Submissions to the inquiry broadly supported the intent of the legislation, but focussed on the scope of key definitions and the reach of the Treasurer’s new powers, and in particular, sought more detailed guidance on the operation of some provisions.
Submitters made general points about the overall intent and effect of the legislation, including the similarity of the legislation to that being introduced in other jurisdictions, and of maintaining the balance between foreign investment and national security.
Specific concerns were raised about changes to the moneylending exemption; the definition of national security business and its possible reach into large areas of the economy; the power of the Treasurer to review investments over time; changes to fees; and appeal rights.
A range of other issues were covered including requirements of the Register; suggestions for a range of exemptions; the decision period extension; calculation of market value; and the increase in compliance and monitoring.
The broad intent and effect of the legislation
As discussed in the previous chapter, the pretext of the legislation is ensuring Australia’s national security. A number of jurisdictions around the world have recently moved to address national security concerns arising from foreign investment, including Canada, China, the European Union, India, Japan, New Zealand, the United Kingdom, and the United States.
The Department of Foreign Affairs and Trade argued the changes in Australia are consistent with those occurring in similar jurisdictions globally. The Department cited Organisation for Economic Cooperation and Development (OECD) research involving 62 countries that showed 21 countries have made policy changes since September 2019 to foreign investment screening regimes.
While the pandemic has been an accelerator for some of the changes, the broader underlying concerns with regard to threats to essential security interests associated with foreign investment were existing. The research also suggests the proportion of foreign direct investment potentially subject to cross-sector investment screening has doubled over the past thirty years. In respect of the legislation, the Department suggests Australia is not an outlier.
In terms of the level of foreign direct investment, the Treasury highlighted research suggesting slowing foreign direct investment was a world-wide trend: global foreign direct investment (FDI) inflows during 2018 and 2019 were lower than at any time since 2010. The United Nations Conference on Trade and Development has attributed this in part to the effects of 2017 tax reforms in the United States and declining outward FDI from China driven by domestic policy settings.
The Australian Financial Markets Association acknowledged it was unsurprising, given actions elsewhere in the world, that Australia would need to improve its national security legislation. The Association, though, expressed concern at the speed at which the legislation was being considered and questioned some aspects of the bill (see below). The Business Council of Australia similarly commented on recent legislative changes in the United Kingdom.
Notably, the Property Council of Australia argued Australia’s screening regime captures significantly more investments than similar regimes in the United States or Germany.
Maintaining a balance between the economy and security
The Australian Strategic Policy Institute (ASPI) welcomed the legislation, highlighting the growing threats to critical infrastructure as industrial control systems are increasingly run through the internet of things. These threats may emerge from past, present and future investment decisions in conjunction with changed political intent on the part of a foreign power.
While ASPI is of the view the zero-dollar threshold should remain in place permanently, others sought a different balance between security and the economy. Some submissions made claims the increased regulation would drive away foreign investors in areas such as mining and agribusiness who will look elsewhere in a competitive global foreign investment environment. This foreign investment, submitters argued, cannot be replaced with equivalent funding from alternative sources such as government loans or domestic investment.
The Treasury is certainly aware of the need to balance competing needs. However, it makes a case for a changed security environment to support the legislative changes:
…risks to Australia’s national interest, particularly national security, have increased as a result of a confluence of developments—including rapid technological change and changes in the international security environment. Security agencies are increasingly consulted as part of the foreign investment review process. For example, the Australian Security Intelligence Organisation (ASIO) undertook 275 foreign investment assessments in 2018–19 (up 12 per cent over the previous year).
The Treasury argues the existing foreign investment framework has gaps in its capacity to scrutinise and address national security risks. As it currently stands:
many private investments under $275 million are not screened, and in some cases under $1.192 billion; and
the majority of Australia’s manufacturers and suppliers of military-related goods and services fall below screening thresholds.
The Department of Home Affairs agrees, stating the existing thresholds do not reflect potential security risks that may come as a consequence of an increasingly complex economic environment, where governments and the private sector rely to a growing extent on smaller businesses to provide critical equipment or outsourced services. While smaller businesses are not themselves critical infrastructure providers, and may not be subject to screening under existing monetary thresholds, they may nevertheless be subject to exploitation as a consequence of the trusted access they have to physical sites, IT networks, and large sensitive data sets.
