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COVID-19: TEMPORARY CHANGES TO THE FOREIGN INVESTMENT FRAMEWORK

COVID-19: TEMPORARY CHANGES TO THE FOREIGN INVESTMENT FRAMEWORK

  • April 28, 2020
  • April Peterson
  • Comments Off on COVID-19: TEMPORARY CHANGES TO THE FOREIGN INVESTMENT FRAMEWORK

28 April 2020

Prepared by Darryl Kipping, Dora van der Westhuyzen and Rachel Taweel

On Sunday 29 March 2020, the Commonwealth Government announced significant temporary changes to the foreign investment framework in Australia in response to COVID-19.  Full details of the announcement can be found here.  On Friday 24 April 2020, the Foreign Investment Review Board (FIRB), released a guidance note to address the effects of the changes that can be accessed here.

WHEN WILL THE CHANGES COME INTO EFFECT?

These temporary changes took effect from 10:30pm AEST, 29 March 2020 (Effective Date), and will apply for at least 6 months, subject to the duration of the COVID-19 pandemic period being extended.  

WHO DOES IT APPLY TO?

The changes will apply to all foreign persons and entities subject to the Foreign Acquisitions and Takeovers Act 1975 (Act), regardless of the investor’s country of origin or the nature of the foreign investor (whether a private or government investor).

The Act defines foreign persons as:

  • an individual who is not ‘ordinarily resident’ in Australia;
  • a corporation or the trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest;
  • a corporation or the trustee of a trust in which 2 or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, hold an aggregate substantial interest;
  • a foreign government; or
  • any other person that meets the conditions, prescribed by the regulations in the Act.

WHAT ARE THE TEMPORARY CHANGES?

The key changes which will impact foreign investors are:

$0 Monetary screening thresholds

All proposed foreign investments into Australia, subject to the Act, will temporarily require screening and approval through FIRB.  The monetary screening thresholds have all been reduced to $0 for all foreign investments under the Act, regardless of the value of the investment, asset class or the nature of the foreign investor. 

In his announcement, the Treasurer stated, “this is not an investment freeze”, it simply means there will be additional examination into all foreign investments.

Extended deadlines for review of 6 months

The volume of FIRB applications is expected to increase significantly due to the changes and in anticipation of this FIRB extend the statutory timeframes for reviewing applications from 30 days to 6 months.  

On 23 March 2020, FIRB announced it will consider refunding application fees where applicants wish to withdraw their applications to either delay or defer their investment as a direct result of these COVID-19 measures.  FIRB noted this is a temporary exception to the advice provided in Guidance Note 29 and Guidance Note 30 concerning fee refunds in the event of a withdrawal.

WHAT ABOUT URGENT APPLICATIONS?

FIRB will prioritise urgent applications for investments that protect and support Australian businesses and jobs, to be determined on a case by case basis.  Any applicant looking to prioritise its application will be required to demonstrate how the proposed investment will meet such key objectives.

WHAT ABOUT AGREEMENTS ENTERED INTO PRIOR TO 29 MARCH 2020?

The changes do not apply to agreements entered into prior to the Effective Date. This includes agreements that are not yet completed or remain subject to conditions.

WHAT ABOUT INTERESTS IN DEVELOPED COMMERCIAL LAND AND LEASES?

FIRB approval will be required for the following transactions concerning developed commercial land (for example, offices, retail stores and warehouses) irrespective of the value of the acquisition or transaction:

  • the acquisition of developed commercial land; or
  • the entry into a lease over developed commercial land where the term of the lease (including any extension or renewal) is reasonably likely, at the time it is entered into, to exceed five years.

FIRB noted “where landlords are simply extending leases under existing options to renew, it is likely that this would not, of itself, give rise to any new significant and/or notifiable action under the Foreign Acquisitions and Takeovers Act (FATA).  Section 15 of the FATA establishes the rule that, if a person has an option to acquire an interest in land, then they are taken to have acquired the interest in land at the time they acquire the option (whether or not they subsequently exercise that option).”

RE-NEGOTIATED LEASES

Where an adjustment is made to reduce, defer, or otherwise delay rental payments under an existing lease, particularly where such adjustment is made in relation to the COVID-19 Pandemic and is temporary in nature, this in itself would not be considered a ‘material’ variation to the lease agreement for the purposes of section 25 of the FATA (and therefore not give rise to a new significant or notifiable action occurring).

WHAT REMAINS UNCHANGED?

The changes do not affect or amend the:

  • definitions of notifiable or significant actions under the Act, other than the monetary threshold component of those definitions;
  • definition of a ‘foreign person’;
  • current proportionate or percentage ownership thresholds; or
  • current FIRB exemptions.

Foreign investment into Australia will continue through the following investments which remain exempt from FIRB approval:

  • privately-owned foreign investors acquiring less than 20% in a non-land rich entity;
  • a privately-owned foreign investor acquiring less than 10% interest in a land rich entity; and
  • a foreign government investor acquiring less than 10% in an Australian entity or business, regardless of value, or the start of a new business in Australia by a foreign government investor.

WHAT DOES THIS MEAN FOR FOREIGN INVESTORS?

  • The processing time extension will affect completion dates in transactions where the acquisition is subject to FIRB approval;
  • short turnaround times for developed commercial real estate settlements will likely be impracticable;
  • parties to smaller transactions that were previously not required to apply for approval will have to notify FIRB of proposed transactions; and
  • all sales will now incur FIRB fees (with the cost of fees dependant on the value of the transaction).

THE AUSTRALIAN OPPORTUNITY

For Australian investors, this potentially creates a significant advantage in relation to timing and being able to commit to a transaction which does not require FIRB approval which is subject to the temporary 6-month processing time.

OUR RECOMMENDATIONS

  • Investors which are wholly or partly foreign owned are strongly advised to seek legal advice in relation to any proposed investment or transaction, particularly given FIRB is yet to release their guide in relation to the changes.
  • All foreign investors should consider obtaining an exemption certificate for a program of acquisitions of interests in kinds of land (for example an investor considering various locations and land acquisitions to facilitate the development of a number of commercial properties) which provides the up-front approval for a program of land acquisitions (multiple acquisitions) without the need to seek separate approvals.
  • Where appropriate, all foreign investors should consider lodging their applications with FIRB as early as possible and allow for significant delays during review of their application.
  • Where parties entered into agreements prior to the Effective Date, consideration should be given to the FIRB approval deadline under the agreement and whether it is considered appropriate given the changes and increase in the processing time for applications.
  • For contracts entered into prior to the Effective Date where it is unlikely that a FIRB approval deadline can be met, parties should consider amending/varying or extending the FIRB approval deadline, or submit an application for urgent processing (in which priority will be given to investments that will support Australian businesses and jobs).
  • Parties who propose to enter into any new agreements should consider the implications of the changes and consider the increase in timing for obtaining FIRB approval prior to negotiating or agreeing to commercial deadlines.
  • Where a transaction is genuinely urgent, parties will need to clearly substantiate the benefits the transaction may provide for Australian businesses and Australian jobs.

It should be noted that foreign persons who fail to meet their obligations under the Act, including the temporary changes, may be subject to a disposal order, civil penalty orders and/or criminal prosecutions.

WE CAN HELP

We are available to advise foreign investors, developers, sellers and agents on how these changes may impact any proposed transaction or if you require assistance amending or preparing a sales contract to capture these changes.

All information is current as of 10:00am on 28 April 2020, based on publicly available information.

Disclaimer: This update does not intend to provide legal advice and should not be relied upon as such. If you require independent legal advice or would like to discuss any of the issues raised that may be applicable to your situation, please do not hesitate to contact our team.

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