Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)Overview and context for foreign investment reforms
Foreign investment is important for Australia's long term economic success, stability and prosperity. It creates jobs, improves productivity, enables the transfer of new technologies and connects Australian businesses to global supply chains. Foreign investment supports:
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- employment (one in ten jobs [1] are created by foreign businesses);
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- the national economy (businesses supported by foreign investment contribute more than a quarter of Industry Value Added); and
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- higher wages (foreign businesses pay wages that are on average $20,000 a year higher).
Australia remains one of the world's most attractive investment destinations, with an overabundance of high-quality investment opportunities that cannot be realised from domestic savings alone. As a net capital importing country, Australia's stable democracy; strong rule of law; highly-skilled and highly-educated workforce; proximity to dynamic and fast-growing markets; abundant natural resources and world-class industry capabilities; and strong and well managed economy, mean choosing to invest in Australia benefits both investors and Australians.
Australia's foreign direct investment (FDI) inflows reflect our status as a leading investment destination, which in the three years to 2019 averaged 3.3 per cent of GDP - compared with 1.7 per cent of GDP for the OECD and 1.5 per cent of GDP for the G20 economies. [2]
Recognising the benefits of economic openness, Australia has maintained an open and transparent foreign investment review framework for over 40 years. It is established clearly in legislation, providing transparency and certainty on our rules. Australia's case-by-case assessment of investment applications ensure proposals are not contrary to the national interest, and maintains public confidence in the integrity of the framework.
However, risks to Australia's national interest, particularly national security, have increased as a result of a confluence of developments - including rapid technological change and changes in the international security environment. The challenge remains balancing the settings to attract foreign capital that supports the economy, while protecting the national interest.
Foreign Investment Reforms
On 5 June 2020 the Government announced its intention to strengthen the foreign investment framework. These changes ensure the framework keeps pace with emerging risks and global developments.
The reforms build on the amendments the Government made to the foreign investment screening regime in 2015. Those reforms modernised the FATA by: bringing all foreign investment into the legislative framework; strengthening the Treasurer's oversight and enforcement of the residential real estate sector; providing greater scrutiny and transparency around agricultural investments; and introducing fees so that the cost of administering the foreign investment regime is borne by foreign investors and not Australian taxpayers.
Under the reforms, individual investments will continue to be reviewed on a case-by-case basis to ensure they are not contrary to the national interest. This is critical to protecting Australia's national interest and national security, and maintaining the Australian public's confidence in the foreign investment regime.
These reforms preserve the core principle underpinning Australia's foreign investment system: Australia welcomes foreign investment for the significant economic benefits it provides.
The reforms strike a balance between the benefits foreign investment into Australia brings and emerging national security concerns.
These comprehensive reforms improve and update the operation of the law across national security, compliance monitoring and enforcement, and integrity as well as streamlining requirements and making technical changes to improve the operation of the law. They strike the right balance between facilitating and attracting foreign investment while protecting the national interest.
National Security Review and Last Resort Power
Rising national security concerns have led many countries to review both their frameworks for screening inward investment and the way in which these frameworks are applied.
The reforms establish a new national security test which:
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- requires mandatory notification of any proposed direct investment in a sensitive 'national security business' (including starting such a business);
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- requires mandatory notification of any proposed investment in sensitive 'national security land';
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- requires the mandatory notification of interests in exploration tenements over national security land;
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- allows a significant action that has not been notified and certain actions not already captured under the FATA to be 'called in' for screening on national security grounds;
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- allows investors to voluntarily notify to receive investor certainty from 'call in' for a particular investment; and
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- in exceptional circumstances, allows the Treasurer to impose conditions, vary existing conditions, or, as a last resort, force the divestment of any realised investment which was subject to the FATA where national security concerns are identified.
Improving the integrity of the framework and technical amendments
The reforms clarify the operation of the change in control test for certain types of significant actions. Increases to approved holdings may also be subject to further approvals, including proportional increases through share buybacks and selective capital reductions.
Where a foreign person acquires a 'national security business' from the Commonwealth or a State, Territory or local government, the reforms ensure that the acquisition is not exempted from the operation of the FATA.
The tracing rules will be expanded to allow interests to be traced through unincorporated limited partnerships.
The Government has improved information sharing provisions to support compliance activities. There are also new information sharing provisions to allow the sharing of protected information with international counterparts where national security considerations are present.
The technical amendments have been made to improve the readability of existing provisions, rectify inconsistencies and address unintended consequences, with a focus on improving clarity for investors.
Improving compliance and additional enforcement tools
The reforms ensure that the Treasurer and Commissioner have enforcement, monitoring and investigative powers, in line with those of other regulators, including access to premises with consent or as permitted by warrant to gather information. This measure will improve the regulators' capabilities to monitor investor compliance and investigate potential non-compliance.
The Treasurer also has new powers to give directions to investors to prevent or address suspected breaches of conditions or of foreign investment laws. This gives the Treasurer flexibility to respond to actual or likely non-compliance.
Increased civil and criminal penalties under the FATA will ensure these penalties act as an effective deterrent. The increase to civil penalty amounts and enabling penalties to be calculated as a proportion of the benefit gained by wrongdoing or the value of the investment links the penalty imposed more directly with misconduct and provides a significant financial incentive for compliance.
The foreign investment infringement notices regime is extended to cover all types of breaches relating to foreign investments and enable proportionate, and appropriate enforcement action in response to investor non-compliance. A third tier of infringement notices applies to high value acquisitions. These changes enable the Treasurer and Commissioner of Taxation to respond to a broader range of compliance issues.
The Treasurer and Commissioner are empowered to remedy situations where foreign persons are given a no objection notification or an exemption certificate based on a foreign investment application that makes an incorrect statement, or omits an important piece of information. This will ensure that there is appropriate recourse available, should the Treasurer or Commissioner makes a decision based on false or misleading information.
Enforceable undertakings are able to be accepted by the Treasurer or Commissioner to manage compliance with the FATA.
To improve visibility of actual foreign investments, foreign persons who have been issued a no objection notification for a proposed action or an exemption certificate are required to notify the Treasurer of certain events.
A fairer and simpler framework for foreign investment fees
The fees applicable for foreign investors have been refined to ensure that fees are fairer and simpler, while ensuring that foreign investors, not Australian taxpayers, bear the costs of administering the foreign investment system.
Register of foreign owned Australian assets
The new Register of Foreign Ownership of Australian Assets will record all foreign interests acquired in Australian land; water entitlements and contractual water rights; and business acquisitions that require foreign investment approval, including acquisitions reviewed under the new national security test.