Foreign Investment - The New Regime Arrives

The long awaited changes to Australia's foreign investment regime have now been introduced into Federal Parliament, and are expected to be law in December 2015.

Consistent with the Government’s statements, the aim of the new regime has two aims:

  1. to strengthen the enforcement of our foreign investment rules; and
  2. increase the transparency of foreign ownership.

A new fee structure will also commence for all foreign acquisitions of property.

The new enforcement regime

Breaches of the new rules may result in:

  • the Federal Treasurer making a range of orders in relation to "significant actions" and “notifiable actions”; and
  • prosecution for both civil and criminal offences in a wide range of circumstances.

Significant actions

A “significant action” as defined under regulation includes:

  • acquiring an interest in securities, assets or land above the set monetary thresholds;
  • engaging in actions that change the control of corporations, unit trusts and businesses above the set monetary thresholds; or
  • an action prescribed by the Regulations including a foreign government investor acquiring a direct interest in an Australian entity or business or an interest in land or foreign government investor starting an Australian business.

Acquisition” is broadly interpreted to include entering into an agreement or option (or materially altering it) including where it is dependent on the fulfilment of a condition.

Notifiable actions

A Notifiable action as defined under regulation includes:

  • an acquisition of a direct interest in an agribusiness over the relevant monetary threshold;
  • an acquisition of a 20% interest in an Australian entity;
  • an acquisition of an interest in Australian land; or
  • an action prescribed by the Regulations including a foreign government investor acquiring a direct interest in an Australian entity or business or an interest in land.

Unless an exemption applies, Notification requirements apply to all Australian land, including agricultural land, commercial land, residential land or a mining or production tenement.

A lease or licence for less than 5 years is not an interest in land.

Monetary Thresholds

The monetary thresholds that must be reached for an action to be classified as a significant action in relation to entities and businesses that are not agribusinesses are:

  • $1,094 million for investors from USA , New Zealand, Chile, Japan and Korea (barring sensitive businesses); and
  • $252 million for other foreign investors.

The China-Australia Free Trade Agreement makes it likely that China will be added to the $1,094 million category.

These thresholds do not apply if the significant or notifiable action has been prescribed by the Regulations, for example an action by a foreign government investor.

Thresholds for land

The monetary thresholds for land (for both significant actions and notifiable actions) are:

  • no threshold for residential land, vacant commercial land, mining or production tenement land or any land being acquired by a foreign government investor;
  • $15 million for investors acquiring agricultural land (other than for investors from USA, NZ, Chile or for an enterprise or national of Singapore or Thailand);
  • for all "other" land (for instance developed commercial land)
    • $1,094 million for investors from USA, NZ, Chile, Japan and Korea (CHAFTA makes it likely China to be added);
    • $50 million for land being acquired by an enterprise or national of Singapore or Thailand used wholly or exclusively for a primary production business; and
    • $55 million for all other foreign investments.

Investors from USA, NZ, Chile or an enterprise or national of Singapore or Thailand are exempt from applying for approval to acquire agricultural land.

The Regulations may expressly exclude the monetary threshholds in some rare instances-such as some acquisitions of land from the Commonwealth.

Treasurer's powers

Significant Actions

Upon notification of a “significant action”, the Treasurer has 30 days to:

  • issue a "no objection" notice;
  • impose conditions on the proposed action, or
  • block it altogether.

The consequence of failing to inform the Treasurer of a significant action, is that the Treasurer may make a disposal order blocking or unwinding the significant action if the Treasurer determines that the significant action is contrary to the national interest.

Notifiable Actions

An acquisition which is a “notifiable action” cannot proceed unless the Treasurer gives his approval, and then only subject to the conditions of that approval.
The Treasurer can make a Disposal order if notifiable actions proceed without approval.

Exemptions and exclusions

There will be exemptions and exclusions to the obligations to notify.

For instance, notification is not necessary:

  • to acquire a new dwelling where an exemption certificate (previously referred to as advanced off-the-plan certificate) has been granted in advance to a developer selling the new dwelling; and
  • where the acquisition of the interest in land is not a significant action, like an acquisition of agricultural land valued under $15 million.

Some New Definitions

A “foreign person” includes:

  • an individual not ordinarily resident in Australia (including expatriate Australians);
  • a corporation (or a trustee of a trust) in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds a substantial interest;
  • a corporation (or a trustee of a trust) in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
  • a foreign government; and
  • any person prescribed by the Regulation.

