Investment threshold and related issues
This chapter examines the issue of the investment threshold which
triggers the Foreign Investment Review Board (FIRB) review process. In doing so,
the chapter first considers the appropriateness of the current threshold for foreign
acquisitions of agricultural land and businesses, the issue of cumulative
purchasing, and potential impacts on local economies.
In addition, this chapter discusses two definitional issues that are
fundamental to the operation of an investment threshold: the definition of
rural land (and by implication agriculture) in the Foreign Acquisitions and
Takeovers Act 1975 (FATA), and the definition of direct investment in the
Australian Foreign Investment Policy (AFIP).
FIRB foreign investment review threshold
The FIRB review threshold is the level of proposed foreign investment
that a private foreign person or private foreign company (as opposed to foreign
government owned company) must notify FIRB of prior to undertaking an acquisition
in Australia. Although special arrangements have been established for certain sectors
of the economy, such as residential real estate and media interests, rural land
and agricultural businesses are covered by the general threshold level.
The threshold applies when a foreign private investor seeks to acquire 'a
substantial interest in a corporation or control of an Australian business that
is valued above $248 million', or a 'substantial interest in an offshore
company whose Australian subsidiaries or gross assets are valued above $248
A 'substantial interest' is defined in the AFIP as occurring:
...when a single foreign person (and any associates) has 15 per
cent or more, or several foreign persons (and any associates) have 40 per cent
or more, of the issued shares, issued shares if all rights were converted,
voting power, or potential voting power, of a corporation.
In the case of foreign investment from United States persons or
companies in Australia, the United States‑Australia free trade agreement specifies
the threshold for the review of investment is $1078 million. On 1 March
2013, the government announced that New Zealand based private investors would
also subject to the $1078 million threshold. These thresholds are indexed on
1 January annually.
In the case of a foreign government entity, the review threshold is $0
meaning that any proposed foreign direct investment in Australia from a foreign
government entity (such as a state-owned corporation) requires FIRB approval
The definition of 'direct investment' is discussed towards the end of the
The committee heard a wide variety of views on the relevance of the current
threshold level to agricultural land and businesses, as well as suggestions for
more appropriate new levels.
For example, the South Australian Farmers Federation (SAFF) recommended
that the threshold that should apply to agricultural land be $2 million.
At the public hearing on 16 November 2011, Mr Peter White, President, SAFF, was
adamant that the $248 million was to high:
...Certainly the [$248] million threshold is an absolute joke.
It has never been triggered and is never likely to be triggered. Our suggestion
is the limit should be $2 million. It does not matter whether the investment is
for mining or agricultural purposes; if it is done on agricultural land they
should both come under the same scrutiny.
The NSW Farmers Association (NSW Farmers) provided evidence that put the
application of the threshold to agricultural assets into stark perspective. As
Mr Bill McDonnell, Chairman, Business Economics and Trade Committee, NSW
Farmers told the committee:
Concerns such as...the threshold for the national interest test
are raised regularly...
I will give you an example. The average land value of grain
producing farms in New South Wales in 2011 was valued at $1.25 million. This
information is courtesy of a report by PRDnationwide in 2011. Their source was
the Valuer-General of land and property of the government of New South Wales.
Extrapolating these figures to market value—and let's be generous and double
that figure to $2.5 million...
Based on the $2.5 million figure (quoted above) and the 2012 FIRB review
threshold of $244 million, a private foreign investor could acquire a property
valued 97 times an average farm or a property of about 194 000 hectares without
being subject to FIRB review.
Evidence of this sort regarding the threshold was also reflected in the Australian
Bureau of Agricultural and Resource Economics and Sciences (ABARES) report Foreign
investment and Australian agriculture which states that:
The threshold of [$248] million is above the value of most
agricultural land transactions, with only large enterprises such as
aggregations of properties in managed investment schemes being subject to FIRB
Similarly, evidence provided by the Australian Taxation Office (ATO)
suggests that there are only a very small number of companies that may be
captured under current FIRB threshold levels. In response to a question on
notice about the number of agricultural entities with a turnover
of more than $250 million, the ATO stated:
Australian Taxation Office data shows that there were 10
entities (all of which were companies) in 2009-10 (the latest year for which
Taxation Statistics have been released) with a turnover of more than $250
million and with "agriculture” as their main industry. Of these 10
companies, none were described as 'non resident' for tax purposes.
