATA, seeks to acquire an interest in an asset or entity which is regulated by the FATA. The definition of ‘foreign person’ is very broad but generally will capture:
- an individual not ordinarily resident in Australia
- a company or trust in which a foreign individual or another foreign corporation or trust (together with associates) holds a substantial interest of 20% or more, and
- a company or trust in which foreign individuals or other foreign corporations or trusts (together with associates) hold an aggregate substantial interest of 40per cent or more.
It is not always readily apparent whether an entity is a ‘foreign person’ or not. It is important to note that companies or trusts incorporated or established in Australia and with no direct ownership by foreign individuals, corporations or trusts may still be classified as ‘foreign persons’ under the FATA.
An interest in an Australian company or trust held indirectly by a foreign entity through its subsidiaries (including, for example, subsidiaries incorporated or established in Australia) will be taken to be interests held by the foreign parent entity for the purposes of determining if the Australian company or trust is a ‘foreign person’.
In addition, the FATA has a broad definition of ‘interest’, which changes depending on the entity and extends beyond direct legal ownership to include the ability to control voting power, potential voting power or the ability to exercise a right (for example, under an option) which would deliver similar types of control. This broad definition serves to prevent parties structuring around the need to obtain FIRB approval.
For FIRB purposes a person is regarded as holding an interest in a trust if the person either holds or acquires a beneficial interest in the income or property of the trust, or the person holds or acquires an interest in the units of a unit trust.
For discretionary trusts, each beneficiary is deemed to hold an interest equal to the maximum percentage that the beneficiary could receive if the trustee exercised its discretion in that beneficiary’s favour. Generally this will mean that each person or entity that falls within any class of beneficiaries of a discretionary trust will be deemed to hold a 100per cent interest (i.e. a substantial interest) in the trust. This can create some obvious issues where the classes of beneficiaries are drafted broadly (which is common). For example, a discretionary family trust that has only ever distributed to (and only ever intends to distribute to) Australian citizens may still be a ‘foreign person’ if a member of one of the classes of beneficiaries is a foreign person. In these circumstances it may be prudent to amend the trust deed to exclude foreign beneficiaries before the trust makes any acquisitions that could trigger the FIRB approval requirements, so as to avoid any unnecessary compliance issues.
In addition to these categories, a foreign government investor will also be considered a foreign person for the purposes of the FATA.
A ‘Foreign government investor’ is defined as a foreign government, separate government entity (such as agencies or departments), company, trust or the general partner of a limited partnership in which:
- a foreign government or separate government entity (either alone or with its associates) holds substantial interest, or
- foreign governments or separate government entities of more than one foreign country together with their associates hold an aggregate substantial interest.
FIRB places particular scrutiny on foreign government investors for all types of investment in Australia, however in recent times there has been a strong and consistent public focus on foreign government investors in the agricultural sector in light of food security. This is an issue which would need to be addressed in any application made to FIRB by foreign government investors.
ACQUIRING AUSTRALIAN LAND
The acquisition of an interest in ‘Australian land’ by a foreign person will require FIRB approval if that acquisition meets the prescribed monetary threshold for the relevant category of land proposed to be acquired. Australian land is split into four categories: ‘agricultural land’, ‘commercial land’, ‘residential land’, and ‘mining or production tenements’. Each category has its own rules and monetary thresholds. For the purposes of this article we have focused on ‘agricultural land’.
Acquisition of land includes, for example, the purchase of freehold land, entry into leases and profit sharing arrangements. The threshold for agricultural land is $15 million (except for certain investors who receive the benefit of various trade agreements discussed below). However, unlike the monetary thresholds for other types of land, this $15 million threshold is cumulative. That is, a foreign person requires FIRB approval to acquire agricultural land if the value of the interests in agricultural land held by that investor, together with all its associates, and including the value of the proposed acquisition, amounts to $15 million or more.
Agricultural land is land in Australia that is used, or that could reasonably be used, for a ‘primary production business’ (with some limited exceptions). The term ‘primary production business’ is defined in the Income Tax Assessment Act 1997 (Cth) (ITAA) and is quite broad. Generally, a business will be a primary production business if it includes the cultivating of plants or animals for the purposes of selling them or a product produced from them. This definition has some further qualifications to exclude a situation where animals or plants may be cultivated but not in a way which would reasonably be classified as a business. As such, when determining if a business is a primary production business FIRB will look at whether the activity is conducted for commercial purposes, is a regular organised activity and if it is conducted in a business-like manner.
