House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 - Preliminary provisions

Outline of chapter

2.1 This chapter explains the preliminary provisions of the Bill, including:

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the short title and commencement;

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the simplified outlines;

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the definitions of key terms used in Schedule 1 to this Bill, which includes the main amendments to the Foreign Acquisitions and Takeovers Act 1975 (Act); and

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the constitutional basis and application of the Bill.

Detailed explanation of new law

Short title

2.2 If the Bill is enacted it may be cited as the Foreign Acquisitions and Takeovers Legislation Amendment Act 2015. [Section 1]

Commencement

2.3 The various provisions in the Bill commence on the day specified in the table to section 2.

2.4 Sections 1 to 3 of this Bill (which concern the formal aspects of the Act), as well as anything in the Act not elsewhere covered by the table, commence on the day on which the Foreign Acquisitions and Takeovers Legislation Amendment Act 2015 receives Royal Assent.

2.5 Schedules 1, 3 and 4 to this Bill commence on 1 December 2015. Schedule 2 commences immediately after Schedule 1 to the Acts and Instruments (Framework Reform) Act 2015 comes into effect. [Section 2]

Schedules

2.6 Each Act specified in a Schedule to the Foreign Acquisitions and Takeovers Legislation Amendment Act 2015 is amended or repealed as set out in the applicable items in the Schedule and any other item in a Schedule has effect according to its terms. This is a technical provision which gives operational effect to the amendments contained in the Schedules. [Section 3]

Repeal of sections of the Act and amendment to the long title of the Act

2.7 If enacted, the Bill would repeal all the substantive provisions in the existing Act. It would also amend the long title of the Act so that it becomes An Act relating to the foreign acquisition of certain land interests and to the foreign acquisition and foreign control of certain business enterprises and mineral rights. [Schedule 1, items 1 to 3]

Simplified outlines

2.8 To assist the reader the Bill includes a number of simplified outlines. However, the outlines are not intended to be comprehensive and it is intended that the reader will rely on the substantive provisions. [Schedule 1, item 3, section 3; Schedule 1, item 4, sections 38, 39, 46, 50, 56, 66, 80, 83, 112, 116 and 131]

Definitions

2.9 The dictionary provides definitions of terms used in the Bill. In some cases the definitions are signposts to other provisions in the Bill or that meanings will be prescribed in the regulations to the Act, or refer to definitions of terms in other Acts in which the meaning of the term is given. [Schedule 1, item 3, section 4]

'Foreign person'

2.10 The term foreign person is central to the Bill. It means:

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an individual not ordinarily resident in Australia. An Australian citizen who is living overseas may therefore be a 'foreign person' for the purposes of the Act;

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a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;

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a corporation 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;

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the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;

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the trustee of a trust in which two or more persons, each of whom is either an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;

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a foreign government; or

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any other person, or any other person that meets the conditions, prescribed by the regulations.

2.11 The terms aggregate substantial interest, foreign corporation, foreign government and substantial interest are each defined.

2.12 A person holds a substantial interest in an entity if the person holds an interest of at least 20 per cent in the entity. In the case of a trust (including a unit trust), a person holds a substantial interest if they, together with any one or more associates, hold a beneficial interest in at least 20 per cent of the income or property of the trust.

2.13 Two or more persons hold an aggregate substantial interest in an entity if the persons hold an aggregate interest of at least 40 per cent in the entity. In the case of a trust, two or more persons, together with any one or more associates of any of them hold, in the aggregate, beneficial interests in at least 40 per cent of the income or property of the trust.

2.14 In determining if a person holds a substantial interest, or two or more persons hold an aggregate substantial interest, interests of associates of the person or persons are also taken into account.

2.15 Foreign corporation refers to a foreign corporation to which paragraph 51(xx) of the Constitution applies.

2.16 Foreign government refers to an entity (within the ordinary meaning of the word) that is a body politic (or part of a body politic) of a foreign country or a body politic (or part of a body politic) of part of a foreign country. [Schedule 1, item 3, section 4]

Meaning of 'ordinarily resident'

2.17 An individual who is not an Australian citizen is ordinarily resident in Australia at any particular time if:

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the individual has been in Australia during 200 or more days in the period of 12 months immediately preceding that time; and

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at that time, the individual is in Australia and the individual's continued presence in Australia is not subject to any limitation as to time imposed by law; or

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if the individual is not in Australia, immediately before the individual's most recent departure from Australia the individual's continued presence in Australia was not subject to any limitation as to time imposed by law. An individual's continued presence in Australia is subject to a limitation as to time imposed by law if the individual is an unlawful non-citizen within the meaning of the Migration Act 1958.

