House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 1 - National security review and last resort power

Outline of chapter

1.1 Schedule 1 to the Bill amends the FATA to give the Treasurer powers to address new and emerging national security risks. These powers enable the Treasurer to protect the national interest - including national security - wherever risks arise from individual investment proposals taking into account the evolving geopolitical risks, technological change and the kinds of assets available to foreign investors.

1.2 The amendments provide 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), proposed investment in Australian land where the location or use of the land could prejudice Australia's national security ('national security land') or an interest in an exploration tenement which is over national security land;

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allows a significant action that has not been notified and certain actions not otherwise captured under the FATA to be 'called-in' for screening on national security grounds;

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allows investors to voluntarily notify of an action that could otherwise be called-in, to obtain certainty about the particular investment and prevent being called-in on national security grounds; and

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allows the Treasurer, in exceptional circumstances, 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.

1.3 Investments subject to the new national security test are assessed against factors that give rise to national security concerns.

1.4 The existing national interest test remains unchanged including the factors that typically underpin the assessment process, such as the character of the investor, competition, impact on the economy and community, national security and other Government policies (including tax).

1.5 In order to avoid overlap between the two tests, wherever the broader national interest test applies to a particular action, only that test is used in deciding which of the Treasurer's powers to use. This is because national security is already a relevant factor that the Treasurer considers when assessing the national interest.

National Security Review

Context of amendments

1.6 The FATA deals with certain actions to acquire interests in securities, assets or Australian land, and actions taken about entities and businesses that have a connection to Australia. Under the FATA, the Treasurer has powers for significant actions and must be informed of notifiable actions.

1.7 When exercising various powers under the FATA, the Treasurer considers whether the action is 'not contrary to the national interest' (the national interest test). The national interest test is not defined in the legislation but indicative criteria are set out in guidance material.

1.8 Once the Treasurer has exercised the Treasurer's powers under the FATA, either by issuing a no objection notification (with or without conditions) or prohibiting the proposed acquisitions, the Treasurer does not have subsequent powers to rescind approval after it is granted, provided that any conditions imposed or orders made by the Treasurer are met and the information contained in the original application was correct. The Treasurer can only vary approvals with the person's consent.

1.9 However, risks to Australia's national interest, particularly national security, are increasing as a result of a confluence of developments - including rapid technological change and changes in the international security environment.

1.10 In recent years, many countries have updated their foreign investment regimes to manage a range of new risks. In particular, both advanced and emerging economies have introduced changes to their foreign investment screening rules to strengthen the powers of government to scrutinise investment in sensitive sectors.

1.11 Currently, in Australia, foreign persons must notify the Treasurer of certain actions where the investment meets certain criteria, such as monetary or percentage thresholds that are dependent on the sector, nature of the investment and the country of the investor.

1.12 To ensure appropriate oversight during the coronavirus crisis, the Government announced on 29 March 2020 the temporary reduction to $0 of the monetary screening thresholds for all foreign investments subject to the FATA. Prior to the temporary changes made to the FATR in response to the coronavirus, foreign government investors faced a zero-dollar screening threshold but private investments under $275 million (or $1,192 million for our Free Trade Agreement partners) were not screened.

1.13 The presence of monetary thresholds means investments in some of our most sensitive sectors are not screened which could present vulnerabilities in the foreign investment screening process.

Summary of New Law

Notifiable National Security Actions

1.14 Schedule 1 to the Bill amends the FATA to define a new category of actions, 'notifiable national security actions' to describe actions that must be notified to the Treasurer for review regardless of the value of the investment or whether they are otherwise significant or notifiable actions.

1.15 These actions involve a foreign person acquiring an interest in national security land or an exploration tenement over national security land, or a direct interest in a national security business, or starting a national security business.

1.16 A notifiable national security action is an action that is, by its nature, likely to give rise to a national security concern that, regardless of its size or value, requires review by the Treasurer.

Call-in power

1.17 National security concerns may still be posed by actions that do not need to be notified. However, imposing further notification requirements to include all potentially concerning actions would disproportionately affect non-sensitive investments.

1.18 The Treasurer is able to review certain actions not otherwise captured by the FATA and significant actions that are not notified if the Treasurer considers the action, whether still proposed or already taken, poses a national security concern. This is referred to as a 'call-in' power.