Like a number of other witnesses, the National Farmers Federation (NFF) argued
for a significant reduction in the threshold. However, the NFF noted the
potential burden of a threshold that was too low and that this needed to be
balanced against appropriate scrutiny:
We have not been prescriptive about any kind of reduction. We
are just saying that the [$248] million at the moment is clearly not a relevant
threshold for the vast majority, if not all, of the agricultural purchases...
Some of the discussions that we have had internally at the
NFF have been talking about: what is the top 10 per cent of agricultural land
values or land purchases? Ultimately, this kind of activity is happening in the
bigger end of town and the larger purchases. If you set the threshold too low
obviously there is the risk of putting in a new level of bureaucracy and
administration that is pretty unnecessary...
We want to make sure it is well targeted. We have not been
prescriptive about those but obviously there has been some discussion at a
higher level maybe around the $30 million dollar mark for some, but we need to
get some greater clarity around the actual FIRB compliance processes—these
other issues that were raised—before we will be in a position to really
appropriately make a call.
The committee heard evidence of two key problems arising from the current
size of the threshold at $248 million. These were the potential of cumulative
purchases by foreign companies avoiding FIRB review and the lack of review for
major purchases that could significantly impact local economies. These issues will
be discussed in turn.
The issue of cumulative purchases was of significant interest to the
committee during the course of the inquiry. The issue arises because under the current
FIRB review framework, foreign companies can make series of smaller purchases of
agricultural interests to avoid the application of the FIRB national interest
The committee was concerned that the FIRB did not have appropriate
oversight of such cumulative purchases. As acknowledged by the former FIRB
Chair, Mr John Phillips:
WILLIAMS: Do you have any system to monitor the accumulation of
land by a company?...
With some companies, where we become available, yes, but I would not like to
pretend that we can monitor all of them, because we do not have the information
at this stage.
The explanation continued, highlighting that in early 2012 FIRB needed
to further develop its approach to the issue:
NASH: ...if the situation proceeds as it is—and, as you say, you
are trying to monitor that accumulation—surely it is too late by the time you
potentially identify the accumulation of parcels of land? They have already
been acquired, so what would you do at that point anyway, once they have been
No, I was not really talking that way. I was really talking about ways in which
one becomes aware of accumulation as it happens or before it happens rather
than after the event. After the event is not much good.
NASH: That is my point. I am just wondering if any consideration
has been given to how you actually do that.
Yes is the short answer, but I could not go any further than that at this
Because at the present time you have no idea, have you?
Some, but not a lot. The answer is yes, we do have some, but it is not as good
as any of us would like.
The relationship between the review threshold and the issue of
progressive agricultural asset purchases was also highlighted by some
submitters. Indeed, the SAFF considered it as a major reason of its
recommendation of a $2 million threshold. As stated in its submission:
A $2 million limit would be low enough to be able to monitor
any progressive buying that may be taking place. There are often allegations
that there is progressive buying of properties just below any trigger level of
price and/or size.
Similarly, the NFF was concerned about how to govern cumulative purchase
in the future:
The concern primarily from our members is around what the [$248]
million would take in and what it would exclude. For the vast majority of
agricultural land there are not too many single purchases that are even going
to hit that threshold. That has been the primary concern of our members to say:
'Well, if that's the case, and we are concerned about that, we are concerned
about creeping acquisitions, then what should the threshold be.' The
overwhelming view has been that it should be lower.
Local economy impacts
The concern expressed by a number of submitters that large-scale foreign
investment could have on local communities was articulated well by NSW Farmers:
...if there is a local community and a larger company or
foreign investment company comes in, they generally are not buying in the local
community. They will go out to the bigger companies, put tenders out and source
it all out. Then the small business owner in that small community does not
receive the benefit of that business...
Although this witness was expressing a concern about the impacts of
foreign investment generally, the committee is of the view that it would apply
directly to the foreign purchases of agricultural assets because the vast
majority of agricultural purchases do not reach the value required for FIRB
review (unless undertaken by foreign government entities).