2.18 This provision substantially re-enacts section 6 of the current Act. [Schedule 1, item 3, section 5]

Meaning of 'associate'

2.19 The term associate is defined broadly. However, unlike the current Act, it does not make any person who is an associate under the existing provision, an associate of any other person who is an associate of the person (including a person who is an associate of the person by another application or other applications of this rule). In the Bill, the following people are associates of a person:

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a person's 'relative' within the meaning given by the Income Tax Assessment Act 1997 (ITAA 1997), which is explained below;

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any person with whom the person is acting, or proposes to act, in concert in relation to an action to which this Act may apply;

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any person with whom the person carries on a business in partnership;

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any entity of which the person is a senior officer (the meaning of the term 'senior officer' is explained below);

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if the person is an entity, any holding entity and any senior officer of the entity;

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any entity whose senior officers are accustomed to or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the person, or, if the person is an entity, the senior officers of the person;

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an entity if the person is accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the entity or the senior officers of the entity;

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any corporation in which the person holds a substantial interest;

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if the person is a corporation, a person who holds a substantial interest in the corporation;

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the trustee of a trust in which the person holds a substantial interest;

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if the person is a trustee of a trust, a person who holds a substantial interest in the trust;

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if the person is a foreign government, a separate government entity (a term which is explained below) or a foreign government investor (a term which will have the meaning prescribed by the regulations, but for the associates definition it is intended to exclude through the regulations foreign government investors who are only foreign government investors due to an 'aggregate substantial interest' from two or more foreign countries) of a foreign government of a foreign country:

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any other person that is a foreign government in relation to that country (or any part of that country);

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any other person that is a separate government entity in relation to that country (or any part of that country); or

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any other foreign government investor in relation to that country (or part of that country).

[Schedule 1, item 3, section 6]

2.20 New section 79 provides the Treasurer with an order power to declare persons involved in avoidance to be taken to be associates if the Treasurer is satisfied that not making an order under the section is contrary to the national interest. Such an order may take such persons to be associates of each other for the purposes of this Act or for specified purposes. The order specifies the duration that it will apply. [Schedule 1, item 4, section 79]

2.21 The term associate has a wider meaning for an action taken relating to an interest in residential land. In this context, the following people are also an associate of a person:

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an entity that is not listed for quotation in the official list of a stock exchange if the person's relative holds a substantial interest in the entity or is a senior officer of the entity; or

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if the person is an entity (referred to in the Bill as the first entity), another entity if:

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an individual holds a substantial interest in the first entity or is a senior officer of the first entity; and

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the individual's relative holds a substantial interest in the second entity or is a senior officer of the second entity; and

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neither the first entity nor the second entity are listed for quotation in the official list of a stock exchange, or are a subsidiary of an entity listed for quotation in the official list of a stock exchange or the trustee of an entity that is listed for quotation in the official list of a stock exchange.

2.22 The Bill excludes certain persons from the definition of associate. A person is not an associate of another merely because:

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one gives advice to the other, or acts on the other's behalf, in the proper performance of the functions attaching to a professional capacity or a business relationship;

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one, a client, gives specific instructions to the other, whose ordinary business includes dealing in financial products to acquire financial products on the client's behalf in the ordinary course of that business;

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one has sent, or proposes to send, to the other an offer under a takeover bid for securities held by the other;

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one has appointed the other, otherwise than for valuable consideration (within the ordinary meaning of the term) given by the other or by an associate of the other, to vote as a proxy or representative;

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one is providing independent services as a trustee of a trust to the other who is a beneficiary of the trust if the trustee is licensed to provide those services under a law of the Commonwealth, a State, a Territory, a foreign country, or a part of a foreign country;

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one holds a substantial interest in a managed investment scheme (within the meaning of the Corporations Act) and the other is the responsible entity of the scheme; or

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both are partners of one of certain kinds of partnerships, namely a partnership of actuaries or accountants; medical practitioners; patent attorneys; sharebrokers or stockbrokers; trademark attorneys; a partnership that has as its primary purpose collaborative scientific research, and includes at least one university and one private sector participant; architects; pharmaceutical chemists or veterinary surgeons; or legal practitioners.

[Schedule 1, item 3, section 6]

2.23 The regulations may also provide that persons are not associates of other persons. [Schedule 1, item 3, section 37]

Meaning of 'relative'

2.24 Section 995-1 of the ITAA 1997 currently defines the term 'relative' of a person to mean an individual's:

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spouse. 'Spouse' is currently defined by section 995-1 of the ITAA 1997 to include:

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another individual (whether of the same or different sex) with whom the individual is in a relationship that is registered under a State law or a Territory law prescribed for the purposes of section 2E of the Acts Interpretation Act 1901 as a kind of relationship prescribed for that purpose; and

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another individual who, although not married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple;

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the parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendent or adopted child of that person, or of that person's spouse; and

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the spouse of a person referred to immediately above.

