Government approval of foreign investment in Australia – A brief introduction

Australia is open for business.  Over one third of our GDP comes from Foreign Direct Investment.  The World Bank’s annual report ranked Australia 14^th out of 190 countries for ease of doing business.[1]

Investors value Australia for its stability, rule of law (including a strong independent court system), strong and sustained economic growth, economic liberalism, and its proximity to major markets in South East Asia.  In addition, the Pacific region is attracting increased attention from investors in recent years, and Australia is well-placed as a base for regional investment.

Due to the 2020 Covid19 Crisis, the Australian government until 31 January 2020 temporarily maintained close control over incoming investments.  By reducing monetary thresholds to $0, it required all foreign investment in Australia business and commercial property to be subject to government approval (although the government also prioritized these applications – reports from investors were surprisingly positive).

Ongoing Reform

Since 1 January 2021, the emergency measures have been largely repealed, and a number of new reform measures brought in.  These are designed to protect Australia’s economic and military security, yet at the same time increase the ease of investing in Australia.  Although it is no longer necessary for many foreign investments to be reported to the Foreign Investment Review Board (FIRB), the Australian Parliament has given the government far wider powers to intervene in non-reportable investments that may be relevant to Australia’s economic or military security.

Obtaining approval from the FIRB

In assessing whether a proposed investment in a business entity needs to be reported to the FIRB, investors need to consider whether a relevant monetary threshold has been exceeded, and the degree of control that they will acquire.

Foreign persons generally require foreign investment approval before acquiring a substantial interest (generally at least 20 per cent) in an Australian entity that is valued above the relevant monetary threshold.  For example, for investments in a company or other business entity the threshold is at least $281 million, and for many favoured countries, that rises to $1,216 million.

From 1 January 2021, a foreign person may require foreign investment approval in certain circumstances where their percentage of interests in an entity have increased, even where they did not acquire additional interests in securities in the entity (passive increases).

Different thresholds and interest levels apply to acquiring interest in land, which are not covered in this introduction.  Specialist business acquisitions may also have their own thresholds and percentage levels.  For example, foreign persons acquiring a direct interest (generally 10 per cent, or in a position of control) in an Australian agribusiness above a monetary threshold of $61 million must obtain approval from the FIRB.

Special measures to protect National Security

A particular type of transaction that has attracted recent media attention is the new definition of “notifiable national security action”.  Foreign persons acquiring a direct interest (which generally means 10% or greater) in a national security business or an interest in “national security land”, must obtain FIRB approval regardless of its value, as must any foreign persons starting a national security business – usually starting a business in Australia avoids the need for FIRB approval, since the value will not exceed any threshold, but this is no longer the case where national security is involved.

Measures to increase certainty for investors

Various measures are available to assist investors who require more certainty ahead of major investments, including Exemption Certificates, optional applications for review, and conditional contracts.

Relaxation of definition of Foreign Government Investor

Where the foreign person is a “Foreign Government Investor” (FGI), additional rules apply. For example, FGIs generally require foreign investment approval where they acquire a direct interest in an Australian entity or Australian business, or start an Australian business, regardless of value, or acquire an interest of 10 per cent or more in securities in a mining, production or exploration entity, regardless of value.  However, the definition of FGI has been relaxed so that entities in which FGIs from multiple countries hold an interest of 40% or more will no longer be caught, provided that FGIs from any one country do not hold 20% or more of the investing entity, and are passive investors.

Conclusion

This article only provides a brief overview of selected aspects of Australia’s system of regulating foreign investment.  Specialist advice should be obtained in appropriate cases.  Nevertheless, we hope that this will encourage many overseas investors to consider investment in the vibrant and growing Australian market, as well as using Australia as a base for expansion into the Pacific and Asia.

[1] “Doing Business 2020 – Comparing business regulation in 190 economies” World Bank Group, http://documents1.worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Business-Regulation-in-190-Economies.pdf