Key takeaways

The Australian government has announced a range of changes to make Australia's foreign investment framework "stronger, more streamlined and more transparent". The changes adopt a risk-based approach and include:

• An accelerated review process for known low-risk investors, intended to attract foreign capital to help modernise Australia's economy.
• Conversely, greater scrutiny of higher risk proposals and enhanced monitoring of foreign investment in sensitive sectors, intended to strengthen Australia's ability to protect its national interest.

These changes were included in Australia's Foreign Investment Policy on 1 May 2024, so their effect may become apparent immediately. The government has stated that most investors will see an improvement in processing times from 1 July 2024.

In depth

The Australian Treasury has amended its Foreign Investment Policy to reflect a new "risk-based" approach to foreign investment proposals. This will essentially involve a more streamlined approach to the processing of "lower risk" cases, allowing the government to focus more resources – and therefore greater scrutiny – on "higher risk" cases.

Streamlined processes

Lower risk investments will be subject to faster approval processes. Investments will continue to be considered on a case-by-case basis without guaranteed timeframes, but faster approvals may occur for:

• Investors with a strong track record of compliance with the foreign investment framework and other Australian laws, repeat investors who are well known to Treasury, are investing alone and not in a consortium with unknown investors, and/or investors who are genuinely passive in nature.
• Investments in non-sensitive sectors, such as manufacturing, professional services, commercial real estate, new housing, and mining of non-critical minerals, and which are not near sensitive government facilities.
• Transactions where the ownership structure is clear, including clarity as to ultimate control of the asset, land or entity, and transactions with less complex structures.

The Treasurer has stated that such investors should see an improvement in the speed of processing their applications from 1 July 2024.

To further encourage foreign investment and streamline low-risk applications, Treasury will also:

• Reduce the need for repeat foreign investors to provide duplicate information on issues such as ownership structures, where the information has not changed since their previous foreign investment application.
• Provide fee refunds for foreign investment applications where a bidder was unsuccessful in a competitive bid process.
• Adopt a target of processing 50% of applications within 30 days from 1 January 2025.
• Introduce a new exemption from mandatory notification requirements and fees for passive "interfunding transactions" (i.e. transactions between funds managed by the same or a related responsible entity, provided the acquiring fund has only passive investors). Treasury is consulting on draft regulations for this exemption until 31 May 2024.
• Align foreign investment review processes with investment attraction and facilitation functions across government.
• Allow foreign investors to purchase established Build to Rent properties, and apply lower application fees with respect to such transactions.

Greater scrutiny 

Efficiencies resulting from streamlining the approval process for low-risk applications should result in additional resources being freed up to focus on higher risk applications. The Treasurer has referred to low-risk applications "gumming up" the system.

Accordingly, Treasury will increase its scrutiny of foreign investment proposals in sensitive sectors including critical infrastructure, critical minerals, critical technology, investments in proximity to sensitive Australian Government facilities, and investments which involve holding or having access to sensitive data sets. These are areas where foreign investment may be seen to provide opportunities for espionage or sabotage, or where there are supply chain resilience concerns or a need to protect sensitive data, technology or capabilities.

This list of sensitive sectors is unsurprising, and such transactions are already subject to a high level of scrutiny. The amended Policy does not provide any further granularity or clarify what the implications of such higher levels of scrutiny might be – particularly in relation to timing, approval conditions (including relating to governance, operations, reporting requirements, etc) and requests for additional information. Relevant applications could be materially adversely impacted.

Other factors that may increase the scrutiny applied to investments include the particular investor, the structure of the transaction, and sectors with a high concentration of foreign ownership.

The government will also increase Treasury's compliance resources to better monitor and enforce the conditions imposed on such transactions, including an increase in on‑site visits, potentially paving the way for the exercise of existing government "call‑in" powers to review investments that raise national security concerns within 10 years.

Foreign investment proposals with certain higher risk tax characteristics will also receive greater scrutiny. These may include:

• Internal reorganisations or other intragroup transactions which may be part of a broader arrangement resulting in avoidance of Australian tax.
• Pre-sale structuring of Australian assets that presents risks to tax revenue on disposal by private equity or other investors.
• Related party financing arrangements to reduce Australian income tax or avoid withholding tax.
• Migration of assets such as intellectual property to related parties in effective low-tax jurisdictions.
• In particular, investments structured through effective low or no tax jurisdictions involving limited relevant economic activity.

Commentary 

These changes will be very welcome to many foreign investors with an existing track record of successful engagement with Australia's Foreign Investment Review Board (FIRB), particularly pension funds and other institutional investors from countries strategically aligned with Australia, notably within the Five Eyes alliance.

Conversely, investors from other countries, particularly those with government connections or in jurisdictions with high levels of government intervention, control or influence, and those proposing to invest in sensitive areas, are likely to find the path to approval even more onerous than currently. The Policy continues to state, however, that all proposals will be reviewed on a case-by-case basis, regardless of the country of investor.

Fee refunds in connection with competitive bid processes will be welcomed by bidders, given the drawbacks of the current fee credit regime, which did not achieve its objective of encouraging early engagement with FIRB.

While the target of processing 50% of applications within 30 days is encouraging, we expect that the decision-making period with respect to larger, more complex transactions, particularly those involving sensitive assets or foreign government investors, will continue to materially, and in many cases significantly, exceed the statutory 30-day decision-making period.

As most of these reforms (excluding the interfunding exemption) are policy-based or administrative and do not require implementing legislation, they strictly take effect immediately, potentially even for existing applications.

Please contact us for advice on any proposed investments in Australia.