The Treasury is of the view the legislation achieves a balance by:
…addressing national security risks, strengthening compliance and enforcement powers, streamlining certain approvals, addressing technical legislative loopholes and implementing a fairer and simpler fee regime.
Beyond commenting on balance, some submitters suggested the legislation raised questions of actual or perceived sovereign risk. The Business Council of Australia, for instance, argued that the rules can be changed after investment decisions are made has the potential to create a chilling effect on foreign investment into Australia. The Council did not quantify this.
The Consolidated Pastoral Company similarly suggested the Treasurer’s last resort power meant there was no way for a foreign person to manage sovereign risk when investing in Australia.
These claims, however, define sovereign risk not in the traditional way as the confiscation of private property, but in a manner that encompasses any policy, regulatory or taxation change that might affect an entity’s operations. The proposed legislation does not allow for the rules to be changed over time, but for an assessment of potential evolving national security risks that may arise in response to the changing economic and political environment.
Mr Jennings from ASPI argued:
I think the flaw in the sovereign risk case is that it argues that, once a decision has been taken—and certainly everything that applied before 1 January 2021 cannot be changed. My concern about that is from a national security point of view. Unfortunately, facts can change. It might have been perfectly reasonable for a particular decision to have been taken 10 years or five years ago, but, if the technology has changed in ways which now make those investments vulnerable to cyberattack, then it seems to me government has to be able to make decisions that might force a reconsideration of past foreign investment decisions.
The claim is: if you do that, that is going to undermine confidence that foreign investors might have in Australia. My view would be: I don’t think that’s right. I think many foreign investors from like-minded democracies would look at that and say, ‘This is an example of Australia taking necessary steps to look after its national security.’ For that reason, I think there has to be some capacity for a retrospective look to past decisions…
I don’t think there can be a sort of statute of limitations on Australia’s national security interests.
Australia’s open foreign investment regime
Several submitters suggested the legislative program would make Australia’s already restrictive foreign investment regime more so, with suggestions this was supported by OECD figures.
The Productivity Commission recently studied the restrictiveness of Australia’s foreign investment framework. It cited research from the OECD comparing Australia’s policies to regimes elsewhere. The OECD’s index of FDI restrictiveness places Australia well above the OECD average, though still lower than Canada and New Zealand. However, the index also shows that Australia’s regime is not overly restrictive in absolute terms (a score of 0.149, compared with a maximum of 1.0). The OECD also notes a decline in Australia’s restrictiveness since 1997.
The Productivity Commission also quantified the effects of Australia’s foreign investment restrictions. Overall, its modelling estimated that the cost of added foreign investment restrictions to Australians is material, though not large in the context of Australia’s nearly $2 trillion economy. Increasing Australia’s restrictions on foreign investment (to a similar level of restrictiveness as New Zealand) would reduce gross national income by between $0.8 and $7.1 billion (or $82–$731 per household per year), due to a loss of $19–$182 billion of net foreign capital.
The Productivity Commission, however, warned reliably measuring ‘restrictiveness’ is difficult:
It’s a very, very difficult thing to really get a handle on, because this OECD measure of restrictiveness is quite subjective and it actually doesn’t take into account at all the national security element, which is the main subject matter of this bill. It’s largely about the screening requirements, more so than what actually gets through and what actually doesn’t. So, on one measure, Australia has a very strong and open approach to foreign investment, because foreign investment as a share of GDP in Australia is higher than it is for many OECD peers, but it can appear that our screening regime is more restrictive, because more deals are coming under the purview of the FIRB [Foreign Investment Review Board] and the Treasurer…it’s not even clear we would be regarded as more restrictive under the OECD measure as a result of these changes.
Assessments of national security risk
A concern was raised during the hearing which goes to the integrity of the reforms that are to address risks to Australia’s national security—specifically, the capacity of agencies to coordinate and provide comprehensive advice on national security risks for the Treasurer’s consideration.
The Australian Strategic Policy Institute suggested there needs to be a robust framework, beyond agencies talking to each other. The advice to the Treasurer, who exercises the call-in and last-resort powers, has to be supported by the wider national security system and agencies have to resist the urge to focus parochially on their own departmental interests.