1.19 The call-in power gives the Treasurer additional visibility and control over those investment proposals that may pose a national security concern without imposing a regulatory burden on those which are less likely to pose concerns. It is expected that the overwhelming majority of investments will not be called-in for review.

1.20 The Treasurer's powers regarding the actions are the same as the Treasurer's other powers in the FATA. The Treasurer may issue a no objection notification for the action, including with conditions; may require that the person divests assets; or may prohibit the action. However, in exercising these powers the Treasurer must consider whether the action is contrary to national security.

1.21 To provide investors with greater certainty, the Treasurer is not able to call-in an action that has been notified to the Treasurer or for which a no objection notification or exemption certificate exists.

1.22 A person can extinguish the Treasurer's ability to use the call-in power by voluntarily notifying of an action.

Last Resort Power

1.23 The last resort power gives the Treasurer a final opportunity to review actions for which no objection notifications have been given if exceptional circumstances arise.

1.24 If a national security risk arises in connection with an action then where certain circumstances exist the Treasurer may give orders directing persons to act to reduce the national security risk. That is, exercise the last resort power.

1.25 Prior to exercising the last resort power, a number of factors need to be present and conditions met. The last resort power may only be exercised if the Treasurer was notified of the action, an application for an exemption certificate was made, or the action was reviewed under the new call-in power. And since that time the business, structure or organisation of the person has changed, or the person's activities have changed, or the circumstances or market have changed, or the Treasurer becomes aware of a relevant material omission or misstatement by the foreign person.

1.26 In addition, before exercising the last resort power, the Treasurer must conduct a review, receive and consider advice in relation to the action from an agency in the national intelligence community, take reasonable steps to negotiate in good faith with the foreign person, and be satisfied that the use of other options under the existing regulatory systems of the Commonwealth, states and territories would not adequately reduce the national security risk.

1.27 The Treasurer must also be reasonably satisfied that the false or misleading statement or omission directly relates to the national security risk, the national security risk could not have been reasonably foreseen at the time of the original approval, or the relevant material change alters the nature of the national security risk.

1.28 If these requirements are satisfied and relevant considerations given, the Treasurer may impose conditions, or vary or revoke any conditions that have been imposed, and may make orders prohibiting an action or requiring the undoing of a part or whole of an action (including, as a last resort, requiring divestment).

Comparison of key features of new law and current law

1.29 The following table provides a comparison of the key features of the new law and the current law.

Notifiable National Security Actions

Detailed explanation of new law

1.30 A new type of action is defined in the FATA - a 'notifiable national security action'. [Schedule 1, items 4, 20, 55, 56 and 72, sections 3, 4, 38, 55A and 55B, and Part 2 (heading) of the FATA]

1.31 The definition of 'notifiable national security action' involves the concepts of 'national security land' and 'national security business'. A notifiable national security action is an action or a proposed action by a foreign person that is to:

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acquire a direct interest in a national security business;

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acquire a direct interest in an entity that carries on a national security business;

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start a national security business;

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acquire an interest in Australian land that at the time of the acquisition was national security land; or

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acquire a legal or equitable interest in an exploration tenement over Australian land that at the time of the acquisition is national security land.

1.32 The definitions of national security business and national security land will be prescribed in the FATR. [Schedule 1, item 18, section 4 of the FATA]

1.33 The FATR will define national security businesses to capture endeavours that if disrupted or carried out in a particular way, could create national security risks. This means that national security risks may arise if national security businesses are controlled or influenced by persons acting not in Australia's interests. For this reason it is important to enable the Treasurer the ability to review investments in such businesses by foreign investors.

1.34 Generally, national security businesses will be, are involved in or connected with critical infrastructure, defence, or the national intelligence community or their supply chains. Because of the broad range of factors that can contribute to national security concerns and the wide range of potentially significant enterprises, the definition includes activities that are not usually considered to be businesses. An endeavour may be a national security business as long as it is carried on wholly or partly in Australia, regardless of whether it is carried on in anticipation of profit or gain, and regardless of whether it is carried on by the Commonwealth, a state, a territory, a local governing body, or an entity wholly owned by them.

1.35 A definition of 'starts a national security business' is inserted into the FATA. A foreign person starts a national security business if the person starts to carry on a national security business, not merely because the person was already carrying on a national security business and establishes a new entity. [Schedule 1, items 20 and 27, sections 4 and 8A of the FATA]

1.36 A definition of national intelligence community is also inserted into the FATA and is given the same meaning as in the Office of National Intelligence Act 2018. [Schedule 1, item 18, section 4 of the FATA]

1.37 The FATR will also define national security land with reference to whether the land is defence premises or a national intelligence agency has an interest in the land.