Meaning of 'senior officer'

2.25 A senior office of an entity means an officer of an entity:

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for a corporation, a director of the corporation;

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for a unit trust, if the trustee is an individual, the trustee. If the trustee is not an individual, a director. It also includes any other individual involved in the central management and control of the trust;

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a person who is, or a person in a group of persons who are, in a position to determine the investments or policy of the entity or the trustee of the entity;

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a person who makes, or participates in making, decisions that affect the whole, or a substantial part of, the business of the entity; and

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a person who has the capacity to affect significantly the financial standing of the entity.

2.26 An independent director is not a senior officer if they or the entity they are a director of meets the requirements set out in new section 7. [Schedule 1, item 3, section 4]

Meaning of 'separate government entity'

2.27 The term 'separate government entity' of a foreign country means an individual, a corporation or a corporation sole that is an agency or instrumentality of the foreign country and is not part of the body politic of a foreign country or of a part of a foreign country. [Schedule 1, item 3, section 4]

Meaning of 'independent director'

2.28 Only directors that are directors of listed entities or entities with a close relationship to a listed entity are independent directors if they meet the requirements of new section 7. [Schedule 1, item 3, section 7]

2.29 For a director of a listed entity, the director is independent if they meet the criteria to be considered independent of the listing stock exchange. If the stock exchange does not have its own criteria incorporated in its listing rules, a director can satisfy director independence criteria recognised by the listing exchange. Such criteria could be based on the law of the jurisdiction where the stock exchange is located and may also be non-binding. [Schedule 1, item 3, subsection 7(1)]

Example 2.1

While the Australian Securities Exchange (ASX) listing rules do not include criteria for director independence, a director of an ASX listed entity where the entity considers one or more of their directors to be independent directors based on their assessment that the director meets the criteria in the ASX Corporate Governance Principles and Recommendations, would satisfy the requirements of new section 7. The entity's assessment that one or more directors are independent directors would be supported by their public announcements and reports such as their annual reports including statements of this.

2.30 For a listed unit trust with a corporate trustee, the status of the directors of the trustee corporation is considered. In such cases, if directors of the trustee meet the criteria for director independence of the stock exchange on which the unit trust is listed, such directors are independent directors. [Schedule 1, item 3, subsection 7(1)]

Example 2.2

Turtle unit trust is listed on a stock exchange that includes criteria for director independence in the listing rules of the stock exchange. Its trustee, the unlisted Turtle trustee corporation, has a board of ten directors three of which meet the independence criteria of the stock exchange on which the Turtle unit trust is listed. These three directors are independent directors under new section 7.

2.31 Subsection 7(2) includes a special rule for entities whose securities are stapled. Such entities are often referred to as stapled entities or members of stapled groups. Such entities can include corporations and unit trusts. The securities of such entities are treated as stapled securities where the securities in an entity can only be transferred together with securities in one or more other entities. However, it is common that only one of the two or more entities whose securities are stapled is listed on a stock exchange. For the purpose of new subsection 7(2), if the listed entity whose securities are stapled to the securities of one or more other entities has a director that meets the requirements of new subsection 7(1) and the director is also a director of an unlisted entity whose securities are stapled to the securities of the listed entity, the director is also a taken to be an independent director of the unlisted entity. [Schedule 1, item 3, subsection 7(2)]

Meaning of 'Australian business'

2.32 Australian business means a business that is carried on wholly or partly in Australia in anticipation of profit or gain. A person who has an interest in a 'mining or production tenement' is taken to carry on a business in Australia of exploiting the tenement in anticipation of profit or gain, and the tenement is taken to be an asset of that business [Schedule 1, item 3, section 8]. The term 'mining or production tenement' is defined by new section 4.

Meaning of 'agribusiness'

2.33 The regulations will prescribe certain kinds of businesses to be an 'agribusiness'. It is anticipated that the regulations will prescribe an agribusiness to be a business that is carried on, wholly or partly, in any of certain classes of the Australian and New Zealand Standard Industrial Classification Codes as in force from time to time, published by the Australian Bureau of Statistics (ABS), and which is published on the ABS website and available free of charge. ^[2]

2.34 It is anticipated that the regulations will prescribe an Australian business to be an agribusiness if the value of the assets of the business used in carrying on an agribusiness is at least the prescribed percentage of the value of the total assets of the business.

2.35 It is anticipated that the regulations will prescribe an Australian entity to be an agribusiness if it meets at least one of the following criteria:

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the value of assets used in carrying on an agribusiness is at least the percentage prescribed by the regulations; or

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the revenue or profits derived from carrying on an agribusiness is at least the prescribed percentage by the regulations.