When assessing if the land could ‘reasonably be used for’ a primary production business FIRB will look at the primary use allowed under zoning laws, the history of the relevant land’s use, the characteristics of the land and what any leases or licenses, if any, allow.
The agistment of land creates some complications in this context. Although agistment may be conducted in a business like manner for the purpose of generating a profit, agisting land in itself is not a primary production business, although the party using the land under the agistment agreement may carry on a primary production business. The relevant tax ruling states that each situation needs to be looked at individually as to whether land is considered the subject of a primary production business or not.
Recently a common issue which has arisen in the context of the classification of land as agricultural land is whether the presence of a farm house means the relevant land is defined as residential land. This is relevant because the application fees for residential land may be higher, there is no monetary threshold for the acquisition of residential land and, most importantly, there is a general policy position that foreign investors will not be granted FIRB approval for the acquisition of established residential real estate. The definition of residential land includes land on which there is at least one dwelling. This obviously would catch a number of properties on which a farm house or similar accommodation is located. However, land that is being used wholly and exclusively for a business of primary production will not be residential land. Therefore, so long as the residence on the agricultural land is used in the conduct of the business (for example if one or more of the occupants are actively involved in the conduct of the primary production business) and the land is otherwise used wholly and exclusively for that business, then it will be characterised as agricultural land.
Similar FIRB approval requirements apply to the indirect acquisition of interests in Australian agricultural land through the acquisition of shares in agricultural land corporations or units in agricultural land trusts. A company or unit trust will fall into this category if it holds interests in Australian agricultural land that constitute 50 per cent or more of the total asset value of that entity.
ACQUIRING AN AUSTRALIAN COMPANY OR BUSINESS
If a foreign investor acquires a substantial interest in an Australian company, trust or business valued in excess of the prescribed monetary threshold (generally $252 million) FIRB approval may also be required. As discussed above, a substantial interest is taken to have been acquired where, following the transaction:
the foreign investor (together with any associates) holds a 20% or more interest in the company, trust or business, or
foreign investors (in aggregate) hold a 40% or more interest in the company, trust or business.
It is however worth noting that if the company, trust or business holds Australian land assets, the stricter FIRB rules relating to that land will generally apply (so, for example, the $252 million threshold may not apply).
ACQUIRING AN AGRIBUSINESS
If a foreign investor proposes to acquire an interest of 10 per cent or more in an agribusiness with a value of $55 million or more, it must obtain prior FIRB approval.
A company or trust will be an agribusiness if:
- it is wholly or partly carrying on an agricultural business, and
- the value of the assets of the company or trust that relate to the conduct of the agricultural business exceeds 25 per cent of the total asset value of the company or trust, or
- the earnings before interest and tax derived by the company or trust and its subsidiaries in the most recent financial year for which there are audited accounts, exceeds 25 per cent of the total earnings for the company or trust.
The definition of agribusiness comes from the Australian and New Zealand Standard Industrial Classification Codes – Division A. Generally this definition is not too far from the common understanding of what an agribusiness is, but it does extend beyond the ‘farm gate’ to certain processing functions such as meat, dairy, fruit and vegetable processing as well as grain and sugar milling.
The standard FIRB application fee for the acquisition of an agribusiness is approximately $25,300.
To an extent, FIRB appreciates that there are times when numerous acquisitions are made as part of a larger long term acquisition plan. In such circumstances foreign investors can apply for what is known as an exemption certificate. An exemption certificate may be available where a foreign person wishes to undertake an agricultural land acquisition regime which would not exceed a value of $100 million over a three year period and the entity can identify the regions and localities of the intended acquisitions. These certificates are issued with reporting requirements and other conditions and are generally not able to be used for any single acquisition valued in excess of $10 million.
The fee for an exemption certificate of this type is $25,300 and no further fees are payable for each acquisition made under the certificate.
In recent years the Government has entered into a number of trade agreements under which investors from certain countries are subject to higher monetary thresholds for certain acquisitions. For example, foreign persons from the US, Chile and New Zealand have an investment exemption threshold of $1,094 million for the acquisition of an agribusiness. That said, these higher thresholds generally do not apply when the investment is being made through an Australian subsidiary which means in practice they are very rarely relevant.