The Western Australian Farmers Federation (WAFF) also noted that there were
situations where foreign investment arrangements were making it difficult for
local producers to gain access to farm assets in their region. As explained in
the following exchange:
CHAIR: ...One of the things that I have noticed, Mr
Norton, concerns a property over there [WA], and this is about distorting the
market in terms of return on your investment with regard to what the commodity
prices are. It concerns, without naming anyone, a serious wheatgrower who has
got himself into a fair bit of a tangle financially. An American super fund
which has some representatives here in New South Wales has bought a property
with him—the right to lease it back. I think this particular gentleman is having
great trouble meeting the lease payments which are related to return on the
superannuation fund's invested capital. The super fund were looking to buy
another lump of this particular property, as I understand it, and made a bid
for it but they were gazumped by a Chinese company who offered nearly double
what the super fund offered. Given that the return on the investment for the
super fund made the lease unviable, do you understand...that you can actually
price farmers, based on returns on produce, out of the market?
Mr Norton: That is what is causing the angst,
Senator. The wheat grower you are talking about had $700,000 quarterly lease
payments on that block, and the Americans padlocked the front gate in about
September or October of last year. I do not know what has happened down there
since then. But with the other property back towards Lake King, there were a
lot of local farmers around that 70,000-acre property who wanted to buy pieces
of it. They certainly contacted the land agent, but the land agent virtually
shut them out and was only doing business with the Chinese to try to sell it in
one lump. Once again, even as late as yesterday I was out in that neck of the
woods, and nobody really knows yet whether that property has been sold. This
has been going on for about nine months, and the owner is busily stripping a
lot of the fixed assets off that block. It is a very confused, twisted debate
that is going on out there at the moment, and the locals just are not getting
an opportunity to have a crack at those assets.
In response to a question about the impacts of cumulative purchases, the
WAFF President, Mr Mike Norton, argued for a local interest test. As Mr Norton
Mr Norton: ...In the rural towns, as farms amalgamate,
you just strip all the assets and the people out of those communities. There is
nobody left in the fire brigade, the ambulance, the golf club falls apart, the
bowling club—all those communities fall apart. We need to do a lot more
in-depth analysis on what we are doing to our rural communities. As this type
of investment takes hold, it has enormous knock-on effects.
On the other hand, there was one case of foreign investment examined by
the committee that provided an alternative view on the local impacts. For
background in this case, the company's (BFB Pty Ltd) Chief Executive Officer
and Managing Director, Mr Terry Brabin, described its relationship to its major
BFB Pty Ltd is located in Temora, New South Wales, and was
founded on 20 May 1985... The bulk of our staff live in Temora on a property
owned by the company. We also hire contractors and seasonal help as may be
required... BFB has two major shareholders. My family and I own 12 per cent
of the company and two investment funds managed by Black River Asset Management
own, collectively, 83 per cent...
The Black River funds first invested in BFB in June 2009 As
private equity funds, they raised capital from qualified third-party investors,
such as pension funds and university endowments—an investing company such as ours,
taking a long-term view. Black River Asset Management is a global alternative
asset management firm based in Minnetonka, Minnesota. It is an independently
managed subsidiary of Cargill—an international producer and marketer of food,
agricultural, financial and industrial products and services. Cargill is a
passive minority investor through one of the Black River funds and its
ownership translates to less than five per cent ownership in our company.
The committee was also told that for the purposes of the FATA, BFB Pty
Ltd was not considered to be a foreign company. As the following exchange
CHAIR: ...For the purposes of the act of foreign
investment [FATA], given that 83 per cent of [BFB Pty Ltd] is owned financially
by a foreign entity [Black River Asset Management], for the purposes of the
act, do you think you are a foreign company? Mr McBride, you might like to
Mr McBride: My understanding is that we [BFB Pty Ltd]
are not, according to the act.
Mr Brabin, then went on to indicate that the company purchased
significantly from businesses in the area:
Through our relationship with Black River, BFB has the
capital resources to grow our company, which allows us to continue creating
good jobs in the Temora community. Our company believes strongly in giving back
to the community. We have given in excess of $750,000 to the community since
inception. We support most of the Temora area sports and have given to numerous
projects, such as our community heated pool.
