House of Representatives

Explanatory Memorandum

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

Chapter 1 - Background

Context of amendments

1.1 The Australian Government welcomes foreign investment because it plays an important and beneficial role in the Australian economy. Foreign investment provides additional capital for economic growth, creates employment opportunities, improves consumer choice and promotes healthy competition while increasing Australia's competitiveness in global markets. It can also help deliver improved productivity by introducing new technology, providing much needed infrastructure, allowing access to global supply chains and markets, and enhancing Australia's skills base.

1.2 While recognising that foreign investment provides significant economic benefits to Australia, it is necessary to regulate certain kinds of foreign investment to ensure that these proposals are not contrary to Australia's national interest. Foreign investment is primarily regulated by the Foreign Acquisitions and Takeovers Act 1975 (Act), the Foreign Acquisitions and Takeovers Regulations 1989 (Regulations) and Australia's Foreign Investment Policy (Policy). ^[1]

1.3 In very broad terms, the Act currently requires foreign persons who are planning to invest in certain interests to notify the Treasurer. Consistent with the Government's approach to welcoming foreign investment, in most cases, the Treasurer is satisfied that the proposal is not contrary to the national interest and does not object to the proposal. However, the Treasurer may also decide not to object to a particular proposal provided that the person complies with specified conditions that are considered necessary so that the proposal would not be contrary to the national interest. If the Treasurer considers that the proposal is contrary to Australia's national interest the Treasurer may make an order prohibiting the proposed transaction or, if the transaction has already taken place, direct the person to dispose of their interest.

1.4 The question of whether a particular investment is contrary to the national interest is a matter for the Treasurer. While each proposal is considered on a case-by-case basis, the factors that are typically considered by the Treasurer when considering any non-residential proposal include the impact of the proposed investment on Australia's national security, the economy and the community, competition, other Government policies (including taxation), and the character of the investor. When considering an application to acquire an interest in residential land, the overarching consideration is whether the proposed acquisition would add to Australia's housing stock.

1.5 The Policy assists foreign investors and their advisers by providing guidance on how the Australian Government interprets and administers the Act and Regulations. The Policy also sets out additional requirements that certain foreign investors such as foreign governments are expected to comply with.

1.6 The Act has remained largely unchanged since it came into effect and includes obsolete provisions, as well as provisions that do not promote investor certainty or consistency in the application of the foreign investment review framework. Further, the Act has not been amended to take into account major changes in other corporate regulatory frameworks such as the Corporations Act 2001, or developments in investment structures.

1.7 Schedule 1 to this Bill, comes into effect on 1 December 2015 and strengthens Australia's foreign investment review framework by:

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promoting greater transparency and confidence in Australia's foreign investment framework by providing a statutory basis for the requirements that apply to foreign government investors;

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facilitating the Commissioner of Taxation's role in administering aspects of the Act, particularly in relation to residential land;

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promoting compliance with the framework by increasing the penalties that can be imposed for offences under the Act;

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increasing the enforcement options available by making it possible for a court to issue a civil penalty order and for certain officers to issue infringement notices;

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increasing scrutiny around foreign investment proposals in the agricultural sector; and

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requiring application fees to be paid. The introduction of fees improves service delivery and ensures that Australian taxpayers no longer have to fund the cost of administering the framework.

Summary of new law

Who does the Bill regulate?

1.8 The Bill imposes a range of obligations on 'foreign persons'. In broad terms, the following persons may fall within the definition of a foreign person:

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an individual not ordinarily resident in Australia;

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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 with associates (that is, an interest of at least 20 per cent in the corporation or trust);

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a corporation or a 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 with associates (that is, an interest of at least 40 per cent in the corporation); or

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a foreign government.

Regulated acquisitions

1.9 The Bill enables the Treasurer to make a broad range of orders in relation to a 'significant action' that a person is proposing to take or has already taken. Broadly, a significant action is an action to acquire interests in securities, assets or land, or otherwise take action in relation to corporations and unit trusts. An action is generally only a significant action if it meets the applicable interest and monetary thresholds (if such thresholds apply to the action) and the action results in either a change in control involving a foreign person or the action is taken by a foreign person.

1.10 If the Treasurer is notified that a person is proposing to take a significant action, the Treasurer may:

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decide that they do not object to the action and give the person a no objection notification not imposing conditions;

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decide that they do not object to the action provided the person complies with one or more conditions and give the person a no objection notification imposing conditions; or

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decide that taking the action would be contrary to the national interest and make an order prohibiting the proposed significant action.