[Schedule 1, item 3, section 4]

Meaning of 'interest' in a 'security'

2.36 Security is defined to mean a share in a corporation or a unit in a unit trust. Share of a corporation is defined to mean a share in the share capital of the corporation and includes stock into which all or any of the share capital has been converted and includes (except in relation to new section 9) an interest in such a share or in such stock. [Schedule 1, item 3, section 4]

2.37 A person holds or acquires an interest in a security if the person has any legal or equitable interest in that security. In determining whether a person holds or acquires an interest in a security it is immaterial that the interest cannot be related to a particular security.

2.38 For the purposes of this Act a person is considered to hold or acquire an interest in a security in an entity if the person is not the registered holder of the security, if the person is entitled to exercise or control the exercise of a right attached to the security (other than because the person was appointed as a proxy or representative to vote at a general meeting of the entity or a class of members or unit holders of the entity).

2.39 A person holds or acquires an interest in the issued shares in a corporation if all or part of the share capital of the corporation consists of stock and the person holds an interest in that stock. The issued shares are taken to have the same nominal amount as the amount of that stock and the same rights attached to them as are attached to that stock. [Schedule 1, item 3, section 9]

Meaning of 'asset' and 'interest' in an asset

2.40 Asset includes an interest in an asset [Schedule 1, item 3, section 4]. A person holds or acquires an interest in an asset if the person holds any legal or equitable interest in that asset [Schedule 1, item 3, section 10].

Meaning of 'interest' in a trust

2.41 A person holds or acquires an interest in a trust if the person holds or acquires a beneficial interest in the income or property of a trust or the person holds an interest in a unit in a unit trust. [Schedule 1, item 3, section 11]

Meaning of 'land', 'Australian land' and 'interest in Australian land'

2.42 The definition of land includes a building (including a new dwelling or an established dwelling) or part of a building and the subsoil of land. Australian land means agricultural land, commercial land, residential land or a mining or production tenement. [Schedule 1, item 3, section 4]

2.43 Agricultural land is defined to mean land in Australia that is used, or could reasonably be used, for a primary production business within the meaning of the ITAA 1997. The definition of 'primary production business' in the ITAA 1997 currently includes cultivating or propagating plants; maintaining animals for the purpose of selling them or their bodily produce; conducting operations relating directly to taking or catching fish and certain other marine animals; planting or tending trees in a plantation or forest that are intended to be felled; or felling trees in a plantation or forest.

2.44 The definition of agricultural land includes land which is partially used for a primary production business, or land where only part of the land could reasonably be used for a primary production business. An example of the latter is where part of the land is subject to an environmental protection zone that does not allow primary production activities within the zone. Agricultural land also includes land which may, from time to time, be covered by water.

2.45 Whether land could reasonably be used for a primary production business depends on the facts and circumstances of the land. Factors that may provide a reasonable indicator that the land could (or could not) reasonably be used, either alone or together with other factors, could include:

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The primary uses allowed on the land under its zoning: These are likely to provide a reasonable indicator of if the land could reasonably be used for a primary production business. For example, if zoning allowed for primary production activities to be undertaken without the further approval of the local regulatory body, this would likely indicate that the land could reasonably be used for a primary production business. However, land within a rural residential zone, where zoning requirements either explicitly do not allow for primary production activities, or would only be approved in special circumstances, is unlikely to be land that could reasonably be used for a primary production business.

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Land use history: If the land has been used in a primary production business in recent years, this is likely to indicate that the land again could reasonably be used for a primary production business, unless there has been one or more significant changes in the land in the meantime (for example, significant permanent environmental degradation, water depletion or pollution, or removal or loss of the earlier primary production business infrastructure). However, even though the land has not been used in a primary production business in recent years does not necessarily mean that it could not reasonably be used for a primary production business in the future. Examples of this could include if the land is not being used in a primary production business due to:

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an extended extreme climatic event, such as a long term drought;

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a recent natural disaster, such as bushfire or floods; or

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other activities, such as mineral exploration and development on the land after which expected, or legally required, land remediation works would mean that the land in whole or part again could reasonably be used for a primary production business.

Example 2.3

Raoul Co, a foreign person, has an interest in leasehold land in Australia. There is currently a mining operation being conducted on the leasehold land and the land could not reasonably be used for a primary production business. However, when the mining lease ends, which is expected to be in twenty years, the land will be rehabilitated at which time a primary production business will be able to be conducted on the property. After rehabilitation, the land is agricultural land.

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Land characteristics (for example, climate, crop yield, land size, remoteness, soil quality, stock holding capacity, topography, vegetation and water availability): While relevant to if the land could reasonably be used for a primary production business, a single characteristic such as land size, in isolation may be insufficient to make a reasonable assessment. It is also not necessary that the land be of sufficient size to allow for the operation of a stand-alone primary production business in some or all cases within the site. Remoteness of the land from goods transport and other infrastructure, as well as key agricultural service providers, is likely to mean that land could not reasonably be used for a primary production business, until such infrastructure and/or services became available to the locality.