Mr Brabin also highlighted that the decisions for developing the
business were not direct by the foreign investors:
...basically in our business we have a strategy of developing
our core property and getting some efficiencies by having some properties close
to each other. When we got to a certain level, we undertook to buy
strategically rather than commercially. Hence our Billabong, Jugiong and Kara
purchases. They were bought purely for strategic reasons—for drought risk management.
I should make it clear that for every single property that we have bought we
have had no influence from our investors. I have made the decision on every
single property that we have bought.
The committee notes the evidence it received stating that BFB Pty Ltd
was not considered a foreign company for the purposes of the FATA. This is
despite clear ties that BFB Pty Ltd has to the foreign entity, Black River
Asset Management. As a result, the committee is concerned that there are
structures that companies can use to avoid coverage of the FATA despite clear
financial relationships to foreign entities. Therefore, as per recommendation six
(chapter three), the committee considers that it is essential that the
agricultural land register capture comprehensive information about company
structures and foreign investment, including foreign debt structuring and
The committee considers that the current investment threshold for
private foreign entities is not appropriate for agricultural land and business.
Very few Australian farm purchases trigger a FIRB review yet the impact of
foreign investments below the $248 million threshold on local economies could
be significant. The committee is concerned that many and perhaps virtually all private
foreign acquisitions of agricultural land and business are proceeding without
any consideration of whether it is in Australia's national interest. In the
committee's view this is largely out of step with contemporary community
expectations. Accordingly the committee believes that a new threshold for
foreign acquisitions of agricultural land and business is needed.
In addition, the committee is concerned about the prospect of
progressive purchases below the FIRB threshold having significant cumulative
effects. The committee is pleased that FIRB has acknowledged this as an issue
and it encourages FIRB to continue to develop mechanisms to identify cases of
cumulative purchases. However, the committee is also of the view that FIRB does
not currently have the capability to make significant in-roads in this area
unless it is required to review foreign investment cases well below the current
threshold of $248 million.
Although the committee acknowledges the positive work of certain
privately‑owned foreign companies to contribute to local economies and
communities, the committee is far from reassured that this is always the case.
At the very least the lack of scrutiny of significant agricultural purchases
makes local communities very concerned that their interests are being
overlooked. It is the committee's view that under the current foreign
investment rules, the future of rural communities impacted by significant
purchases by foreign entities relies more on the goodwill of individual
companies than effective government regulation.
The committee recommends that the threshold for private foreign
investment in agricultural land be lowered to $15 million.
The committee also recommends that once cumulative purchases of
$15 million of private investment in agricultural land has been reached by
a private business or associated entities, any further investment by that
business or entity be required to receive FIRB approval regardless of value.
The committee recommends that FIRB reviews any proposed foreign
acquisition of an agribusiness where investment exceeds 15 per cent or more in
an agribusiness valued at $248 million (indexed annually) or exceeds $54
The committee recommends that the zero trigger required for approval by
FIRB for any purchase of agricultural land or an agribusiness by a state owned
enterprise will continue to apply.
The committee recommends that Australia's Foreign Investment Policy
(AFIP) be amended to clearly define the "interests of local
economies" and the "interests of local communities".
Furthermore, there should be a greater requirement for FIRB to take into account
these local interests in the assessment of foreign purchases of agricultural
Definition of "rural land"
The committee received evidence raising concerns about the
appropriateness of the definitions of 'Australian rural land' and 'Australian urban
land' in the FATA. This was of particular concern because "agricultural
land" and "agricultural businesses" are not specifically defined
in the FATA. Agricultural businesses are treated the same as any other businesses
and the distinction between 'rural land' and 'urban land' provides the clearest
guidance in the FATA regarding the arrangements for the agriculture industry.
The definition of rural land is set out in the FATA as follows:
Australian rural land means land situated in
Australia that is used wholly and exclusively for carrying on a business of
Furthermore, the FATA defines urban land simply as land that is not
Australian urban land means land situated in
Australia that is not Australian rural land.
