Malcolm Brennan(Australia) Intan Eow(Australia) King & Wood Mallensons

The Australian Treasurer has announced major reforms to Australia’s foreign investment regime.  On the one hand there is some welcome relief and greater regulatory clarity for investment in sensitive sectors and on the other hand, the introduction of a national security test, stronger enforcement powers, greater compliance monitoring and harsher penalties.

The exposure draft of the legislation is expected to be available for consultation in July 2020 and if passed, come into effect on 1 January 2021.

An enormous amount of material and commentary has and will be written about the changes that will provide some relaxation but add further complexity to what is an already extraordinarily complex and difficult regime.

Almost every reference to the regime by any Australian Treasurer over the last 45 years starts with “Australia welcomes foreign investment” and goes on to recognise the importance of foreign investment to Australia. The regime is in place to ensure that investment is consistent with Australia’s national interest and in recent times this has clearly been focused on ensuring appropriate investment in sensitive sectors and critical infrastructure. The reforms clarify the Government’s position in this space.

FIRB is there to facilitate investment as Mr Irvine has stated. It is important to ensure that the messaging by Government and commentators alike is clear that these significant reforms are not a block on investment. Care must be taken to not focus too heavily on the negative (in particular the broader compliance and penalty regime) and ensure that Australia remains seen as an attractive destination.

The reforms are the most significant since the introduction of the Foreign Acquisitions and Takeovers Actitself in 1975 (including the legislation rewrite in 2015). Australia’s foreign investment landscape as we know it today will shift with a focus on national security being at the forefront. What lies ahead is an unprecedented road which will undoubtedly be full of unexpected challenges for foreign persons seeking to invest in sensitive sectors in Australia, but also hopefully, a more streamlined experience for investment in non-sensitive sectors.

Intended to safeguard Australia’s national interest and mitigate risk associated with sensitive sector acquisitions, the new reforms are both complex and strict. Foreign investors will be subject to greater scrutiny and more rigorous compliance obligations.

As a result of the changes, the Treasurer (through the Foreign Investment Review Board (“FIRB”)) will acquire an unprecedented degree of discretionary power to review, oversee and prohibit foreign investment and the Treasury and the Australian Taxation Office (“ATO”) will have stronger compliance monitoring and enforcement capacity. Judging by the Treasurer’s recent active involvement in responding to the COVID-19 crisis by dropping the FIRB value thresholds to $0, and now by announcing these reforms, the newfound powers appear highly likely to be exercised.

A Brave New Word

The impact that the reforms will have on foreign investment in Australia is impossible to predict. There is a mixed bag of welcome reforms, clarification, greater reach of the Treasurer’s power and new rules to deal with. The changes are said to be necessary for safeguarding Australia’s national interest and in these challenging times of increased State interference will be broadly supported. The reforms will also be welcomed by those resistant to the growing foreign presence in Australia’s economy.

The changes nevertheless raise a number of concerns.

The increased compliance and harsh penalties have the very real risk of scaring away good investment into Australia. Along with the new reforms comes even more red tape which will be highly visible to foreigners before making investment decisions.

In addition, whilst the national security reforms do provide a clearer view of the Government’s position, it is perhaps unfortunate that the sensitive sector changes may be read as having an overtly deterrent nature to foreign investment in general. Importantly, the reforms continue the Australian practice of not being discriminatory and are applied to all foreign investors. Investors proposing to make genuine investments in Australian sensitive sectors will have to navigate the highly complex and legalistic investment regime.

The reforms are welcomed where they aim to streamline processes for certain non-sensitive investment. (Whilst a power will be given to the Treasurer to correct an approval issued on the basis of incorrect information, we suggest that it would be an equally sensible change and long overdue to finally provide a clear power to amend an error in approval where the error is that of Treasury’s or a simple inadvertence.)

The Government states it is committed to delivering a timely and efficient foreign investment regime which recognises commercial deadlines and does not unnecessarily impede the operation of foreign investors or markets. The Government will continue to work with stakeholders in identifying ways to streamline and enhance the investor experience.  Investors will also appreciate the Government’s indication that it will improve readability of existing provisions, rectify inconsistencies and unintended consequences in the foreign investment rules.

Overall, it is hoped that these reforms will provide assistance to investors who do not raise any national security or national interest concerns.

The Proposed Reforms

1. New national security test

The most significant change arising out of the reform relates to the implementation of the national security test which will allow the Treasurer “to impose conditions or block investment by a foreign person on national security grounds regardless of the value of investment.”