1.38 The definitions of 'national security business' and 'national security land' will operate to require endeavours that are sufficiently likely to give rise to national security concerns to be notified to the Treasurer for review.

1.39 If an action would be a notifiable national security action if taken in relation to a stapled entity, the action is a notifiable national security action in relation to another one of the stapled entities. [Schedule 1, items 81 and 82, paragraphs 65(1)(c) and 65(1)(d) of the FATA]

1.40 A person proposing to take a notifiable national security action must give notice of the action to the Treasurer and must not take the action before receiving a no objection notification, an exemption certificate covering the action or before the decision period lapses, regardless of the size or value of the action. [Schedule 1, items 133 to 136, 139 to 141, and 217, Part 4 (heading), sections 80, 81 and 82, subsections 81(1), 81(2), and 82(1), and paragraph 135(3)(b) of the FATA]

1.41 A person who does not notify the Treasurer of a notifiable national security action may be committing an offence, contravening a civil penalty provision, or both. [Schedule 1, items 143, 147, 159, 163 and 173, section 83, paragraph 84(c), Subdivision A of Division 3 of Part 5 (heading), section 91 and subsection 94(1) of the FATA]

1.42 A person who takes a notifiable national security action before the day mentioned in section 82 of the FATA may be committing an offence, contravening a civil penalty provision, or both. [Schedule 1, items 150, 151, 152, 159, 168, 169, 171 and 174, sections 85 and 92, paragraph 85(b), Subdivision A of Division 3 of Part 5 (heading), paragraph 92(a) and subsection 94(2) of the FATA]

1.43 A notifiable national security action is an action that is by its nature so likely to give rise to a national security concern that regardless of its size or value, requires review by the Treasurer.

1.44 If the notifiable national security action is not otherwise required to be screened (for example an action that is not a significant action), then it will be assessed by the Treasurer on national security grounds and not national interest grounds. [Schedule 1, items 83, 84, 85, 87, 100, 118 and 119, sections 66, 67, subsections 67(1) and 69(1), paragraph 74(2)(a), subparagraph 74(2)(a)(ii) and Division 2 of Part 3 (heading) of the FATA]

1.45 The Treasurer can issue a prohibition order, interim order or disposal order, or issue a no objection notification with or without conditions. [Schedule 1, items 7, 83 to 85, 88 to 90, 93 to 97, 100, 101, 103, 106 to 109, 111, 112, 114, 116, 117, 122 and 124, sections 4, 66 and 67, subsections 67(2), 67(3), 68(2), 69(2), 69(4), paragraphs 70(1)(a) and 70(1)(b), sections 71 to 73, subdivision B of Division 2 of Part 3 (heading), subsection 74(1) and 75(1) and paragraph 76(4)(b) of the FATA]

1.46 If the action is both a notifiable national security action and a significant action then it will be reviewed by the Treasurer on national interest grounds. It is not intended that the national security reforms limit the scope of the national interest test. [Schedule 1, items 83 to 85, sections 66 and 67, and Division 2 of Part 3 (heading) of the FATA]

1.47 The Treasurer can issue a prohibition order, interim order or disposal order, or issue a no objection notification with or without conditions. [Schedule 1, items 19, 83 to 85, 88 to 90, 93 to 97, 101 to 103, 106, 107, 109, 111, 112, 114, 116, 122 and 124, sections 4, 66 and 67, Division 2 of Part 3 (heading), subsections 67(2), 67(3), 68(2) 69(2), 69(4), paragraphs 70(1)(a) and 70(1)(b), sections 71 to 73, Subdivision B of Division 2 of Part 3 (heading), paragraph 74(1)(b), subsection 74(1) and 75(1), and paragraph 76(4)(b) of the FATA]

Example 1.1

Compnay A, a foreign government investor, is proposing to acquire a 15 per cent interest in a critical defence manufacturer. As a foreign government investor, Company A is already subject to a zero dollar monetary screening threshold under the existing national interest test for acquisitions of direct interests in Australian entities or businesses. The proposed acquisition is subject to pre-acquisition notification as both a notifiable national security action, and as a significant and notifiable action. As part of the review process, the Treasurer will consider whether the proposed action would be contrary to Australia's national interest (which includes national security).