The implication of such a definition was illustrated by the former Chair
of the FIRB, Mr John Phillips. The explanation shows how the definition came
about and why the focus on urban land existed:
...The legislation that we deal with deals with urban land.
It only deals with rural land as a business. My involvement does not go back to
the time when that legislation was written, but my understanding is that at the
time the legislation was put into the parliament one of the major concerns of
the legislators was what was happening in the housing market, particularly what
was happening with foreign investment in the housing market. This was still the
case when I first became the chairman. So there was a concentration on making
sure that the law covered what was described as urban land, but it seems that
people did not regard the rural land as being a problem in those days. So it
was just regarded as part of the normal turnover of business.
The current Chair of the FIRB, Mr Brian Wilson expanded the reasoning
for the urban and rural land distinction:
When the act was first put in place in 1975, land in total
was entirely excluded. In 1989 urban land, which was defined as everything
other than wholly rural land, was included largely, as I said earlier, around concerns
about Japanese investment in Queensland tourism and the like. As I understand
it, the main reason that all land was not brought into the net back in 1989 was
as a result of relatively effective lobbying by the farming lobby back at that
The committee received evidence that showed the inconsistency in the definitions
of rural land and urban land in the FATA to the common understandings of what such
land is in reality. The consequence of the current definitions is that land
used exclusively for agricultural production (i.e. 'rural land') is subject to
the higher national interest test threshold of $248 million, while very similar
land that was not used for agricultural purposes could be categorised as urban
land and subject to the much stricter review process for urban land.
This inconsistency was clearly demonstrated by following exchange with
the committee and the former Chair of the FIRB and other FIRB officials:
CHAIR: ...Can you explain the difference between urban
land and rural land under the act.
Mr Phillips: ...Everything that is
not urban land is rural land.
Ms Reinhardt: So rural land is land that is used for
12 months of the year for producing agricultural outputs. Urban land is all
Mr Phillips: We get some very funny situations—and I
blame you legislators for this—because we get some things that look as though
they are rural land but which, by definition under the act, are clearly—
CHAIR: ...does that mean you class land in the middle
of the Simpson Desert as urban land and you class a mine in the middle of the
Kimberleys as urban land but not the pastoral property next door?
Mr Phillips: We do not; the act does.
CHAIR: So that is actually the description?
Mr Phillips: I think that is fair enough. The act
defines one [Australian rural land] and everything else falls into the second
basket [Australian urban land].
CHAIR: So the Kimberleys is urban land?
Mr Phillips: If there is no agricultural production
Senator STERLE: I just want to clarify this, as a
regular visitor to the Kimberley for the last 30 years. What is the Kimberley?
It is cattle country, but what do you classify it as?
Ms Reinhardt: It would depend on the particular piece
of land and how it was used through the year.
Mr Phillips: If it was used for grazing cattle it
would be rural land.
Senator STERLE: ...The west Kimberley, particularly
the Dampier Peninsula, where there is no cattle grazing, would be urban?
Ms Reinhardt: Nonrural.
Mr Phillips: It would be nonrural, therefore it would
be treated as though it was urban land. But bear in mind the propositions that
would come forward in foreign investment there would almost certainly qualify
for examination not because of the land but because of the activity.
Aside from producing seemingly incongruous cases (such as the remote Dampier
Peninsula being defined as urban land rather than rural land), one submitter
argued that, because agricultural industry was included in the FATA in terms of
the 'rural land' definition, this has negative impacts on agricultural policy. This
submitter, the Agribusiness Council of Australia (ACA), noted that:
The restrictive definition of ‘agriculture’ in the [FATA]
restricts appropriate policy responses appropriate to Australia’s competitive
positioning of agriculture and agribusiness in the global marketplace.