At present, only foreign investments which exceed the relevant monetary thresholds are subject to a national security review as part of the national interest test in which the Treasurer considers whether a proposed investment is contrary to the national interest. Where the target is very small, e.g. a start-up, often only investments by foreign government investors (“FGIs”) are screened because of their $0 threshold. As a result of the proposed reforms, a standalone national security test which is not dependent on the monetary thresholds will have a broader application, applying to all foreign persons, not just FGIs.

It has long been a concern that the arbitrary nature of a monetary threshold allows for anomalous outcomes. For example sale of a data centre that has sensitive Government tenants is able to proceed without FIRB review to a non-government foreign person if the relevant monetary threshold is not met.  That will no longer be possible.

The introduction of this national security test will not affect foreign persons who invest in non-sensitive sectors(unless of course they commence to carry on an activity that raises national security concerns). It will only apply to investors who are proposing to acquire a direct interest, where that direct interest raises national security concerns.

The test is accompanied by a number of other measures to enhance national security protections. A mandatory pre-investment notification will be required from foreign persons who are seeking to acquire a direct interest in a ‘sensitive national security business’. The reform package suggests consultation will be undertaken as to what a ‘sensitive national security business’ will be. The reform package indicates that the concept will include critical infrastructure, telecommunications businesses, Defence related business or land, national supply chain as well as data. (There will be a challenge for Government to restrict the reach of the data limb as well as national supply chain.  We have already seen the health sector move into “critical infrastructure”.

A business or entity owned by a foreign person which starts to carry on a sensitive national security business will also have to seek prior approval.

In addition to this, the Treasurer will also have the power to ‘call-in’ for review investments which would otherwise not be notified under the national security mandatory pre-investment notification process. This national security call-in power would extend beyond the scope of the sensitive national security business, but investors may make voluntary filings to require the Treasurer to decide whether to exercise the call-in power within a certain period of time. The reform material states that the majority of investment will not be called in for review however only time will tell.  Increased involvement of the security agencies in the FIRB process has been a feature of the review process for the past few years.

Changes will also be made to ensure acquisitions of interests from governments to perform government services or functions associated with privatisation programs that may raise national security risks are subject to the Treasurer’s review and aligned with the definition of sensitive national security business.

Investors will be able to apply for an investor-specific exemption certificate which enables them to make eligible acquisitions, on the basis that they have been found not to pose a risk to national security. This is intended to provide greater flexibility whilst reducing investor burden.

Further to the above, the reforms will also introduce a last resort review power which, in effect will enable the Treasurer to reassess previously approved investments if subsequent national security concerns arise. The Treasurer will have the power to impose conditions, vary existing conditions and require that the acquired interest be divested.

2. Exemptions for less sensitive FGI investments

One of the most positive of the proposed reforms and in many respects an olive-branch to investment funds with passive FGIs, this change will see certain investment funds exempt from the national interest test where their government investors have no influence or control over the decisions of the investment funds.

This reform is welcomed as it means that investment funds with passive FGIs, who are currently classified as FGIs and subject to $0 screening threshold, will be treated as foreign persons and subject to higher monetary thresholds.

This exemption will apply in two ways:

a. investment funds where they have more than 40% FGI ownership in aggregate but less than 20% from any single foreign government will no longer be deemed FGIs; and

b. investment funds which have a single FGI with at least 20% ownership (without control or influence) will still be deemed FGIs however they can apply for an exemption.

3. Stronger compliance monitoring powers

The introduction of stronger monitoring and investigative powers is intended to allow for site-based inspections to examine whether certain conditions are being complied with. Whilst FIRB has advised that this power is line with that possessed by other business regulators, it appears to be quite police-like in nature and will be something to watch.

4. Stronger and more varied enforcement powers

Under the current investment regime, the Treasurer arguably is only empowered to remedy a breach of conditions through punitive action, after the breach has occurred. The introduction of the power to give directions in instances where the Government has a reason to suspect that a foreign investor has or will breach their conditions, will strengthen the Treasurer’s ability to proactively curtail breach before it occurs.

Under the current regime, only breaches of the foreign investment rules in relation to residential real-estate can be punished by way of an infringement notice.  The new reforms aim to broaden the application of infringement notices, allowing them to be issued in regard to all types of breach, regardless of the type of acquisition or land. Fortunately, the infringement notices will be both graduated and proportionate, allowing for fairer penalties to be imposed.

The broader penalties and compliance regime will result in additional cost of investment as compliance activities including reporting and audit, add to the expenses.

The Government will also be able to impose civil penalties and infringement and take other actions if foreign investment approval was given based on an application that is incorrect, or omits an important piece of information. The Government will also be able to accept enforceable undertakings.

