The Federal Investment Review Board has implemented significant and wide reaching changes to the foreign investment regime.
One major change is the introduction of new exemption certificates for businesses and in respect of residential property.
Affected foreign investors are strongly encouraged to consult with the Foreign Investment Review Board, if necessary, before undertaking further investment activities.
The Australian government welcomes foreign investment and recognises the positive effects it has on the continued growth of the Australian economy. Properly structured and carefully assessed foreign investment creates new jobs, provides access to markets, promotes healthy competition, encourages innovation and contributes to Australia’s GDP. Foreign investment proposals are reviewed against Australia’s national interest on a case by case basis and in accordance with the provisions of the foreign investment legislation. A failure to comply with the conditions imposed by the foreign investment regime may give rise to significant penalties.
On 1 July 2017 significant changes were introduced to Australia’s foreign investment framework. The changes have broadly been promised to simplify, streamline and enhance processes.
As a part of the reform, two new exemption certificates have been introduced to improve multiple transaction processes:
- the “residential land (new and near new) dwelling” exemption certificate (the New Exemption); and
- the “exemption certificate for businesses and entities” (the Business Exemption).
The reform also saw the introduction of the “residential land (other than established dwelling)” exemption (not discussed).
New Exemption certificates
The New Exemption has been introduced to rectify a longstanding loophole affecting failed off-the-plan purchases. As it stood, under the original “new dwelling exemption” (the Original Exemption) foreign investors could seek an exemption when purchasing new residential property. For the purposes of the foreign investment legislation, a “new” property” is defined as a property that has not been previously sold. A property is considered to be sold once a binding purchase agreement is entered into with the purchaser, regardless of whether the property proceeds to completion. New properties in respect of which a purchase agreement has been entered into but which do not proceed to completion fall outside the ambit of the Original Exemption, leaving developers and foreign investors feeling frustrated.
Under the New Exemption, developers (Australian and foreign) can apply for an exemption certificate for specified developments, being those:
- which contemplate 50 or more dwellings (not including townhouses);
- in respect of which development approval has been granted; and
- in respect of which foreign investment approval has been granted (if applicable).
What does this mean? It means that individual foreign investors will not be required to seek their own foreign investment approval to purchase new or near-new residential dwellings, provided that the cumulative value of the dwellings in any single development does not exceed $3 million.
The New Exemption will not apply to developments for the construction of house and land packages and developers will only be allowed to sell a maximum of 50% of the total dwellings forming part of a development to foreign persons.
Example: Oz Builders Pty Ltd wishes to construct a 150 dwelling apartment complex. The local government has authorised the development subject to Oz Builders Pty Ltd obtaining the approval of the transit authority. Oz Builders Pty Ltd would not meet the eligibility criteria for a New Exemption until it obtained the approval of the transit authority.
Business Exemption certificates
The Business Exemption allows foreign investors to seek an exemption is respect of multiple acquisitions in:
- interest securities; or
- Australian businesses and/or entities.
The Business Exemption applies to “low risk” or “low sensitivity” transactions only and allows foreign investors to apply once prior to making multiple acquisitions, rather than having to notify before each separate acquisition. The Business Exemption is of particular value to foreign investors who may not have a precise target acquisition plan in mind but rather intend to undertake an exploratory exercise and make a series of investments in a particular industry or industry sector.
While there is no restriction on which type of foreign investor may apply for the Business Exception certificate, it is envisaged that typically applications should be made by or on behalf of corporate entities with an Australian investment history. First time investors are unlikely to qualify under the Business Exception.
Applications will be scrutinised on a case-by-case basis to ensure they are compliant with Australia’s national interest. Relevant considerations will include:
- the character of the investor;
- the nature of the Australian businesses in which the foreign investor wishes to invest;
- the purpose and scope of the acquisitions;
- the investor’s acquisition history;
- past compliance standing; and
- any national security risks posed by the proposed activity.
In circumstances where an investor obtains a Business Exemption certificate, the certificate will be issued subject to conditions which may include strict acquisition parameters and adherence to set time limits. As with other types of exemption certificates, the Business Exemption certificate will be subject to certain reporting requirements.
Post by Vanja Simic and John Kell