The ACA explained further that the restrictive scope of the definition
limits the FATA to deal with important areas of the agricultural economy and
policy debates regarding the broader agricultural sector:
The definition of ‘agriculture’ used by the FIRB is
restricted, in the main, to agriculture or ‘farming operations’ and it
consequently detrimentally affects much of the administration of the Foreign
Acquisitions and Takeovers Act 1975 (FATA). There is much more to
agribusiness than farming. Therefore, contemporary approaches to analyses of
the economy is restricted to that, and thus whole swathes of the wider
‘agribusiness economic system’ are absent. This is a major flaw in this and
other modern policy debates on the Australian economy. Agribusiness is the
world’s largest industry – it is how the world feeds its entire peoples. In
that regard, the smaller subset of agriculture or farming grossly understates
the importance of the agribusiness sector (Australia’s the 2nd
largest industry), and effects its competitive stances in the global economy
accordingly [i.e. there is a constant tendency to devise piecemeal rather than
whole-of-system competitive stances (private sector) and policy responses
The ACA argued that the issue of definitions in the FATA should be
reviewed to reflect agribusiness more broadly and to this end it recommends:
That the RRAT Committee recommends to the government that the
FATA definition of “Australian Rural Land” be amended to reflect contemporary
meaning of the term ‘agribusiness’ so as to improve the efficacy of the
application of the [FATA] and its regulations in the national interest (i.e. to
enable strategic assessments on a whole-of-industry/economic sector basis).
Concern about the issue of land definition in the FATA is emerging as an
issue that also needs to be examined by the government as part of the set up a
register on foreign ownership of agricultural land. A Treasury official
summarised the alternative approaches to the definitions well:
It seems to me that if you were to come to a definition of
agricultural land there are a couple of ways you could do that. You could adopt
the land use definitions. There are a range of those. One of them you would be
familiar with in the FIRB area—the rural land definition. That is just one.
That is a regulatory definition. There are other definitions for land use that
might go to the ABS methods that use the ANZSIC classification. When you step
away from land use definitions you start to go into where land is located. That
is another way you can define agricultural land. That might be based on a
zoning arrangement that the states currently use. So there are a range of options
that we will need to explore.
This diversity of approaches shows the complexity of defining rural land.
The difficulty of applying the FATA definition of rural land appears to be
tacitly acknowledged by the Treasury because it is seeking consultation on which
definition should apply to the national foreign ownership register for
agricultural land that the government has announced it will establish.
The committee recognises that the FATA's definitions of 'urban land' and
'rural land' were developed in the context of concerns about foreign investment
in urban real estate purchases in the 1980s. As a result, urban land came to be
treated as all land not exclusively used for primary production—and, as noted
in chapter two there has been little change to the FATA since 1989.
However, the committee is of the view that these definitions lead to a range of
unintended consequences in today's context as the definitions provide separate
triggers for the application of the FIRB national interest test. First, the
current definitions make it difficult for interested parties, including the
public, parliamentarians, farmers and investors to interpret the nature and
governance of foreign investment in Australia.
In addition, the existence of seemingly absurd cases, such as large
tracts of outback and remote Australia being classed as urban land (and
therefore requiring FIRB to undertake a national interest assessment), has the
potential to erode public confidence in how the foreign investment review
Finally, if the definitions of ‘rural land’ in the proposed national
register on foreign interest in agricultural land and in the FATA are
different, then the usefulness of the information that can be obtained from the
register will be undermined. The committee considers that there is little value
in having different definitions of rural land for the FATA and the national
register, as the national register will be a key feature of assessing the
ongoing effectiveness of Australia's foreign investment framework as it applies
to the agriculture sector.
The committee recommends that the government update the definitions of
'Australian rural land' and 'Australian urban land' in the FATA with the aim of
more accurately reflecting the common understandings of these terms.
Definition of "direct investment"
It emerged during the inquiry that the definition of foreign "direct
investment" was somewhat imprecise despite an extensive definition of
direct investment being articulated in the 2012 version of the AFIP. The case
that brought this issue to light was Etihad's purchase of shares in Virgin
Australia (Virgin) in June 2012. While not an agriculture-related example, the
committee considered that the Etihad/Virgin issue could have a significant
impact on the conduct of the general FIRB process which covers the sale of
agricultural land and businesses to foreign entities.
At public hearings on 16 August 2012 and 11 October 2012, the committee
questioned FIRB regarding Etihad's investment in Virgin. The questions related
to Etihad's investment in June 2012 of a 4.99 per cent stake in Virgin and a
subsequent approval by FIRB in July 2012 for Etihad to invest in up to 10 per
cent of Virgin. FIRB was not notified by Etihad or Virgin about the initial
investment of 4.99 per cent.