Once a foreign investor has lodged an application, FIRB will consider the application and supporting material and either approve the investment, approve the investment with conditions, or reject the investment thereby blocking the investment.
In recent times there have been several high-profile public rejections by FIRB in the agricultural space, being the Archer Daniels Midland’s proposed 100 per cent acquisition of GrainCorp in 2013 and more recently the rejection of the proposed sale of S. Kidman & Co to a Chinese consortium. Both these decisions were said to be made in the national interest with the Kidman decision specifically referencing national security issues due to the South Australian holdings of Kidman & Co having close proximity to Australian Defence Force facilities. Although we have noticed an increased focus by FIRB on agricultural land and its connection with national security, the size of the Kidman & Co land portfolio was also likely a key concern.
Although the above two examples are high-profile and high value investments, the increased scrutiny placed by FIRB on all foreign investment in the agricultural space should be a key consideration for any proposed investments by foreign persons as it is often a manageable issue if addressed proactively.
STATUTORY DECISION PERIOD
Upon the submission of a foreign investment application and the payment of the relevant fee, the Treasurer, through FIRB, is generally required to make a decision within 30 days of receipt of the application and respond to the applicant within a further 10 days. However if FIRB needs additional time to consider an application, it can seek the applicant’s consent to an extension of time. If the extension is not agreed to, FIRB has the power to issue an ‘interim order’ preventing the investment for a period of up to 90 days while it further considers the application. Interim orders are published in the Government Gazette, so it is common for investors to agree to extensions of the relevant time frame if requested by FIRB. It is important to note that if foreign investment approval is obtained for a specific transaction and that transaction does not proceed in a timely manner (usually 12 months) or the parties enter into new arrangements, further approval will need to be sought for the transaction.
Foreign investors applying for foreign investment approval must pay an application fee to FIRB. FIRB will generally not begin assessing an application until the correct fee has been paid in full. The fee payable by foreign investors differs according to the type of interest that a foreign investor is proposing to acquire under a transaction.
The FIRB application fee for the acquisition of agricultural land is approximately one per cent of the purchase price for the land, capped at $101,500. This fee is not refundable, even if the transaction does not proceed or FIRB approval is not granted.
There are, however, fee reduction rules which can in certain circumstances see the fee reduced substantially. For example, although FIRB usually charges fees on a ‘per lot’ basis, in the case of acquisitions of multiple titles of agricultural land from the same vendor under one agreement, FIRB will generally only charge the one fee based on the most valuable lot.
REGISTER OF FOREIGN OWNERSHIP
Under the Register of Foreign Ownership of Water or Agricultural Land Act 2015 (Cth), interests in agricultural land held by foreign investors must be notified by foreign investors to the ATO, regardless of whether or not prior FIRB approval is required. All existing agricultural land holdings must have been registered with the ATO by 29 February 2016 and there is an ongoing obligation to notify the ATO within 30 days if any of the following events happen:
- a foreign person holds or ceases holding an interest in agricultural land
- whilst holding an interest in agricultural land, a foreign person changes foreign person status, either becoming a foreign person or ceasing to be a foreign person, or
- the land or property type held by a foreign person has changed from, or to, agricultural land.
From 1 July 2017 the registration requirements will be extended to cover certain water entitlements and contractual water rights held by foreign investors. After an initial stock take period where existing water entitlements must be registered by 30 November 2017, there will be an ongoing obligation to report annually (within 30 days after the end of each financial year) if any of the following events happen:
- a foreign person holds or ceases holding an interest in a registrable water entitlement or contractual water right
- whilst holding an interest in a registrable water entitlement or contractual water right, a person changes foreign person status, either becoming a foreign person or ceasing to be a foreign person, or
- there is a change to certain characteristics of a registrable water entitlement or a contractual water right.
Foreign investors who fail to notify the ATO or do not give notice within the required timeframe may be liable to pay an administrative penalty.
The Treasurer has significant powers to prosecute non-compliance and to prevent or unwind transactions. The penalties may include both criminal prosecution and civil penalty orders and, in certain circumstances, a forced divestiture of assets.
Therefore all foreign investors looking at investments which involve Australian businesses, companies, trusts, assets or land, agricultural or otherwise, in any way (including indirectly) should carefully consider the foreign investment notification and approval requirements.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.