1.11 If the significant action has already been taken which the Treasurer is satisfied is contrary to the national interest, the Treasurer may make an order, known as a disposal order, which is directed at unwinding the action. For example, the Treasurer could order a person to dispose of their shares by a specified time. This Bill also allows the Treasurer to impose legally enforceable conditions in such circumstances as an alternative to a disposal order.

1.12 A foreign person is not obliged to inform the Treasurer that they are proposing to take a significant action unless the action is also a notifiable action (that is, only certain significant actions are also notifiable actions) - this concept is explained below. However, it is anticipated that some foreign persons will choose to notify the Treasurer because they will want the certainty offered by a no objection notification. If a foreign person is given a no objection notification in relation to the significant action, provided the person does not take any action which is not specified by the notification, the Treasurer generally is not able to make a disposal order.

1.13 A foreign person who proposes to enter an agreement to take a notifiable action must notify the Treasurer before entering into the agreement.

1.14 In broad terms, a notifiable action is a proposed action:

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to acquire a direct interest in an agribusiness;

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to acquire substantial interests in Australian entities; or

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to acquire an interest in Australian land.

1.15 Generally, the action is only notifiable if the entity, business or land meets the threshold test.

1.16 A foreign person who gives a notice must not enter into the agreement for a specified period (generally 40 days) unless the person is given a no objection notification.

1.17 Actions to acquire interests in Australian land that are specified in an exemption certificate are generally not notifiable actions. An exemption certificate is a certificate given by the Treasurer that specifies an interest, or an interest of a kind, is not a significant action or notifiable action. Currently exemption certificates are issued under the Regulations and includes certificates for an annual program of acquisitions of Australian urban land (this alleviates the need for a foreign person to notify and seek a no objection notification (imposing conditions) in relation to each covered acquisition during the period) and a pre-approval certificate that allows developers to sell new dwellings in a development to foreign persons, without the foreign person having to notify and seek a no objection notification not imposing conditions.

Administration and enforcement

Fees

1.18 Fees are generally payable by any person who makes an application under this Act. The Treasurer may waive or remit the whole or part of a fee if the Treasurer is satisfied that it is not contrary to the national interest to waive or remit the fee. Notices and applications are not considered given or made until the applicable fee has been paid or the fee has been waived or remitted. The amounts of the fees are found in the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015.

Offences

1.19 A person may commit an offence or contravene a civil penalty provision if the person:

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fails to notify the Treasurer before taking a notifiable action;

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takes an action that has been notified, before the end of the applicable time limit;

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contravenes an order made by the Treasurer which prohibits a proposed significant action, an interim order or a disposal order; or

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contravenes a condition in a no objection notification imposing conditions or an exemption certificate.

1.20 A foreign person who fails to comply with the obligations imposed by this Act in relation to residential land may also be liable to a civil penalty.

1.21 Each civil penalty provision in this Act is enforceable under Part 4 of the Regulatory Powers (Standard Provisions) Act 2014 (Regulatory Powers Act).

1.22 An infringement officer may issue an infringement notice if the infringement officer believes on reasonable grounds that the person contravened a civil penalty provision relating to residential land. The framework for the use of infringement notices created by the Regulatory Powers Act applies to infringement notices given for suspected contraventions of this Act.

Confidentiality of information

1.23 Much of the information needed to assess whether a significant action or a notifiable action is contrary to the national interest is personal information within the meaning of the Privacy Act 1988 or commercial-in-confidence. To assess whether a significant action or a notifiable action may be contrary to the national interest it is often necessary for officers assisting the Treasurer to perform the Treasurer's functions under this Act to consult with officers in a range of Commonwealth, State and Territory departments and agencies.

1.24 Recognising that the unauthorised use or disclosure of information that is collected under or for the purposes of the Act could cause significant harm to the affected person, the Bill makes it an offence for a person to use or disclose information provided under the Act for an unauthorised purpose. The Bill also specifies the purposes for which information may be disclosed and the classes of people to whom it may be disclosed.

Other matters

1.25 All substantive provisions in the existing Act will be repealed.

Comparison of key features of new law and current law

1.26 The Bill forms part of a package of legislation which includes:

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the Foreign Acquisitions and Takeovers Fees Imposition Bill 2015; and

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the Register of Foreign Ownership of Agricultural Land Bill 2015.

1.27 It is also anticipated that the Regulations and the Foreign Acquisitions and Takeovers (Notices) Regulations 1975 will be repealed and a new regulation made which will come into effect on 1 December 2015.