Mr Jennings stated the Treasury was not designed to shape national security advice to the government and in the past the consolidation of advice to the Treasurer and the Foreign Investment Review Board had been a ‘poorly resourced, ad hoc process that has not developed timely, well-considered whole-of-government advice for the Treasurer’.
The Treasury responded that over time it has evolved to be a much more effective, consultative agency:
We do consult very regularly with security partners, including ASIO…We work very closely with the Department of Defence on a range of issues that might affect their equities. We work very closely with colleagues in departments across government, both security and non-security…to form our judgements on individual cases—and, importantly, not just on individual cases; we work very closely with them on some of the broader policy issues as well around foreign investment and how we work to implement the government’s foreign investment policy framework.
One reform under the current legislative program is to the Foreign Acquisitions and Takeovers Regulation 2015 to amend section 27 that relates to exemptions from the Act for moneylending agreements. Under current regulations, an interest in securities, assets, a trust, Australian land or a tenement is exempt from the Act (that is, it does not have to be notified or assessed) if the interest is held by way of security for the purposes of a moneylending agreement.
Amendments to the regulations remove the exemption to screening requirements for national security land; an exploration tenement that is national security land; and an interest in an asset of a national security business. This means prospective lenders for these purposes, who would hold the debt on a secured basis, may need to obtain approval from the Treasurer. Under current drafting, this may apply for both crystallising and contingent interests.
The Australian Financial Markets Association is of the view the intent of the changes or their scope is not clear and they potentially capture contingent interests prior to there being any crystallising interest. Mr Love stated the concern:
We are concerned about syndicated lending…This is the common way that lending occurs. When we’re talking about national infrastructure matters, like gas pipelines and these types of things, we’re talking hundreds of millions of dollars. Normally, the primary vehicle for the initial getting the project going is to finance it through lending. This is done through syndicated lending, where a group of banks come together.
If you look at the legislation, it’s unclear at the moment whether or not you would have to approach FIRB to get prior approval. Normally you appoint a security holder for the syndicate, the syndicate security holder, to hold those secured assets in the event that you need to enforce your interest, if they default on their payments to the syndicate banks. You would then have to go through an approval process there. A discussion about whether or not it would only result where you actually needed to crystallise your interest, in the sense that the borrower had defaulted—we’re talking about the direct investor here—whether or not the investor itself defaults, and how you would go about enforcing that enforcement process—whether or not you might need to approach FIRB at that point, which would be a better outcome, certainly a much less impactful outcome—might be, hopefully, a way forward on these matters.
I also note that it is very common, once you have a project well underway and you have the initial financing all in place, to, after a period, refinance the transaction through debt issuance by the investor themselves. That would be intermediated, once again, through banks. The processes around the secured asset and dealing with that sort of situation need to be clarified and clearly understood.
The Association argued this was complicated by the fact many major Australian banks, because of their foreign shareholdings, may be considered foreign persons for the purposes of this legislation when they act as intermediaries. And further, that many financial institutions have broad-based shareholdings and focussing on where, nominally, an institution has its home jurisdiction may not be appropriate.
The Association argued for a limited change that would ensure only the actual acquisition of a national security related interest by way of enforcement of a security (that is, a crystallising interest) held solely for the purposes of a moneylending agreement be subject to approval by the Treasurer. It argued against contingent interests triggering the need for review.
It also suggested in relation to listed entities that were moneylenders:
It’s better to think of the possibility of looking at financial institutions, looking at their business, what they are doing, who they’re owned by, on a regular basis maybe, on a periodic basis, to look at their fitness to participate in syndication or other intermediation in relation to those fundraisings. So you’re saying that that financial institution has gone through a process once maybe for a period of several years of being looked at, of being considered whether or not it presents national security threats. If they get a clean bill of health, then they can participate, basically, and have a certification that says they can participate. These are simple processes.
The Treasury explained the broader policy considerations that were driving its approach to the exemption:
The changes that the government is making at this time very much look at the possibility that because of the moneylending exemption it is possible for a lender to take possession, ultimately, of an asset in a way which effectively extinguishes any conditions that might have been put on that without the government having an opportunity to review that transaction and to consider whether to prohibit or to impose conditions.
Definition of national security business
A significant concern to several submitters was the definition of national security business and how this might affect a range of foreign investors. This was a particular concern of mining and minerals groups who sought special recognition for critical minerals.
