Overview of recent changes to foreign investment laws

16 March 2021


The Commonwealth Treasurer announced the introduction of new changes to Australia’s foreign investment regime on 5 June 2020 in response to increased national security risks and to ensure stronger compliance to FIRB’s approval conditions.

Following extensive consultation, changes created by the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 (Cth) (Reform Act), the Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 (Cth) (Reform Regulations) and the Foreign Acquisitions and Takeovers Fees Imposition Amendment Act 2020 (Cth) (Fees Act) took effect from 1 January 2021. Upon the commencement of the Reform Act, Reform Regulations and Fees Act, temporary COVID-19 changes (see link to our previous article) were lifted.


Summary of changes

The key changes resulting from the Reform Act and Regulations include:

  • the introduction of a new category of ‘national security business’ and the enforcement of mandatory review of all investments relating to this new category of businesses. We note that this category also includes a carve out meaning that an entity will not be a ‘national security business’ unless it is publicly known, or could be known upon the making of reasonable inquiries, that the entity meets the criteria for being a ‘national security business’ (described below);
  • the narrowing of the ‘money lending exemption’ from FIRB approval for foreign lenders;
  • a new register of foreign ownership of Australian businesses and assets;
  • increased penalties for non-compliance;
  • a new ‘call-in’ power, enabling the Treasurer to review certain actions which may pose national security concerns, notwithstanding FIRB approval was not compulsory and was not obtained; and
  • the ‘last resort’ power, enabling the Treasurer to review, in exceptional circumstances, FIRB-approved actions and make necessary orders or restrictions in respect of such actions;
  • the narrowing of the definition of a ‘foreign government investor’ to prevent unnecessary screening of small, passive foreign government investments in private investment funds;
  • the reinstatement of monetary thresholds (below which FIRB approval is not required) that were in place before the COVID-19 pandemic and accordingly adjusted for indexation from 1 January 2021; and
  • the broadening of the definition of a ‘media business’ to include online-only businesses subject to a threshold test of an average daily audience of more than 10,000 people.

For a greater understanding of the changes, please see the booklet prepared by the Treasury here


New national security test

To protect Australia’s national security, a new national security test has also been introduced.

This national security test allows the Treasurer to review any acquisition that is of a direct interest by a foreign person on national security grounds, regardless of the value of the investment. Furthermore, the test empowers the Treasurer to mitigate national security concerns by imposing conditions, or if necessary, prohibiting the proposed investment.

National security will also be enhanced through the following measures under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA):


Sensitive national security business

From 1 January 2021, foreign persons acquiring a direct interest (at least 10 per cent or an interest resulting in change of control) in a ‘sensitive national security business’, or where a foreign person commences activities of such a business, now need to notify and obtain foreign investment approval prior to making the acquisition.

A 'sensitive national security business' is an Australian business that meets certain defined categories, including those that relate to telecommunications, defence and national security, and sensitive data, amongst other things.


New ‘call in’ power

From 1 January 2021, the Treasurer now has the power to ‘call in’ an investment (before or after it occurs) that is a significant action under the Act to review whether it raises national security concerns and passes the prescribed national security test. There will be a 10-year time limit on the use of this power. It is expected that FIRB will provide guidance on when this power may be exercised. The option of voluntary notification of proposed investments will still be available to investors. Alongside this, investors can also apply for exemption certificates permitting the acquisition of multiple eligible investments without the hassle of case-by-case screening.


‘Last resort’ power

The ‘last resort’ power will give the Treasurer the ability to call in foreign investments that were previously approved to be reassessed where national security risks later emerge. This will only apply to future foreign investments, and only to those that have been subject to review under the legislation. This power is similar to the last resort powers already in place in relation to critical infrastructure under the Security of Critical Infrastructure Act 2018 (Cth), giving the Treasurer the ability to:

  • impose new conditions on approved investments; or
  • ‘as a last resort’ and subject to a number of specific criteria, require divestment of the business, entity or land.

Although enforcement of the power cannot occur retrospectively, investors should take note that the commencement of new business activities by existing businesses may be subject to both the ‘call in’ power and consequently the ‘last resort’ power.


Other FATA amendments

Two other key amendments to FATA include:

  • a voluntary notification option for investors to avoid the possibility of being ‘called in’ for review on national security grounds; and
  • the opportunity to apply for a time-limited investor-specific exemption certificate to allow for acquisitions without case-by-case screening.


Foreign investment funds – ‘Foreign Government Investor’ definition and exemptions

From 1 January 2021, foreign investors that are 40% owned in aggregate by multiple foreign governments will no longer be considered ‘foreign government investors’ (FGIs) provided that the FGI’s interest does not have influence or control over the Australian business, entity or land.

Foreign investors that are 20% owned by a single foreign government are still considered FGIs. However, exemption certificates for particular time periods can be applied for, where an absence of influence or control can be demonstrated (for example, a private equity limited partnership with foreign government pension funds invested, where the real control is in the hands of the general partner). This exemption is a very welcome approach to cater for the increase in private equity investment in the Australian M&A market and introduces a more streamlined approach in the screening of foreign investors.


Moneylending exemption

The scope of the moneylending exemption has been narrowed so that FIRB approval is required prior to the acquisition by a foreign investor of an interest in securities, assets, a trust, Australian land or a tenement in a ‘sensitive national security business’, where the interest will be held solely by way of security for the purpose a moneylending agreement.


FIRB approval required for increased foreign holdings in companies

Where a foreign person increases its proportional holdings by 20% above what was already approved by FIRB, the increase will require FIRB approval. This is primarily to prevent ‘creep’ acquisitions, share buybacks or selective capital reductions and to minimise the gaps in the FIRB regime.


Stronger penalties, compliance and enforcement powers

The Treasurer and the ATO will be empowered to more effectively monitor, investigate and prosecute breaches of foreign investment laws. Furthermore, there  has been an increase of civil and criminal penalties under the Act and an expansion of the infringement notices regime to ensure effective deterrence (including the introduction of minor breaches and penalty by infringement notices).


Integrity measures

The Treasurer has been empowered to impose new penalties and has the power to add conditions or require divestment of investments, where investors who have previously obtained FIRB approval or an exemption certificate are found to have made incorrect statements or omitted material information from such applications.

The current tracing rules have been extended to include unincorporated limited partnerships in addition to corporations and trusts. This will ensure all offshore acquisitions that involve downstream Australian businesses are captured under the indexed thresholds.


FIRB applications – fees and timing

The review of fees has taken into account the increased roles and responsibilities of FIRB, and increasing costs of the review process.

In respect of time periods, FIRB has new powers to extend the 30-day decision deadline by up to 90 days for complex or sensitive applications. Previously, this 30-day decision period was only extended by way of request by an applicant.


Closing comments

These changes increase the importance of considering whether a transaction requires FIRB approval. If you would like to discuss your current business arrangements with one of our transaction experts, please contact the author or Chris Floreani, Principal in our transactions team.


This article provides general comments only.  It does not purport to be legal advice.  Before acting on the basis of any material contained in this article, we recommend that you seek professional advice.



Jessica Le, Lawyer in our Transactions Team

Email:  jle@dmawlawyers.com.au
Direct Telephone:  +61 8 8210 2269