By Malcolm Brennan, Stephen Brightman King & Wood Mallesons’ Canberra office.
An array of changes to Australia’s foreign investment framework took effect from 1 July 2017 under the Foreign Acquisitions and Takeovers Amendment (Exemptions and Other Measures) Regulations 2017 (Cth). The amendments will be of particular interest to private equity sponsors, and industry players in the renewables, aged care, student accommodation and other commercial real estate sectors. They will impact the types of acquisitions requiring FIRB approval, as well as introducing new types of exemption certificates. The Treasurer has claimed that the changes will “enhance and streamline the operation of the foreign investment framework”, as well as “facilitating business investment” and “reducing red-tape”.We see a number of the amendments as positive changes. However, the usefulness of some of the changes, in particular the business acquisitions exemption certificates, will largely depend on how they are implemented in practice.
Amendments to the filing fees regime also took effect on 1 July under the Foreign Acquisitions and Takeovers Fee Imposition Amendment (Fee Streamlining and Other Measures) Act 2017 (Cth).
Amendments affecting business acquisitions
In a radical break from past practice, foreign persons, including foreign government investors can now apply for an exemption certificate to obtain pre-approval to acquire interests in securities over a specified period.
Private equity funds with foreign government investors will be particularly pleased by this progress. Those funds have been subject to a $0 notification threshold even where the foreign government investors in the funds are purely passive. This replaces the underwriter exemption certificate regime – which was not widely used in any event.
The usefulness of a business exemption certificate will depend on a number of factors including the flexibility of the regime, limits on the value of acquisitions permitted, FIRB’s ability to process applications in a timely and sensible manner and conditions attached to certificates. We expect that similar to other types of exemption certificates, negotiations with FIRB will take time and patience, and applicants will benefit from having some ‘runs on the board’ with FIRB from previous investments. We anticipate that certificates will be most useful for small non-sensitive acquisitions.
Some guidance has been included in the Treasurer’s Explanatory Statement indicating a good degree of flexibility in how these certificates might apply, but we eagerly await additional policy guidance in this area.
2. Increased threshold for offshore acquisitions with Australian interests by foreign government investors
Prior to the amendments, a foreign government investor acquiring a foreign target with Australian interests was required to obtain FIRB approval where the total asset value (Australian assets) for the foreign entity was at least 1% of the total value of the assets and the total asset value (Australian assets) was at least $10 million. The amendments sensibly increase this threshold to 5% and $55 million. These are familiar values in the range of thresholds that apply in the regime.
3. Consortiums
Finally, the technical debate over whether foreign government investors are required to notify of the initial acquisition of interests in an investment vehicle has been resolved. Consortiums with foreign government investors will no longer be required to agonise over whether to obtain separate FIRB approval to merely set up an acquisition vehicle before making a notifiable acquisition. Additionally, a foreign government investor will no longer be required to obtain FIRB approval to acquire an interest in a consortium vehicle.
This is a most welcome development and one that will reduce cost to investors and remove excessive red tape.
4. Foreign custodians
Australian companies with foreign custodian holdings that are a foreign persons only for that reason will now benefit from an exemption. This exemption previously existed prior to the 2015 reforms but was mistakenly omitted in those reforms. This exemption will also apply to registering interests on the agricultural land register and water register.
Amendments affecting land acquisitions
Renewable energy will benefit from the new regulations.
Developed solar farms and wind farms that are accredited power stations under the Renewable Energy (Electricity) Act 2000 will now be consistently treated as non-vacant commercial land ($55 million or $252 million notification threshold). Prior to the amendments, these types of developments could be treated as either vacant commercial ($0 notification threshold), non-vacant commercial land ($55 million or $252 million notification threshold) or agricultural land ($15 million cumulative notification threshold), depending on the nature of the underlying land and nature of structures on the land. Foreign government investors will still be subject to a $0 notification threshold.
For land containing supporting infrastructure for a solar farm or wind farm, only above-ground infrastructure will qualify to make the land non-vacant. Land with only below-ground infrastructure will be vacant land.
Unfortunately, the amendments do not address the treatment of other types of developments that do not qualify as non-vacant commercial land because they do not contain substantive permanent buildings that can be legally occupied by persons, goods or livestock. Examples of land with significant structures that could still be regarded as vacant are wharves and piers, gas transfer stations, substations and antenna arrays.
2. Student accommodation and aged care facilities
These types of dwellings will now be treated as commercial residential premises instead of residential land. Removing the confusing treatment that has operated to date, acquisitions in this space will now benefit from a higher notification threshold of $55 million (sensitive land) or $252 million (non-sensitive land) instead of $0. Foreign government investors will still be subject to a $0 notification threshold.
An exemption has been included for buy-backs by owners or operators of interests in residential land within retirement villages (including foreign government investors).
3. Narrowing of the low threshold land definition
The incredibly confusing “prescribed airspace” criteria has been removed from the sensitive land criteria. With a multitude of interpretations of that term, it eventually was treated as so broad that almost all land of any value in the capital cities could not benefit from the higher non-sensitive land threshold.
Removal of the poorly conceived “prescribed airspace” criteria will allow greater use of the $252 million notification threshold for developed commercial property.
Additionally, leases to corporate Commonwealth entities (such as Australia Post) will be excluded for the purposes of determining whether land is leased to a Commonwealth Government entity for the sensitive land definition. We anticipate that this change will reduce the number of acquisitions requiring notification, particularly in CBD areas and in shopping centres. However, the presence of State Government tenants such as police stations or government shopfronts will still render a property as sensitive.
Foreign government investors will still be subject to a $0 notification threshold.
4. Unlisted land entities
The requirement that an unlisted Australian land entity have at least 100 security holders before the exemption applies for an acquisition of a less than 5% interest is removed.
5. Pre-approval for new dwellings or vacant land
Foreign persons can now seek a pre-approval enabling purchase of one new dwelling or vacant land without specifying a particular property.
New dwellings that have previously failed to settle (near-new dwellings)
A foreign non-resident person can apply for an exemption certificate to allow purchase of a new dwelling that has previously failed to settle. Prior to the amendments, these dwellings were categorised as established dwellings, which foreign non-resident persons were generally prohibited from purchasing.
Fee amendments