As discussed in chapter 1, the definition of a national security business is made in the Foreign Investment Reform (Protecting Australia’s National Security) National Security Business) Regulations 2020, currently in draft form.
Concern from mining industry
The Association of Mining and Exploration Companies suggested:
Under the current broad definitions, businesses that ‘develop’, ‘manufacture’ or ‘supply’ goods or services to a sensitive national security business could refer to the entire minerals sector at all stages of the supply chain…[there is] no certainty that any good or service that isn’t technically considered military in nature, will not be subject to review because it may be utilised at some point by defence or intelligence personnel.
The Minerals Council of Australia made a similar argument—miners should not be captured by the definition of national security business because the raw minerals may be processed and manufactured into components that directly or indirectly feed into defence supply chains. The Council further questioned the potential scope creep for ‘criticality’ permitted by the Treasurer’s regulation-making powers.
The Association of Mining and Exploration Companies expanded on the importance of foreign investment to the critical minerals industry, suggesting this may be endangered by the current broadly drafted regulation:
Over 100 Australian mining and exploration companies are currently working to find and develop critical mineral projects in Australia. Many of these companies are also pursuing potential value-adding and downstream processing opportunities here in Australia. The reality is that most of these projects will require foreign investment and offtake agreements with overseas customers to be viable. For these projects to incorporate and develop downstream processing will also likely require international partners, bringing technical expertise and intellectual property as well as further investment...Under the proposed provisions and broad definitions, all transaction could be subject to review, regardless of their actual or implied threat to national security.
The Association went further to state:
The reality is: although we’ve worked hard to build a wider range of investment opportunities with strategic partners across the world, that investment has not come forward in the early stages. Our companies, explorers and project developers have been very reliant on investment from China in particular, in getting that early seed capital that we are able to build a project around and in finding those customers that actually want to take the product. In that environment we have seen a couple of examples recently where it has not been quite as simple as some might think to find other investment opportunities once an investment application has been rejected.
The argument that mining should be exempt is based on a suggestion the minerals do not become critical until such time as they are processed, and further that any processing requires foreign investment. This was explained by the Minerals Council of Australia:
…on the critical minerals side, it’s not mining where the pinch point is. The pinch point that is often referred to as the ‘seat of the national security point’ is much further down in the supply chain before you get to the manufacturing. At the mining level, it can’t be used in any products; it needs to be separated. What you mine needs to be separated and those separated components need to be smeltered; then you’re in a position where you have early manufacture material. But you need the technology and the know-how to do the smelting and the early manufacture material. That technology and know-how, unless you buy something that’s old technology and off-the-shelf, requires foreign direct investment to access and partnerships to deliver that access through foreign direct environment.
The Minerals Council of Australia, however, acknowledged they were not privy to the ‘second half of the equation in the tension between national security and the national interest’:
We’re not privy to the national security considerations that they are referring. We can only talk about the economic impacts and, yes, the economic impacts would appear to us to be potentially significant, but we’re not in a position to say whether the government—how the government has weighed up those two.
Concern from property industry
The Property Council of Australia does not accept owners of property would use their ownership to access premises (or would only do so rarely when the owner was not present) and is of the view the definition of ‘national security business’ is in danger of being interpreted too broadly to capture interests and assets that would not normally warrant national security concerns—this includes foreign ownership of premises holding data centres and government agencies.
The Property Council of Australia argued there were often steps between the asset and the owner:
Typically, when we’re talking about data centres—or any commercial asset, but data centres as well—in the property asset that houses the data centre there might be a number of investors in that property asset. The management of the property asset would be undertaken, normally, by a real estate investment trust…So you’ve already got one step removed. If you’ve got an offshore investor in that asset, they don’t have any operational control. They’re not on the ground doing the normal property management activities of a property manager; they’re removed already.
Then you’ve got the fact of the difference between the owner of the property asset in total, including whatever mix of investors actually own the asset, and what’s happening within the data centre… I understand if the government is concerned about security issues and about information being held on data centres or, indeed, on servers within office tenancies. Yes, there may well be information, data, which has some sensitivity or security dimensions to it, but it’s not managed by, it can’t be accessed by and it’s not owned by the property owner.
Further, the Council is of the view the meaning of ‘interest’ in Australian land under the Act is too extensive—it includes legal and equitable interests, options, and leases of greater than five years. And, given there will be no public register for critical infrastructure or carriage service providers, or land used for defence purposes, it will be difficult for property investors to determine whether an acquisition falls within the relevant definitions.