Whilst a rare event, the reforms will also provide the ability to look beyond some exemptions. One improvement to enforcement will be having power with respect to an investment that was originally made in breach of the FATA where the interest has subsequently been transferred to another foreign person by will or devolution by operation of law which is currently an exempted transaction.

5. Increased penalties

A significant change to come out of the proposed reforms, and one that needs to be messaged very carefully so as not to scare investment away, is the large increase in both civil and criminal penalties that will may be imposed on foreign investors who are found to be in breach of their conditions or the law.

Currently, an individual investor criminally charged can be fined up to $157,500 with 3 years’ imprisonment, whilst a corporation can be fined up to $786,500. Under the new reforms, an individual can be fined up to $3.15 million and 10 years imprisonment, whilst a corporation can be fined up to $31.5 million.

Changes to the civil penalties have also occurred.  Individuals can be fined an amount between $1.05 million to $525 million, whilst corporations can be fined an amount between $10.5 million to $525 million.

Whilst these penalties are intended to act as an effective deterrent, they have the potential to cause investors to rethink many genuine investments.

6. Approval required for interest increase as a result of share buybacks or selective capital reductions

Under the current legislation, there was confusion at FIRB as to whether the increase of an interest as a result of a share buyback, the exercise of redemption rights or selective capital reduction, is a significant or notifiable action under the FATA, even where the relevant thresholds are met.

We welcome the clarification that such an acquisition is in fact a notifiable and significant action.  The new approach contemplated by the reform is in line with our perspective and is consistent with the FATA.

7. Narrowing the scope of the moneylending exemption

The change to the moneylending exemption will only impact upon foreign money lenders who are seeking to obtain interests in sensitive national security businesses. This was foreshadowed some time ago and is consistent with the Government’s position regarding critical infrastructure. It does close a potential loophole for using the exemption to avoid the strict approach to critical infrastructure.

We do not anticipate that this will have widespread adverse implications on existing investors already relieved under the exemption. However, foreign banks engaging in project and infrastructure financing will need to assess the impact of this change on their business and whether an investor-specific exemption certificate may be available to it.

8. Stricter tracing rules

Under the proposed stricter tracing rules, unincorporated limited partnerships will be subject to the imposition of conditions and beneficial interests will be able to be traced.

9. Establishment of a Register of Foreign Ownership and increased information sharing between government agencies and international counterparts

The proposed establishment of a new Register of Foreign Ownership, which will be administered by the ATO, is intended to enable increased information sharing between relevant government agencies. This Register merges and expands the scope of the existing foreign ownership registers for agricultural land, water entitlements and residential properties.  Foreign persons will be required to register their interests held in Australian land, water entitlements and any acquisitions that require FIRB approval. The Register ultimately aligns with the significant increase in compliance monitoring powers, allowing the Treasurer a comprehensive database by which to keep a tally on foreign investors.

Further measures to increase information sharing between government agencies are also being introduced. These will hopefully assist in created a more coherent review of applications and reduce the time agencies take to assess applications.

Importantly and consistently with the approach to careful messaging of the reforms, the new register is not public. The confidentiality of the FIRB process will be maintained.

The Government also proposes to introduce new information sharing provisions to allow sharing of protected information with international counterparts where national security considerations are present.

This will be another measure adding cost to investment in Australia and a need for investors to be able to monitor their compliance with the regime.

10. Review of fees

The reforms also announced that the foreign investment fees framework would be reviewed so as to make the fees both fairer and simpler for investors.  FIRB has stated that the fee schedule will be updated to reflect the enlarged roles and responsibilities of foreign investment activities across government, including aspects related to national security. It will also take into account the growing complexity of cases, as well as the administrative cost of the review process over recent years.  It can be expected that fees will most likely increase as the review process becomes more complex and harder to navigate.


In light of these proposed reforms, we expect that foreign investment in Australia will look very different to how it does currently. Assessing proposed acquisitions against the 2 separate tests and lower threshold for sensitive sectors will be challenging for investors and advisers alike.

Both foreign investors currently investing in Australia and those who intend to do so in the future will need to understand the nature of the changes and how they will be impacted.

The foreign investment process shifted with the 2015 rewrite from an economic policy approach to a more legalistic review. These new reforms will continue that shift with a more rigorous and deeper scrutiny of sensitive matters which will take significant time and add cost to an already expensive process.

Whilst only time will tell how the reforms impact on Australia and its economy, investors should brace for turbulence as we fly into an unprecedented future. The reforms are intended to start just as the COVID-19 $0 thresholds end. Hopefully by then the economy will be improving, but keeping the brakes on foreign investment too long under the current $0 thresholds may be damaging and we call for the Treasurer to consider a staged return to normal well before 1 January 2021.