Reforms to Australia’s foreign investment framework – a positive change or more of the same? 

The Australian Federal Treasurer has announced policy reforms to Australia’s foreign investment framework intended to strengthen, streamline, and increase transparency to the regime through an updated Foreign Investment Policy document. 

The announcement came ahead of the 2024-2025 Federal Budget which provides additional funding, amongst other things, to increase the Foreign Investment Review Board’s (FIRB) monitoring and enforcement activities, and hopefully support a faster decision process.

These policy goals are welcome; however, they are largely changes to the Foreign Investment Policy, and not legislative changes. They therefore remain largely at the discretion of FIRB to enact.

Further, this increased funding for compliance taken in the context of recent FIRB decisions rejecting proposed investments, makes it clear that FIRB will continue to be an active regulator both in the granting of its approvals and enforcement where there have been breaches of the Foreign Acquisitions and Takeovers Act 1975 (FATA).

This article discusses these policy reforms broadly, and outlines what we expect to see in practice if this new policy is implemented.

Reforms to Australia’s Foreign Investment Framework

On 1 May 2024, the Treasurer announced that the Federal Government will reform and renew Australia’s foreign investment framework to make it better for investors, the economy, and Australia’s national interest. The Treasurer has framed the reforms as a way to bolster economic security while ensuring Australia remains an attractive place for foreign investment to support the Government’s ‘Future made in Australia’ agenda. 

The announcement includes the following key reforms:

Streamlined assessment process for ‘low risk’ investments

This process will be informed by who the investor is, the proposed target of their investment, and the structure of the transaction. Foreign investors with a history of compliance investing in non-sensitive sectors (i.e. manufacturing, professional services, commercial real-estate, new housing and mining of non-critical minerals) are expected to see benefits through this streamlined approach.

Although there is nothing negative about any of the above, it is already largely the case. Investors from countries with close relationships with Australia generally already see faster approval times. For example, investors from New Zealand regularly have below average application turnaround times compared to investors from countries such as China.

It is not just the country of origin or the sector into which the investment is being made which impacts approval times – increasingly, it is the structure of the investment. The Australian Tax Office (ATO) is one of the main consult partners of FIRB and gets to review and comment on every application. The requests for further information now being made by the ATO are material, often requiring detailed input from tax advisors. The ATO is essentially asking investors to confirm their technical compliance with relevant tax rulings, information which the ATO can then use later in audits of the investors. 

New timeframe performance targets

FIRB will adopt a new target to process 50% of investment proposals within the 30 day statutory decision period starting 1 January 2025.

Although a welcome goal, this is just a target. For almost all applications, FIRB requests an extension, relying on the applicant to request the extension so as to not need to use the capped 90 day unilateral extension limit FIRB has under the FATA. This 90 day period can be extended by public gazette which is the “stick” that encourages an investor to agree to as many extensions as requested, as most investors prefer their investment decisions to remain confidential while conditional.

Therefore, the request for an extension should not be automatically viewed as a negative sign in respect to an application. However, continued extensions can materially delay a transaction. Often, these delays are outside FIRB’s control and are caused by consult partners, but FIRB’s inability to communicate the reason for the delay or even the subject matter of any issue a consult partner may be fixating on creates significant investment uncertainty.  We would suggest in addition to a goal of faster applications, a regime requiring FIRB to provide more detailed updates and reasons for a delay or decision would provide as much investor benefit.

Reforms to facilitate investment

To facilitate foreign investment the Treasurer announced:

• a 75% refund of application fees for foreign investments that do not proceed because the investor was unsuccessful in a competitive bid process;
• allowing foreign investors to buy established build to rent developments for which lower application fees will apply; and
• releasing draft legislation to exempt interfunding transactions from mandatory notification requirements and fees under the foreign investment framework.

The proposed reforms to the fee regime may be an acknowledgement from FIRB that the material increase in fees, coupled with the larger number of transactions that the FIRB rules apply to, was at best incentivising a delay in engaging with FIRB, and at worst potentially encouraging non-compliance with FIRB.

FIRB has always encouraged and actively participated in early engagement with an investor, which certainly is beneficial when, as a buyer, you expect a tight sale timetable or competitive bid process, and the new 75% refund policy will further support early engagement with FIRB.

Increased enforcement and compliance

The announcement that more resources will be allocated toward screening foreign investment in critical infrastructure, critical minerals, critical technology, those that involve sensitive data sets, and investment in close proximity to defence sites clearly aligns with a recent policy shift within FIRB. This includes greater use of existing powers to monitor compliance with conditions imposed on investment – including conducting on-site visits.

FIRB intends to publish more detail and public guidance on their approach to foreign investment and tax integrity over the coming months. The revised framework will place additional scrutiny on foreign investment proposals with tax characteristics considered high risk.

Since 2015, FIRB has gradually evolved into a much stronger compliance enforcement body, these announcements are just the latest step in that evolution. Investors need to be aware that conditions imposed by FIRB will be enforced and not only carry monetary penalties but can impact the future success of an application.

What will be interesting to see, is whether the new proposed tax integrity guidelines include the briefly mentioned requirement that investors may be required to disclose to FIRB and the ATO legal advice on tax structuring which they have received. The Treasurer raised this notion some months ago causing great concern amongst investors and advisors alike.  FIRB has since sought to alleviate some of that concern by assuring investors that this policy does not purport the forced waiver of legal professional privilege which would dramatically impact an investors ability to seek confidential legal advice. Certainly, an important wait and see issue.

What next?

As a general statement, the proposed reforms all push FIRB policy in a positive direction, but the actual implementation of these new policies will be the test. FIRB continues to approve almost all applications put before it, but the increasing application cost and delay cause commercial issues for parties wanting to move ahead with transactions in a timely manner.

Although FIRB has changed a lot over the years, the keys to a successful outcome with FIRB remain the same – early and detailed engagement.