Interaction with SOCI Act
The current amendments are occurring alongside amendments to expand the scope of the Security of Critical Infrastructure Act 2018 (SOCI Act) to cover additional sectors and introduce new regulatory requirements, including a positive security obligation, enhanced cyber security obligations, and a government assistance regime. Under the arrangements, foreign-owned and Australian-owned businesses will be held to the same security standards.
Broad concerns were expressed at the evolving nature of the definition of national security business through its connection to the SOCI Act. Certain critical infrastructure defined in the SOCI Act will be included in the definition of a national security business through the regulations. The Minister of Home Affairs is empowered to add assets to this class of businesses under the Act.
The Department of Home Affairs stated the government is particularly concerned about a number of sectors containing critical infrastructure, including telecommunications, energy, banking, finance, health, food and grocery. Submitters also included water and sewerage in the list.
For the Department of Home Affairs, the security situation with regard to critical infrastructure evolves:
…the zero-dollar threshold that’s been in place through COVID has brought to light cases that we haven’t previously seen in the sectors that we’re concerned about, and that has increasingly convinced us…that there are sensitive assets, regardless of the dollar value, that we might need to take a careful look at.
The Business Council of Australia argued against any ‘automatic update’ by reference to the SOCI Act, and suggested the definition should be limited to identifiable assets—electricity, gas, water, ports, telecommunications, and defence assets; with the ability to add or remove assets to take account of changing risks or emerging technologies.
The Chair of the Foreign Investment Review Board argued generally against being overly prescriptive for issues of security concern:
We’ve been very careful, and I suspect the government’s been very careful not to box itself in by being too prescriptive in nominating a particular sector or a particular element of a sector, simply because, from our experience looking at hundreds and hundreds and hundreds of cases every year, no case is similar. And the national interest is subtly different in each case and requires different consideration. On the face of it, what you’re suggesting makes a lot of sense, and it makes a lot of sense to me. It’s actually more difficult to do in practice without becoming overly prescriptive and boxing yourself in, and thereby hindering your ability to apply the most appropriate solution on a case-by-case basis.
One submitter, Associate Professor Shumi Akhtar, argued for an expansive national security definition to include real-estate, agriculture, airspace, water rights, trees, soil, animals, marine lives, mining resources, financial assets, and human capital.
Powers to review over time
The change in the Treasurer’s role from gatekeeper to regulator over time (and by delegation that of the Treasury) was noted. Under current arrangements the capacity of the Treasurer to review an approved transaction has been limited. Some provisions have allowed the Treasurer to modify conditions after an approval. However, this power has been subject to the limitation that the investor has to voluntarily agree, or the Treasurer has to be satisfied it will not disadvantage the investor.
The Department of Home Affairs stated the ‘single touch nature’ of the foreign investment framework is not well suited to regulating changes to national security risk over time. The call-in and last-resort powers allow for assessments against risks to Australia’s national security to be made over time.
The Business Council of Australia argued the power to re-examine is a major shift and creates uncertainty as it deals with matters not entirely in an entity’s control and potentially reduces the incentive for comprehensive assessments during the screening process.
It is not clear the legislation would operate in the manner that concerns some submitters. As discussed in chapter 1, the safeguards in the last-resort power require that changes that lead to a national security review and potential use of the last-resort power could not have been foreseen at the time of the initial assessment. There are further a range of safeguards on the use of the disposal power, including that the national security risk cannot be addressed in any other way (for instance through conditions or negotiations with the investor). The call-in power does not relate to investments that have been approved, and investors can extinguish the power by voluntarily notifying.
Last resort power
The Business Council of Australia called for clearer guidance and additional safeguards to be added to the use of the last-resort power, including:
a standard of reasonableness and knowledge for directors as to what level of ongoing monitoring is required by an investor to identify future national security risk;
opportunity to consult with the FIRB in the event the power has been triggered;
the Treasurer to consult with senior cabinet ministers, states, territories and the foreign person impacted.
Several submitters argued the ten-year time period for the call in power was too long and should be reduced to three years.
The Treasury, however, explained a broader benefit to investors from the call-in power: it allows the ‘national security business’ definition to be more targeted, particularly as that type of action requires mandatory notification and assessment:
The call-in provides that national security risks can be addressed, which in turn allows the national security business definition to be focused on investments that are most likely to present national security risks.