Because Etihad is a foreign government entity, the committee was interested in
the operation of the $0 threshold for FIRB reviews in such instances.
The debate centred on the issue of whether Etihad's investment was
defined as "direct investment" in accordance with the AFIP (at the
time). In the 2012 AFIP, the obligation of foreign governments and related
entities to contact FIRB was stated as follows:
All foreign governments and their related entities should
notify the Government and get prior approval before making a direct investment
in Australia, regardless of the value of the investment. 
The definition of "direct investment" in the 2012 version of
the AFIP was:
A direct investment has the objective of establishing a
lasting interest in an asset(s), or a strategic long-term relationship with a
target enterprise. It may allow a significant degree of influence by the
investor in the management of the target.
It is common international practice to consider any
investment of 10 per cent or more as a direct investment. However, Australia’s
foreign investment regime is concerned with all investments that provide the
investor with influence or control over the target, including any indirect
Therefore, we consider that interests below 10 per cent may
also be direct investments and must also be notified if the acquiring foreign
government or related entity can use that investment to influence or control
the target. In particular, investments of less than 10 per cent which include
any of the following must be notified:
- preferential, special or veto voting rights;
- the ability to appoint directors; and
- contractual agreements including, but not restricted to, for loans,
provision of services and off take agreements...
Based on the evidence the committee received at the hearing on 16 August
2012 (discussed below) it was unclear whether or not, in circumstances such as
the Etihad investment in Virgin, FIRB should have been advised of the 4.99 per
cent investment. Two competing views of whether this should have happened were explained
to the committee.
The first view was that FIRB should have been notified of the 4.99 per
cent purchase. Mr Murphy, Executive Director, Markets Group, the Treasury
stated that although the AFIP was a 'little unclear in terms of direct and portfolio
investment', it was nevertheless 'the preference of the government and the rule
under the policy that all investments by state owned enterprises are
notified to the government as of zero dollars.'
This first view also appears consistent with information on the FIRB
website (in 2012) that stated that proposals for the acquisition of assets or
shares should be notified to the government 'where any doubt exists as to
whether they are notifiable.'
The alternative view was that FIRB did not need notification of such an
investment because it did not qualify as 'direct investment'. Under this view,
the 4.99 per cent purchase (because it was less than a 10 per cent stake)
would be direct investment only if it 'has the objective of establishing a lasting
interest in an asset(s), or a strategic long-term relationship with a target
The FIRB Chair told the committee that 'Etihad already had a
strategic and long-term interest in Virgin... [including] a codeshare agreement
and a cooperation agreement'.
Because this condition existed, it was open to interpretation that the
4.99 per cent purchase was not a direct investment because it was not establishing
the strategic interest (and it was less than 10 per cent investment).
At the public hearing on 16 August 2012, the FIRB Chair indicated that
information would be published on the FIRB website to clarify the issue
The committee followed up on the issue of website information at the hearing on
10 October 2012. To this the FIRB Chair responded:
Yes, we have looked hard at the definition... In looking at
the definition we considered that there were a number of aspects that needed to
be worked through so that we have something that is watertight. When you have
these definitions, particularly when some of the issues are those that are
subtle, to the extent we are codifying it, it is important to get it right. To
get it absolutely right this time we are working through that. We are
consulting widely in a legal sense, and the like, to ensure that when we do get
it up on the site it is absolutely clear.
The 2013 version of the AFIP has changed the definition of 'direct
investment'. These changes include the addition of 'building or maintaining
a strategic or long-term relationship with a target entity' to the definition
of direct investment [emphasis added].
The committee is pleased that the FIRB has recognised that the previous definition
of direct investment was an issue that required further examination. The
committee is also pleased that the government subsequently updated the
definition of 'direct investment' in the 2013 version of the AFIP. Had the
government not made this change, the committee would have recommended that it
did so. The committee considers that the FIRB should continue to monitor the
issue to ensure that the updated definition effectively prevents similar
misinterpretations (as discussed in the case above) from occurring in the
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