Although a "foreign person" includes expatriate Australians, the Regulations exclude the application of the Act for land acquisitions by Australian citizens not ordinarily resident in Australia.

A substantial interest means:

  • Holding at least a 20% interest in an entity.
  • For trusts, a substantial interest is a beneficial interest in at least 20% of the income or property of the trust.

An aggregate substantial interest is where:

Two or more persons hold:

  • at least a 40% interest in an entity; or
  • beneficial interests in at least 40% of the income or property of the trust.

Agricultural land means Land in Australia that is used, or that could reasonably be used, for a primary production business consistent with the Income Tax Assessment Act. This is broader than the current concept of "rural land" being land in Australia used wholly and exclusively for carrying on a business of primary production.

Agribusiness has been expanded to capture primary production businesses plus certain downstream activities with links to primary production. Acquisitions of a direct interest in agribusiness over $55 million (with exceptions for investors from the USA, New Zealand and Chile) will need to be notified to the Treasurer.

Fees for notices

Application fees will be introduced for notifications of acquisitions, applications for exemption certificates and variations to exemption certificates and objection notices.

Notifications for both residential and agricultural land start from $5,000. Exemption certificates (some were previously referred to as advanced off-the-plan certificates) and investments in commercial real estate, business and the agriculture sectors, as well as acquisitions of direct interests in agribusiness and acquisitions of securities or assets in an entity or Australian business, will attract application fees from $25,000.

Exemption certificates for the sale of off-the-plan new dwellings will also attract a further fee payable every six months based on the number of foreign sales achieved in that six month period.

Transparency-a Register for agricultural land

All foreign persons who hold interests (including a right to occupy under a lease or licence likely to exceed 5 years) in agricultural land as at 1 July 2015 must register those interests by 31 December 2015 with the Australian Taxation Office (ATO) regardless of the value of that land. The national register to be made available to the public in 2016.

Penalties for offences

The Bill introduces harsh criminal and civil penalties including:

Criminal

  • maximum criminal penalties of $127,500 for individuals;
  • $637,500 for companies,
  • up to three years' imprisonment; and
  • divestment orders

Developers holding exemption certificates and who fail to advertise their new dwellings in Australia in accordance with the conditions of their exemption certificate are subject to penalty.

Civil

The penalty for a foreign person (who is not a temporary resident) failing to notify the acquisition of an existing dwelling or not complying with a condition of acquisition is the greater of:

  • the amount of capital gain;
  • 25% of the consideration of the acquisition; and
  • 25% of the market value.

Penalties paid will not be deductible for the purposes of calculating capital gain tax payable to the ATO.

Infringement notices will be introduced for individuals and companies.

Third Party Liability

Third parties such as company officers, lawyers, accountants and real estate agents run the risk of incurring penalties if they assist in any breaches of the new regime.

Setting up sham companies for foreign persons, holding interests on trust for foreign persons and being a party to such conduct will be a significant risk.

For third parties subjected to such prosecution or penalties, it is also unlikely that any professional insurance will cover any such liability.

Charges upon Land

Unpaid penalties for failure to notify, for entry into agreements in contravention of the law, for contravening an order or for contravening a condition will result in a charge against the land.

Such charges upon the land will need to be cleared before transfer of the land much like the charge for unpaid land tax or council rates.

Changes to withholding tax

From 1 July 2016, purchasers of certain types of Australian property will be required to pay 10% of the purchased price to the ATO as a non-final withholding tax if they know, or have reason to believe, the vendor is a foreign resident, and the property is:

  • taxable Australian real property;
  • an indirect Australian real property interest; or
  • an option or right to acquire this property or interest.

There are exceptions, such as transactions on the stock exchange, or residential property under $2.5 million (excluding vacant land).

What do the new changes mean for you?

If you are a person who deals with foreign buyers-whether as an agent or professional adviser-you need to know about the new rules. These changes introduce a new range of enforcement options and penalties which may result in your clients or yourself being exposed to liability.

Getting the right advice about structuring a transaction will be more important than ever before.

How can we help?

If you work with foreign buyers or are a foreign person proposing to enter into a purchase of Australian property, we can help with the new regime and offer guidance and assistance to ensure that you comply with your obligations before entering into any agreements.

For further information and advice on foreign investment, contact Michael Sing.

Michael Sing - Special Counsel

P 07 3009 8444 D 07 3009 8472 F 07 3009 8499

m.sing@rostroncarlyle.com | www.rostroncarlyle.com

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