The Treasury also noted call-in powers existed in other jurisdictions:
the United Kingdom is considering a five-year call in power; and
the United States, New Zealand and Canada have unlimited time frames for call in.
A further consideration for the timeframe was the fact technical provisions in the Act can deem an acquisition to have taken place many years before the title transfers. For instance:
The way section 15 operates means that it can be, again on the advice of different agencies, perhaps anywhere up to four years before the acquisition in fact occurs. It can start to appear in ways which will allow us to identify that information and take a decision. So there are a range of factors that we’ve balanced in reaching that decision.
The Business Council of Australia suggested it was not clear what the national security concern trigger is and argued some threshold triggers were too low—for instance, entering or terminating a significant agreement with an Australian business.
Many submissions commented on the fee structure suggesting it was disproportionate to the cost of administering the regulatory system, did not reflect the nature of assessments, was not equitable, and operated more like a tax.
In the Explanatory Memorandum, the government states ‘all fees imposed are a tax’. As such, fees are not levied on a cost recovery basis and neither are they intended to be so levied. This does not appear to be well understood.
The Treasury acknowledges some investors will pay more, but states these are investors proposing to undertake the highest value investments. Under the reforms, the Treasury states more of the costs of administering the framework will be borne by larger investors and investors that currently pay a disproportionately smaller fee for their investment. The maximum fee for a commercial transaction over $50 million will not be higher than 0.03 per cent of the consideration. For agricultural land over $2 million, it will not be higher than 0.66 per cent.
However, the committee notes that in comparison to the existing fee framework, the new fee framework is intended to be fairer and simpler, and will reduce the administrative burden of determining the fee that is payable.
The Real Estate Institute of Australia does not oppose fees but questions the equity of the fee structure. It states an asset with a value of $210 million has a proposed fee of $52,800. This is the same fee level as a residential property valued at $5 million. The Institute argues it is difficult to see how the complexity involved with the assessment of an asset with a national security risk is the same as a residential property at a fraction of the value. The Institute also notes that the proposed fee increases for residential property up to the value of $6 million are 30 per cent or more whilst for properties of greater value the increase is half of that. The rationale for the disparity in proposed fee increases, according to the Institute, is not apparent.
The Treasury noted the different fee treatments between commercial, agricultural and residential investments are not new, and are consistent with the fee structure adopted under the 2015 foreign investment reforms.
The Consolidated Pastoral Company stated that while fees cap out at $500,000, it was concerned fees would increase to $1 million for agricultural land acquisitions with a value of more than $152 million—approximately 0.65 per cent of the acquisition price. It argued this is effectively a federal stamp duty or a tax on investment that will discourage foreign investors with impacts for farmers. The Company also expressed concerns that the fee for an exemption certificate is based on the maximum value covered by the exemption certificate, regardless of whether the full cap it used.
Several submissions mentioned an analysis of foreign investment fees undertaken by the Productivity Commission. The Productivity Commission argues for aligning fees for the assessment of foreign investment proposals with the actual cost of administration—as it says was intended when the fees were announced. It states the fees are set at levels that are out of proportion with the cost of delivering the regulatory regime and are thus taxes, not a fee for service. This is not disputed by the Treasury (see above).
In 2017–18, the government collected $114 million in fee revenue; the operation costs of the FIRB and its secretariats in the Treasury and the Australian Tax Office (ATO) totalled $14.7 million.
The Commission states that while fees on large commercial transactions are likely to be immaterial, the relatively much higher fees on small agricultural investment applications have the potential to affect growth in regional communities.
Other comments on the bill
Under proposed subsection 79A(2), a person may apply to the Administrative Appeals Tribunal for review of a decision that a national security risk relating to the action exists—but not the orders made under the power. The Association Mining and Exploration Companies argues for the right to review to be extended to the appropriateness or merits of any orders made, or new or varied conditions imposed. The Business Council of Australia argues similarly.
Although the Treasury has estimated a minimal regulatory burden on businesses and individuals (see discussion in chapter 1), some submitters commented on the increase in regulation, particularly related to the expansion of infringement notices for civil penalty provisions.
The Minerals Council of Australia said the cost of ensuring compliance would increase.