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Lease or licence conditions or limitations: Where there is a right to occupy agricultural land under a lease or licence whose term (including any extension or renewal) is reasonably likely to exceed five years, there may be land use conditions or restrictions attaching to the lease or licence:

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Where these explicitly allow for primary production activities to be undertaken, the land could reasonably be used for a primary production business, irrespective of the lessee or licence holder's intention during the lease or licence term.

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Where these do not permit use for a primary production business by the lessee or licence holder, this in isolation should not be taken as meaning the land could not reasonably be used for a primary production business. Other factors, such as those outlined above and the rationale for such a restriction on the lease or licence would be relevant to an assessment. For example, if a lessor has retained adjacent land on which they are operating a primary production business and has restricted the uses of the lessee so that they can incorporate the land back into their operations should they decide to so at the end of the lease term (after the land has been left fallow to raise productivity), then the land could reasonably be used for a primary production business.

2.46 Commercial land is defined to mean land in Australia or the seabed of the offshore area (that is, the exclusive economic zone of Australia or the continental shelf of Australia). It does not include land used wholly and exclusively for a primary production business; land on which there is at least one dwelling (except 'commercial residential premises' within the meaning given by the A New Tax System (Goods and Services Tax) Act 1999); or land on which the number of dwellings (except commercial residential premises) could reasonably be built is less than the number prescribed for the purposes of subparagraph (a)(ii) of the definition of 'residential land'.

2.47 The term 'commercial residential premises' is currently defined by section 195-1 of A New Tax System (Goods and Services Tax) Act to mean:

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a hotel, motel, inn, hostel or boarding house;

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premises used to provide accommodation in connection with a school;

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a ship that is mainly let out on hire in the ordinary course of a business of letting ships out on hire;

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a ship that is mainly used for entertainment or transport in the ordinary course of a business of providing ships for entertainment or transport;

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a marina at which one or more of the berths are occupied, or are to be occupied, by ships used as residences;

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a caravan park or a camping ground; or

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any other premises similar to the ones described above, other than premises to the extent they are used to provide accommodation to students in connection with an education institution that is not a school.

2.48 Residential land means land in Australia on which there is at least one dwelling, or on which the number of dwellings that could be reasonably built on the land is less than the number prescribed in the regulations (which is anticipated to be 10). It does not include land used wholly and exclusively for a primary production business or land on which the only dwellings are commercial residential premises.

2.49 Mining or production tenement means:

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a right under a law of the Commonwealth, a State or a Territory to recover minerals (such as coal or ore), oil or gas in Australia or from the seabed or subsoil of the offshore area, or a right to preserve such a right, but does not include a right to recover minerals, oil or gas for the purposes of prospecting or exploring for minerals, oil or gas;

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a right which includes a right mentioned in the first dot point;

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a lease under which the lessee has a right mentioned in the first dot point; or

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an interest in a right mentioned above or a lease mentioned above.

2.50 The definitions of agricultural land, commercial land, residential land or a mining or production tenement are not intended to be mutually exclusive.

2.51 A person has an interest in Australian land if the person has:

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a legal or equitable interest in Australian land. However, it does not include an interest under a lease, a licence, a unit in a unit trust, an interest in an agreement given a right (known as a profit à prendre) to take something off another person's land, or to take something out of the soil of that land, or an interest in an agreement involving the sharing of profits or income from the use of or dealings in, Australian land;

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an interest in a security in an entity that owns Australian land, being a security that entitles the holder to a right to occupy a dwelling of a kind known as a flat or home situated on the land;

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an interest as lessee or licensee in a lease or licence giving rights to occupy Australian land if the term of the lease or licence (including any extension or renewal) is reasonably likely, at the time the interest is acquired, to exceed five years;

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an interest in an agreement giving a right known as a profit à prendre if the term of the agreement (including any extension or renewal) is reasonably likely, at the time the interest in the agreement is acquired, to exceed five years. For example, in New South Wales, a forestry right is considered a profit à prendre;

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an interest in an agreement involving the sharing of profits or income from the use of, or dealings in, Australian land if the term of the agreement (including any extension or renewal) is reasonably likely, at the time the interest in the agreement is acquired, to exceed five years;

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an interest in a share in an Australian land corporation or an agricultural land corporation. Australian land corporation and agricultural land corporation have the meanings prescribed by the regulations;

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an interest in a unit in an Australian land trust or agricultural land trust. Australian land trust and agricultural land trust have the meanings prescribed by the regulations; or

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if the trustee of an Australian land trust or agricultural land trust is a corporation, an interest in a share in that corporation.

