Thinking | 16 August 2021
Updated FIRB Guidance Notes clarify investor obligations following major foreign investment reforms
By Conrad Smith
Treasury has released updated FIRB Guidance Notes which aim to provide greater clarity to investors about their obligations under Australia’s foreign investment framework, including by addressing a number of issues identified since major reforms to the framework commenced on 1 January 2021.
In this update, we highlight some of the key changes in how the Foreign Investment Review Board (FIRB) will apply these rules.
Agreements for lease
Guidance Note 2 has been updated to provide that the entry by a prospective tenant into an agreement for lease (AFL) will, in most cases, constitute the acquisition of a leasehold interest in Australian land for FIRB purposes where:
- the AFL is considered binding and unconditional when it is entered into;
- a form of lease is attached to the AFL that includes key terms such as rent and term of the lease; and
- the lease itself is unconditional or any conditions have been satisfied.
Land subdivisions and amalgamations
The update to Guidance Note 2 also provides further guidance regarding FIRB’s position on subdivisions and amalgamations of land. In FIRB’s view, the subdivision or amalgamation of land will generally result in the extinguishment of the old title and the creation of a new title or titles resulting in an acquisition of a new interest in Australian land that can constitute a significant and notifiable action under the Act. This is because each acquisition of an interest in relation to a title is a separate action for the purposes of the Foreign Acquisitions and Takeovers Act.
In these circumstances, the Government considers there is $0 consideration value attached to this acquisition where the person already owned the same land immediately prior to subdivision or amalgamation, and therefore the minimum $2,000 fee applies for seeking FIRB clearance.
Acquisitions pursuant to a Will
The 1 January 2021 reforms included the removal of the exemption for acquisitions pursuant to a Will, such that foreign persons who inherit Australian assets are now be required to obtain FIRB approval where the relevant notification thresholds are met.The update to Guidance Note 2 clarifies that the point at which a foreign person is considered to have acquired an asset under a Will is when the person acquires a legal interest on completion of administration of the Will, and that they can seek FIRB approval within 30 days after acquiring a legal interest, in circumstances where the person was not certain that they would inherit that interest.
Acquisitions of entities holding national security land
FIRB Guidance Note 7 has clarified that acquiring securities in a land entity may constitute an action to acquire and interest in national security land (and therefore be a notifiable national security action) where the land entity holds any interest in national security land. The acquisition of an interest of such an entity would be notifiable regardless of the value of the investment.
Change of trustee
Amendments to FIRB Guidance Note 7 has also confirmed FIRB’s view that upon a change of trustee, foreign ownership of interests in the trust (rather than the ownership of the trustee) will dictate whether the incoming trustee is considered a ‘foreign person’ and required to obtain FIRB approval.
Carrying on a national security business
Guidance Note 8 has been updated to provide an inclusive list of indicators of when a business will be taken to have a presence in Australia for the purposes of determining whether the relevant business is a ‘national security business’. It states that a 'business would generally be expected to have a presence in Australia or some form of connection to Australia to be considered a national security business' and that various factors may be considered for this purpose, such as:
- a physical presence in Australia, such as locally engaged employees or a lease of office space;
- the need for regulatory approvals to operate in Australia, such as the requirement to have an Australian Business Number;
- whether the business is required to comply with Australian law;
- the payment of tax in Australia;
- whether the business receives payments into an Australian bank account for goods and services rendered;
- the terms of the contract, such as requirements to undertake certain steps in Australia;
- using an agent in Australia to assist with some aspect of its business activities; and
- a website with a .au domain.
As this is not an exhaustive list, other factors will also be relevant in determining whether a business has a presence in Australia.
Change in activities
Guidance Note 8 has also been updated to provide an inclusive list of factors FIRB considers to be indicative of whether a change of activities is sufficient to constitute the starting of a national security business. These factors are:
- whether the new activity is in a different division under the Australian and New Zealand Standard Industrial Classification (ANZSIC) Codes, noting changes in activity within ANZSIC Codes may still amount to starting a national security business;
- whether new licences or approvals are required;
- whether new employees with different skillsets need to be engaged;
- entering into business contracts or investment in a new product or service that is not incidental to the current business activity; or
- the new activity results in a materially different product, input or service than previously provided.
National security land
When it comes to an acquisition of 'national security land' (which includes ‘defence premises’ as defined in section 71A of the Defence Act 1903 (Cth), and includes all land owned or occupied by Defence), Guidance Note 8 has been updated to provide that Defence is only taken to occupy land if it has the legal right to use the land at the exclusion of others, at the time when the foreign investor is acquiring the interest in the land, and the mere presence of Defence on the land will not amount to occupation. Further, buildings that are owned by the Defence Housing Authority are not considered to be defence premises under the foreign investment regulatory regime.
The update to Guidance Note 8 also highlights that an ‘interest in land’ – in the context of land in which an agency in the national intelligence community has an interest – has a broad meaning. It means concern or involvement, and is not limited by the definition of interest in Australian land in section 12 of the FATA. Therefore land in which an agency in the national intelligence community is known to have short term licence or leases will be caught.
Passive foreign government investor (FGI) exemption certificate
Guidance Note 9 now, through the exemption certificate regime, gives entities in which foreign government investors from a single country only hold a passive interest access to the higher non-FGI FIRB monetary thresholds. Though a nil monetary threshold for FIRB purposes will still apply in relation to national security businesses and national security land. The passive FGI exemption certificate can be granted for a specified period, including up to the life of a fund.
As part of the reform of Australia’s foreign investment framework, an exemption was included in the regulations that provides that it is not a notifiable or significant action where a foreign person who is not a foreign government investor acquires an interest in an exploration tenement. The updated Guidance Note 5 clarifies that, notwithstanding this exemption, the conversion of an existing exploration tenement into a mining or production tenement may constitute a new acquisition of an interest in a mining or production tenement under the foreign investment framework, and therefore require approval.
Guidance Note 5 further provides that while a retention licence, general-purpose lease or miscellaneous licence generally does not constitute an interest in Australian land due to such interests typically not conferring a right to occupy land, the facts of the case. For instance:
- a retention licence or similar licence that provides the licensee a mining licence without further approval may require FIRB clearance;
- a retention licence which only confers the right to explore generally will not constitute an interest in Australian land as it would be akin to a mining or production tenement; and
- in relation to a general-purpose licence, where the foreign person licensee takes an action which excludes others from using the licenced land (eg where the licence holder builds a road for private use only) that action may result in the licensee having an interest in Australian land.
Wind and solar farms
Guidance Note 4 now provides that approval of acquisitions of land for the purpose of operating a wind and solar farm will generally now be subject to land development conditions similar to those usually imposed on acquisitions of vacant commercial land. These conditions include requirements that:
- a wind or solar farm must be developed on the land;
- continuous construction of the proposed development must commence within five years of completing the purchase of the land; and
- the land not being sold, transferred, or disposed of prior to completion of the development.
The default position that these conditions will be imposed is intended to prevent 'land banking'.
Hall & Wilcox has a FIRB app, which has been designed to help foreign investors, investees and advisors determine whether Foreign Investment Review Board approval is required before a proposed transaction or acquisition is implemented.
The app is updated as the FIRB rules and requirements change and is a useful tool.
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