Treasurer pushes forward with foreign investment reforms

The Australian Government has released the first tranche of draft regulation for its proposed reforms to Australia’s foreign investment regime, due to come into effect from 1 January 2021, and recently completed a consultation process on this first tranche of draft regulations.

The second tranche of exposure draft regulations are due to be released later this month.

What are the key proposals?

The key elements of the Treasurer’s proposed reforms were outlined in our article “Proposed shake-up of Australia’s foreign investment regime

The proposals included (amongst others):

  1. Introducing a new national security test – this will provide the Treasurer with greater powers to scrutinise, block or impose conditions on investments based on national security grounds (irrespective of the dollar value of the investment).
  2. Broadening notification requirements in relation to national security businesses.
  3. A right to “call in” existing investments for review on national security grounds.
  4. Providing the Treasurer with a right to cause divestiture of investments on national security grounds, even if the investments was previously approved.
  5. Introduction of a Foreign Ownership Register (broader than the existing land and water registers maintained by the ATO)

Clarity around what constitutes a ‘notifiable national security action’?

The first stage of exposure draft regulations provides detail as to what will constitute a ‘notifiable national security action’.

In summary, foreign persons will be required to notify the Treasurer if the person starts, or acquires a direct interests in a ‘national security business’ or an interest in ‘national security land’. Notification will not be subject to any monetary thresholds in relation the size or value of the business or land.

‘National security land’ is proposed to include Australian land in which an agency in the national intelligence community has an interests or a prospective interest.

A business will constitute a ‘national security business’ if it operates in Australia and falls into any of the following categories:

  1. Critical infrastructure: The business holds assets regulated under the Security of Critical Infrastructure Act 2018 (covering certain assets in the water, gas, electricity and port sectors).
  2. Telecommunications providers: The business is a carrier or a carriage service provider to which the Telecommunications Act 1997 applies.
  3. Defence critical goods and technology: The business is involved in the development, manufacture or supply of critical goods or critical technology intended to be for a military end-use by defence or intelligence personnel in activities relating to Australia’s national security (or by the defence force of another country in activities that may affect Australia’s national security).
  4. Defence critical services: The business supplies critical services to defence or intelligence personnel in activities relating to Australia’s national security (or to the defence force of another country in activities that may affect Australia’s national security).
  5. Critical Information: The business, stores, has access to or collects certain classified information or personal information on Australia’s intelligence personnel.

Each of these categories are defined broadly which will give the Treasurer room to frame an approach to assessment that provides the Australian Government with flexibility (and if they desire, a broad ambit) in its review of investments that relate to Australia’s critical infrastructure, information storage and defence industries.

“Call-in” and “last resort” powers

As previously foreshadowed, the exposure legislation includes an ability for the Treasurer to review transactions, or foreign ownership in Australian assets, that pose a national security concern. Subject to the ‘national security concern’ requirement, this power of review is quite broad but will only apply to transactions that are taken after 1 January 2021 and to which a ‘no objection’ status or exemption certificate has not been granted.

The ‘last resort’ powers gives the Treasurer power – on the basis of national security concerns – to impose or vary conditions, or as a last resort, require the divestment of investments which have previously been cleared by the Treasurer.

Each of these powers, whilst intended to only be used sparingly, are broad in their reach.

When will further detail be released?

Drafts of the remainder of the regulatory amendments are due for release and consultation in September 2020. The Treasurer is still targeting implementation on 1 January 2021.

What should I be thinking about?

Any persons in the critical infrastructure, data and defence industries should be paying close attention to these new regulations as they move towards implementation at the beginning of 2021.

The proposed regime will also have an impact on M&A and investment transactions in these industries – including transactions processes, scope of diligence and an investor’s or investee’s approach to FIRB notifications for such transactions (even if it is not technically required). If you would like to discuss the proposed changes, please contact Michael Garry.