2.52 The Bill clarifies that a person is considered to acquire an interest in land even if the person already has an interest in Australian land and the person increases their interest. [Schedule 1, item 3, section 12]

Interests that are remote or subject to restraint

2.53 A person holds or acquires an interest in a security, asset, trust or Australian land despite its remoteness, the manner in which it arose, or the fact that the exercise of a right conferred by the interest is or is capable of being made subject to restraint or restriction. [Schedule 1, item 3, section 13]

Interests held or acquired jointly

2.54 A person holds or acquires an interest in a security, asset, trust or Australian land even if the person holds or acquires the interest jointly with one or more other persons. [Schedule 1, item 3, section 14]

Interests acquired by entering into agreements or acquiring options

2.55 A person is taken to acquire an interest in a security (that is, a share in a corporation or a unit in a unit trust), asset, trust or Australian land if the person:

•

enters an agreement to acquire the interest;

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in relation to an interest in a security, asset or trust, the person has a right to acquire such an interest under an option;

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in relation to an interest in Australian land, the person acquires an option to acquire such an interest; or

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has a right, other than by reason of having an interest under a trust, to have such an interest transferred to himself or herself or to his or her order.

2.56 It is irrelevant whether or not the right or option is presently exercisable or exercisable in the future, or whether the agreement, right or option requires the fulfilment of a condition.

2.57 However, for some purposes of this Act, if the provisions of an agreement to acquire or sell an interest in a security, asset, trust or Australian land do not become binding on a person until one or more conditions are met, the person is taken to have entered the agreement, and to have acquired or sold the interest, only when the provisions become binding. This exception applies for the purposes of new Part 4 (notice of notifiable action), new Part 5 (offences and civil penalties) to the extent that it relates to Part 4, and any other provision of the Act to the extent that it relates to new Part 4 or Part 5. This ensures that persons who notify a notifiable action prior to the related agreement entered into becoming binding have not committed an offence and are not subject to a civil penalty. [Schedule 1, item 3, section 15]

Meaning of 'proposes' to take certain action

2.58 Without limiting the meaning of 'propose', a person proposes to acquire an interest in securities (that is, shares in a corporation or a unit trust), assets or Australian land if:

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the person makes an offer to acquire the interest;

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the person makes or publishes a statement that expressly or impliedly invites a person who holds an interest in securities, assets or Australian land to dispose of that interest; or

•

the person takes part in, or proposes to take part in, negotiations with a view to acquiring an interest in securities, assets or Australian land.

2.59 A person proposes to enter into or terminate an agreement if the person takes part in, or proposes to take part in, negotiations with a view to entering or terminating the agreement. [Schedule 1, item 3, section 16]

Meaning of 'interest' and 'aggregate interest' of a specified percentage in an entity

2.60 A person holds an interest of a specified percentage in an entity if the person, alone or together with any one or more associates of the person:

•

is in a position to control at least that percentage of the voting power or potential voting power of the entity; or

•

holds interests in at least that percentage of the issued securities of the entity, or would hold at least that percentage of such interests, if securities in the entity were issued as the result of the exercise of certain other specified kinds of rights, such as the right to acquire an interest in shares under an option.

Example 2.4

Finland Co is the trustee of the Finco Unit Trust. There are 100 units in the Finco Unit Trust as at 1 July 2015. Menfem Co, a foreign person, holds 24 units in Finco Unit Trust, which gives it a beneficial interest in the Finco Unit Trust of at least 20 per cent. This means that Menfem Co has a substantial interest in Finco Unit Trust. Thus Finland Co, as the trustee of the Finco Unit Trust, is a foreign person under the Act.

2.61 Two or more persons (not being associates of each other) hold an aggregate interest of a specified percentage in an entity if they, together with any one or more associates of them:

•

are in a position to control at least that percentage of the voting power or potential voting power in the entity; or

•

hold interests in at least that percentage of the issued securities in the entity, or would hold at least that percentage of such interests, if securities were issued as a result of the exercise of specified kinds of rights.

2.62 In determining the percentage of voting power or potential voting power that a person is in a position to control in an entity, any votes that the person controls as a proxy are disregarded. This does not affect the voting power of the person who has appointed the proxy or representative. [Schedule 1, item 3, section 17]

Rules relating to determining percentages of interests in entities

Exercise of future rights

2.63 In determining the percentage of the interests in the issued securities in an entity that a person holds, or would hold at a particular time, it should be assumed that:

•

if a person has a right which would result in the person holding an interest in an issued security in an entity, the right is exercised at that time; or

•

if it cannot be determined at that time whether the right could be exercise, the right is exercised at that time.

Discretionary trusts

2.64 If the terms of a trust confer on a trustee a power or discretion to distribute the income or property of a trust to one or more beneficiaries, for the purposes of this Act each beneficiary is taken to hold a beneficial interest in the maximum percentage of income or property of the trust that the trustee is permitted to distribute to that beneficiary. [Schedule 1, item 3, section 18]

Example 2.5

Jakarta Co is the trustee of the Ronson Discretionary Trust. Pursuant to the Trust Deed, the trustee has discretion to distribute up to 25 per cent of the income of the trust each financial year to each of four beneficiaries Able, Brian, Cain and Donna (all of whom are individuals not ordinarily resident in Australia).