1.48 Treasurer has 30 days from when he is notified of a proposed notifiable national security action to make a decision or order. This timeframe can be extended consistent with other amendments being made by Schedule 1 to the Bill. [Schedule 1, item 129, sections 77 and 77A of the FATA]

1.49 In the same way that the Treasurer can vary an order or decision made about a significant action, the Treasurer can vary or revoke a decision or order made about a notifiable national security action. When the action is not also a significant action, the Treasurer must consider whether the variation is contrary to national security. [Schedule 1, items 120, 125 and 132, subsection 74(4) and 76(8), and sections 79L, 79M and 79N of the FATA]

1.50 The FATR will be amended to provide that a foreign person may seek an exemption certificate to undertake a program of acquisitions of actions or kinds of actions that are notifiable national security actions. The regulations may provide that actions of a kind specified in an exemption certificate are not notifiable national security actions, if they otherwise would be. The Treasurer will be able to revoke or vary the certificate if it is not contrary to national security. [Schedule 1, items 73 to 77 and 80, sections 56 and 63, subsections 60(2), section 62 (heading)62(1), paragraph 61(4)(b)of the FATA]

Consequential amendments

1.51 The existing anti-avoidance provisions in the FATA are updated to make clear that the Treasurer can consider national security risks when making an order about persons being considered associates. [Schedule 1 items 130 and 131, section 78 and paragraph 79(1)(b) of the FATA]

1.52 The existing record keeping requirements in the FATA are also updated so that a person must make and keep records of every act, transaction event or circumstance relating to a notifiable national security action. [Schedule 1, items 193 to 196, 199 and 237, Part 7 (heading), paragraphs 116(a) and 117(1)(a), section 116, and subparagraphs 117(1)(d)(i) and 117(1)(d)(ii) of the FATA]

Application and transitional provisions

1.53 The requirement to notify of a notifiable national security action applies to actions taken on or after 1 January 2021. Actions that are notified before this date because the action meets the definition of significant action, but a decision was not made, will be considered under the FATA against the national interest test. [Schedule 1, item 233]

1.54 If a person does notify of a national security action that will be taken on or after 1 January 2021 and that action is not a significant action or notifiable action and the notice is given to the Treasurer before 1 January 2021, the notice will be taken to have been given on or after 1 January 2021. In this way a person who knows that an action will meet the definition from 1 January 2021 does not need to delay notifying. [Schedule 1, item 227]

1.55 The application and transitional provisions are intended to ensure that the national security reform provisions do not apply in a way that would disrupt actions that have already occurred or agreements that have been entered into before 1 January 2021. [Schedule 1, items 230 to 232, 235, and 236]

Call-in power

Detailed explanation of new law

1.56 Schedule 1 to the Bill gives the Treasurer new powers to review actions that have been taken or that are proposed to be taken if the Treasurer considers that the action may pose a national security risk. [Schedule 1, items 2, 3, 55, 56 and 83, sections 3, 38, 66 and 66A, and Part 2 (heading) of the FATA]

1.57 The actions which may be subject to the Treasurer's new powers are a new type of action defined in the FATA as 'reviewable national security actions' and significant actions that have not been notified.

Reviewable national security actions

1.58 There are nine scenarios where a reviewable national security action may arise. In all scenarios an action will not be a reviewable national security action if it is otherwise a significant action, notifiable action or notifiable national security action. [Schedule 1, item 72, sections 55C, 55C, 55D, 55E, 55F and 55G of the FATA]

1.59 Broadly, reviewable national security actions are those actions expected to give foreign persons potential influence and rights, such as the ability to influence or participate in the central management or policy of an entity or business, or the right to occupy Australian land. This includes instances where a foreign person is already in a position to influence or participate in the central management or control of the entity, but as a result of the reviewable national security action gains further power to influence or participate

1.60 The first scenario where an action would be a reviewable national security action is where a person takes an action or proposes to take an action, to acquire an interest of any percentage in an entity, and as a result of the action a foreign person either:

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acquires or will acquire a direct interest in the entity and this is not otherwise a significant action, notifiable action or notifiable national security action;

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will be in a position, or a further position to influence or participate in the central management and control of the entity; or