The Association of Mining and Exploration Companies suggests increasing civil penalty amounts, and with some penalties now calculated as a proportion of the benefit gained by wrongdoing raise a concern commercially sensitive information would be investigated for reasons under the expanded definition of national security, that would previously have been unaffected.
Decision period increase to 90 days
Several submitters criticised provisions that would allow the Treasurer up to 90 days to make a decision in some instances—this was regarded as too long by stakeholders.
The Business Council of Australia stated the time increase would involve significant cost because major investments typically involve merger and acquisition project teams and project implementation teams. These are established and funded in advance of application and continue to operate during the decision period to ensure implementation can occur upon approval. It recommended a maximum of thirty days, supported by a better resourced secretariat on a cost-recovery fee-for-service model.
The Consolidated Pastoral Company, writing of recent experience with foreign investment approvals, stated delays in approvals allowed the buyer to renegotiate the sale to terms that better supported the buyer when the competition for the assets was removed. A slow approval process takes competition out of the market and can leave sellers in a long sale process where the buyer can position to renegotiate terms.
A number of submitters raised concerns about the Register of Foreign Ownership of Australian Assets. The Minerals Council of Australia stated it would impose substantial additional costs and a compliance burden on foreign investors—though it is not clear how the cost would be substantial.
Optus sought more detail on the requirement for the register, unsure if it would need to disclose each of its mobile network’s over 8,000 locations across Australia.
The Property Council of Australia fears the register could be made public and could be used outside the stated mandate. The Council also argued it should not include interests that are not direct ownership stakes but which may still be considered interests (e.g. leases over five years).
A broader role for the Register
The Business Council of Australia sought a different role for the Register—one to streamline the foreign investment process by introducing a new action. The Council suggested:
…use these registers more to give yourself more visibility of what foreign investment is coming in. There are probably a lot of transactions you could do just with the registration process and not have to go through the whole screening process. We actually think there’s the potential to use the registration idea to maintain the visibility of foreign investment coming in, but to make registration the only requirement.
You can say: ‘Register your investment. Tell us what you’re going to do. Tell us how much you invested. If we think there’s a problem, we’ll let you know.’ They don’t have to necessarily go through the whole process of the FIRB, the screening process and waiting months for approval. We think that registers have some potential to improve the system. I don’t think that’s being utilised currently.
Calculation of market value under civil penalty provisions
The Inspector General of Taxation and Taxation Ombudsman (IGTO) raised concerns about the manner in which market value is calculated for some civil penalty provisions where the penalty is calculated proportionally to the degree of the benefit obtained from misconduct and harm to the national interest. In particular, the IGTO highlights proposed section 95A in relation to market value for residential land, the method of calculation (greatest of three different calculations) is also used elsewhere.
Drawing upon a 2015 review investigation of the ATO’s administration of valuation matters, the IGTO found:
There are inherent difficulties associated with valuations, such as their subjective nature, the use of ranges and the potentially prohibitive costs of obtaining them. Minor changes in valuations may also have a disproportionate tax effect where, for example, the eligibility for a concession is dependent on not exceeding certain thresholds. These difficulties, combined with the taxpayers’ burden of proof where the ATO challenges their valuation, increase the potential for increased uncertainty, disputation and costs for both taxpayers and the ATO alike.
The IGTO warns the risk where market valuation is used is that it can lead to collateral disputes as to the correct ‘market value’. The IGTO acknowledges the difficulty of ascertaining market value may have been acknowledged through the option for a nil value—however, it is not clear under what circumstances a market value would be considered unascertainable, who would make the decision, and whether this, in and of itself, may generate further disputes.
The IGTO recommends exploring options to more clearly define how ‘market value’ is to be determined, identify alternative options that are less subjective or consider how approaches in disputes about valuation can be mitigated, or recommend market value is only used where other options have been exhausted.
No role for the IGTO
The IGTO also expressed concern there is a possibility it could have jurisdiction to review decisions relating to matters of national security risk under amendments to the Act. Specifically the existing investigation powers of the IGTO—power to investigate administrative actions and decisions of Tax Officials)—may be inadvertently invoked in some circumstances. The IGTO seeks an express exclusion through the bill or amendment to the Inspector-General of Taxation Act.