The trustee did not distribute income to any of the beneficiaries from commencement of the trust in the 2012 and 2013 income years. However in the 2014 income year the trustee distributed 25 per cent of the income to each of Able, Brian and Cain but there was no distribution to Donna. Even though Donna has not received a distribution, for the purposes of the Act she is taken to hold a beneficial interest to the maximum percentage the trustee is permitted to distribute to her being 25 per cent. The same applies to Able, Brian and Cain and Donna for the trust from commencement. Thus Jakarta Co, as the trustee of the Ronson Discretionary Trust, is a foreign person under the Act.

Tracing of substantial interests in corporations and trusts

2.65 The Bill provides for substantial interests in a corporation or trust to be traced back through the ownership of relevant entities.

2.66 The tracing rules do not apply for the purposes of determining, under new subsection 47(2) (which concerns the meaning of notifiable action) whether a foreign person acquires a direct interest in an Australian entity or Australian business that is an agribusiness or a foreign person acquires a substantial interest in an Australian entity. This ensures that acquisitions that occur offshore and are remote from Australia (such as an acquisition by a French Group of a United Kingdom parent entity of a multinational group that has an Australia business as part of its global operations) are not notifiable actions, although it may still be a significant action where the Treasurer may have powers available should the acquisition be considered contrary to the national interest.

2.67 The tracing rules also do not apply when determining if a foreign person acquires a direct interest in an Australian entity or Australian business that is an agribusiness is a significant action. This means that if the Australian agribusiness was owned by a United States parent entity that was acquired by a French Group, it would not be a significant action specific to an Australian agribusiness (this does not necessarily exclude it from being a significant action - entities if the conditions are met for it to be a significant action to acquire a substantial interest in an entity). [Schedule 1, item 3, sections 19 and 42]

Meaning of 'acquire' an interest of a specified percentage in an entity

2.68 A person acquires an interest of a specified percentage in an entity if the person:

•

starts to hold an interest of that percentage in the entity; or

•

would start to hold an interest of that percentage in the entity on the assumption that the person held interests in securities that the person has offered to acquire or held rights to votes that might be cast at a meeting of the entity that are rights the person has offered to acquire; or

•

with respect to a person who already holds an interest of that percentage in the entity, the person:

-

begins to be in a position to control more of the voting power or potential voting power in the entity;

-

starts to hold additional interests in the issued securities in the entity; or

-

would start to hold additional interests in the issued securities in the entity, if securities in the entity were issued as a result of the exercise of all rights of a kind mentioned in new paragraph 15(1)(b) or (c).

[Schedule 1, item 3, section 20]

Meaning of 'subsidiary' and 'holding entity'

2.69 An entity (described in the Bill as the 'lower entity') is a subsidiary of another entity (described in the Bill as the 'higher entity') if the higher entity is in a position to control more than half the voting power in the lower entity; holds more than half the issued securities in the lower entity; or the lower entity is a subsidiary of an entity that is the higher entity's subsidiary. The Bill provides that certain securities held or powers exercisable by various persons are to be disregarded for the purposes of determining whether a lower entity is a subsidiary of a higher entity.

2.70 An entity (the higher entity) is a holding entity of another entity if the lower entity is a subsidiary of the higher entity. [Schedule 1, item 3, section 21]

Meaning of 'voting power' and 'potential voting power'

2.71 The voting power in an entity refers to the maximum number of votes that might be cast at a general meeting of the entity [Schedule 1, item 3, subsection 22(1)]. The term 'general meeting' is defined by new section 4.

2.72 The potential voting power in an entity refers to the voting power in an entity calculated on the basis that the votes that might be cast at a general meeting include each vote that might come into existence in the future because of the exercise of a right, and, if it came into existence, might be cast at a meeting of the entity.

2.73 For the purposes of assessing how much of the potential voting power in an entity a person is in a position to control at a particular time, if a right exists that, if exercised, would result in the person being in a position to control more of the potential voting power in the entity and it cannot be determined at that time whether the right would be exercised, it should be assumed that the right would be exercised at that time.