Various submitters called for exemptions from certain provisions of the Act they were concerned might affect the interests they represent, though there was little evidence presented on the likely scope of the impact. Some of these exemptions have the potential to undermine the integrity of the Act, and in particular its concern to protect Australia’s national security, or do not acknowledge some of the provisions of the Act which might ameliorate some concerns.
The Minerals Council of Australia called for the following exemptions:
either all mining should be exempt from the call-in power or the majority should be excluded (including mineral sands);
the coverage of the exemption certificate in section 43BB (of the Regulations) should be widened; and
there should be exemptions from water reporting as water access for the industry is largely non-tradeable.
Optus (which is a wholly owned subsidiary of Singtel, which in turn is owned by Temasek Holdings, a Singaporean government investment company), called for an exemption for investment in assets that are deemed to be supporting an essential service when the investor is considered low risk and has long-track record of supporting the government on national security matters. It stated:
The ideal application of this amendment would be that where an ownership structure is well known and understood by the government, investment by a foreign owner into an Australian-based company would not be subject the current levels of compliance or administrative hurdles. This should be of particular priority where the investment is in the national interest…
Optus recommends that fees are waived or moderated for investments into critical infrastructure—telecommunications.
The Business Council of Australia called for exemptions for non-sensitive transactions from review by introducing a registration process for buy-backs, Australian entities with no Australian assets, small land acquisitions incidental to land already approved, commercial property leases, bolt-on transactions, and existing shareholders making creep investments in certain parameters. It argued for the removal of some non-sensitive transactions completely, including internal corporate restructures where ultimate beneficial ownership remains unchanged; and initial or further capitalisation of wholly-owned subsidiaries where there is no new acquisition or business created and the foreign person is contributing working capital to an existing business owned through a wholly-owned subsidiary.
The Australian Sugar Milling Council called for ‘benign acquisitions in non-sensitive sectors such as sugar are exempted from all proposed national security provisions’.
The Property Council of Australia argued for exemption or a streamlined regime to facilitate investment by ‘trusted offshore investors, who are appropriately regulated and have a track record of investment in Australia’, and a higher threshold for foreign investment into locally managed funds.
The Treasury made a case for its compliance powers to be strengthened, tying it to the increase in the impositions of conditions. In 2018–19, conditions were applied to 80 percent (by value) of foreign investment approvals. In 2017–18, Treasury applied conditions to 43 per cent of approved applications—representing 75 per cent of the value of approved applications. The majority of conditions for non-real estate approvals apply to taxation.
The Treasury has separately stated:
The credibility of the ongoing and expanding use of conditions is dependent on having adequate resources and effective powers to ensure compliance and hold entities and individuals to account. Existing compliance powers are limited in comparison to other financial services, tax and competition regulators, and blunt in that action is largely reliant on the courts.
The Department of Foreign Affairs and Trade confirmed a common message from investors was the need for clear guidance on how the reforms will be implemented—particularly the definition of national security business and the proposed link to the SOCI Act. This was repeated in many submissions and by many witnesses to the inquiry.
The Treasury acknowledges there is a range of regulations yet to be finalised, including the definition of national security business, national security land, fee regulations, streamlining of passive foreign government investors, and moneylending.
The committee is in agreement that foreign investment is important for Australia’s long-term economic success, stability and prosperity.
It is appropriate to highlight evidence to this effect received during the inquiry:
It [foreign investment] creates jobs, improves productivity and connects Australian businesses to global markets. At the same time, Australia is an attractive destination for foreign investors thanks to our stable democracy, strong rule of law, highly skilled and highly educated workforce, proximity to dynamic and fast-growing markets, abundant natural resources and world-class industry capabilities, and strong and well-managed economy. This is evidenced by the foreign direct investment inflows relative to the size of our economy. In the three years to 2019, foreign direct investment inflows into Australia averaged 3.3 per cent of GDP, compared with 1.7 per cent for the OECD and 1.5 per cent for the G20.
The committee acknowledges the changes proposed by the legislation are complex and some areas of confusion could be resolved by a more thoroughgoing understanding of the bill.
The committee supports calls for guidance material to be provided by the Treasury as a matter of priority in advance of the legislation coming into effect.
The committee recommends the Treasury publishes comprehensive guidance as soon as practicable to offer foreign investors in Australia greater clarity as to their responsibilities and rights.
The committee recommends the bills be passed.