2.74 If a person is in a position to veto any resolution of the board or a general meeting of the entity, then (except for the purposes of new subsection 47(2)(b) (meaning of notifiable action) and subsection 54(4) (meaning of control)) the person is taken to be in a position to control 20 per cent of the potential voting in the entity. [Schedule 1, item 3, section 22]

Meaning of 'controls' the voting power

2.75 A person controls the voting power in an entity if the person controls the power directly or indirectly, including as a result or by means of agreements or practices, regardless of whether the agreements or practices have legal or equitable force or are based on legal or equitable rights. [Schedule 1, item 3, section 23]

Meaning of 'determines the policy' of a business of exploiting a mining or production tenement

2.76 Without limiting the meaning of determines the policy, a person determines the policy of a business of exploiting a mining or production tenement if the person determines questions relating to the disposal of an interest in the tenement. [Schedule 1, item 3, section 24]

Meaning of 'enters' an agreement

2.77 Without limiting the meaning of the term, the Bill provides that a person enters an agreement if the person enters any formal or informal scheme including by creating a trust, entering into a transaction, or acquiring an interest in a security, asset, trust or Australian land. A person is also taken to enter an agreement if the agreement is materially altered or varied. [Schedule 1, item 3, section 25]

2.78 A material alteration or variation would include an alteration or variation that increases the percentage that a person holds or would hold in an entity. A variation to the way that consideration is worked out is not material. [Schedule 1, item 3, Note 2 in section 25]

2.79 'Scheme' is broadly defined by the Act and includes any agreement, understanding, promise or undertaking, express or implied, regardless of whether this is legally enforceable. [Schedule 1, item 3, section 4]

Meaning of 'sensitive business'

2.80 A business that meets the conditions specified in the regulations made under the Act is a sensitive business. The regulations may prescribe sensitive businesses generally, or different sensitive businesses for different kinds for foreign persons and different conditions for different kinds of sensitive businesses. [Schedule 1, item 3, section 26]

2.81 Businesses that may be prescribed as a sensitive business include if:

•

the business is carried on wholly or partly in the media, telecommunications and transport sectors (including a business relating to infrastructure for those sectors); or

•

the business is wholly or partly:

-

the supply of training or human resources to, the manufacture of military goods, equipment or technology for, or the supply of military goods, equipment or technology to, the Australian Defence Force or other defence forces;

-

the manufacture or supply of goods, equipment or technology able to be used for a military purpose;

-

the development, manufacture or supply of, or the provision of services relating to, encryption and security technologies and communications systems; or

-

the extraction of (or the holding of rights to extract) uranium or plutonium or the operation of nuclear facilities.

Regulations to provide in relation to valuing assets

2.82 Regulations may be made in relation to valuing the assets of an entity, trust or business. [Schedule 1, item 3, section 27]

Acts done by agents

2.83 Any act done or proposed to be done by an agent on behalf of his or her principal is taken to be done or proposed to be done by his or her principal. [Schedule 1, item 3, section 28]

Application of this Act to individuals and entities

2.84 The Act and any regulations made under it apply to all individuals, irrespective of whether they are resident in Australia or Australian citizens; all corporations, whether or not formed or carrying on business in Australia; and all unit trusts, regardless of whether they are Australian unit trusts. [Schedule 1, item 3, section 29]

Extension to external Territories

2.85 The Bill and any regulations made under it apply to every external Territory. 'External Territory' has the meaning given by section 2B of the Acts Interpretation Act 1901. [Schedule 1, item 3, section 30]

Extraterritorial application

2.86 The Bill and any regulations made under it apply both within and outside Australia. [Schedule 1, item 3, section 31]

Extension to exclusive economic zone and continental shelf

2.87 The Bill applies to matters relating to the exercise of Australia's sovereign rights in the exclusive economic zone or the continental shelf. [Schedule 1, item 3, section 32]

Act binds the Crown

2.88 The Commonwealth, State and Territory Governments are bound by the Act. In line with normal practice, the Crown is not liable to a pecuniary penalty or to be prosecuted for an offence. [Schedule 1, item 3, section 33]

Effect of Act on other laws

2.89 The Bill and any regulations made under it are not intended to exclude or limit the operation of a law of a State or Territory that is capable of operating concurrently with it. [Schedule 1, item 3, section 34]

Severability

2.90 The Bill provides for continued operation of the Act (or provisions of the Act) in the event of a successful constitutional challenge. It sets out the various constitutional heads of power upon which the Act can draw if its operation is expressly confined to apply to persons under those constitutional powers. This gives the Bill the widest possible operation consistent with Commonwealth constitutional legislative power. [Schedule 1, item 3, sections 35 and 36]

Regulations providing for exemptions

2.91 Regulations may be made that provide that this Act, or specified provisions of this Act, do not apply to:

•

acquisitions of the kind or in the circumstances prescribed by the regulations;

•

interests of the kind or in the circumstances prescribed by the regulations;

•

Australian businesses of the kind or in the circumstances prescribed by the regulations; or

•

foreign persons if the kind or in the circumstances prescribed by the regulations.

2.92 In addition, the regulations may provide that:

•

land of a specified kind is not agricultural land; or

•

specified foreign persons who take action in relation to interests in Australian land may disregard the fact that the land is agricultural land for all or specified purposes.

[Schedule 1, item 3, section 37]