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will be in a position, or a further position to influence or participate in or determine the policy of the entity. [Schedule 1, item 72, subsection 55D(1) of the FATA]

1.61 Where the circumstance is to acquire an interest in shares, the entity must be a corporation that carries on an Australian business or the holding entity of such a corporation. Otherwise, the entity must be a corporation that carries on an Australian business or the holding entity (other than a foreign corporation) of such a corporation. If the action involves a unit trust, the entity must be an Australian unit trust or a holding entity of an Australian unit trust. [Schedule 1, item 72, subsection 55D(3) of the FATA]

1.62 The second scenario is where a person takes an action or proposes to take an action that is to issue securities in an entity and as a result of the action a foreign person either:

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acquires or will acquire a direct interest in the entity and this is not otherwise a significant action, notifiable action or notifiable national security action;

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will be in a position, or a further position to influence or participate in the central management and control of the entity; or

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will be in a position, or a further position to influence or participate in or determine the policy of the entity. [Schedule 1, item 72, subsection 55D(2) of the FATA]

1.63 The third and fourth scenarios are where a person takes an action or proposes to take an action:

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to enter an agreement about the affairs of an entity under which one or more senior officers of the entity will be under an obligation to act in accordance with the directions, instructions, or wishes of a foreign person who holds a direct interest in the entity; or

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to alter a constituent document of an entity as a result of which one or more senior officers of the entity will be under an obligation to act in accordance with the directions, instructions or wishes of a foreign person. [Schedule 1, item 72, subsection 55D(2) of the FATA]

1.64 In the case of the second, third and fourth scenarios the entity must be, for an acquisition in shares or an issue of shares, a corporation that is a relevant entity that carries on an Australian business or the holding entity of such a corporation. For any other action relating to a corporation, the entity must be an Australian business or the holding entity (other than a foreign corporation) of such a corporation. If the action involves a unit trust, the entity must be an Australian unit trust or a holding entity of an Australian unit trust. [Schedule 1, item 72, subsection 55D(4) of the FATA]

Example 1.2

Company B, a foreign person, has a 10 per cent holding with no influence in the management of an entity, Company C. A new shareholder agreement is entered into which provides that all shareholders with a 10 per cent or more holding in Company C are to be directors on the board. As a result of the new shareholder agreement senior officers within Company C are subject to the directions and instructions of Company B. The action of entering into a new shareholder agreement would be a reviewable national security action.

1.65 The fifth, sixth and seventh scenarios where an action may be a reviewable national security action is where a person takes or proposes to take an action that is either:

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to acquire an interest of any percentage in an Australian business;

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to acquire an interest in the assets of an Australian business; or

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to enter or terminate a significant agreement with an Australian business. [Schedule 1, item 72, subsection 55E(1) of the FATA]

1.66 And as a result of the action or proposed action, the foreign person will:

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acquire or acquires a direct interest in the Australian business and this is not otherwise a significant action, notifiable action or notifiable national security action;

•

be in a position, or a further position to influence or participate in the central management and control of the Australian business; or

•

be in a position, or a further position to influence or participate in or determine the policy of the Australian business. [Schedule 1, item 72, subsection 55E(1) of the FATA]

Example 1.3

Company D, a large foreign-owned corporation, leases a widget from a small Australian business (Company E). As part of the lease arrangement, Company E agrees to Company D nominating a director to sit on the board of Company E. This would be a reviewable national security action.

1.67 The eighth scenario where an action may be a reviewable national security action is where a foreign person takes or proposes to take an interest in Australian land. [Schedule 1, item 72, section 55F of the FATA]

1.68 The final scenario where an action may be a reviewable national security action is where a foreign person starts or proposes to start an Australian business. [Schedule 1, item 72, subsection 55E(2) of the FATA]

1.69 The definition of a reviewable national security action requires that other definitions are also inserted into the FATA and that some existing definitions are amended. The following definitions are inserted into the FATA or amended by Schedule 1 to the Bill:

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to start an Australian business;

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an interest of specified percentage in an Australian business; and

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to acquire an interest of a specified percentage in an Australian business. [Schedule 1, items 7, 16, 20, 27, 34 and 41 sections 4, 8A, 16A and 19A of the FATA]

1.70 If an action would be a reviewable national security action if taken in relation to a stapled entity, the action is a reviewable national security action in relation to another one of the stapled entities. [Schedule 1, items 81 and 82, paragraphs 65(1)(c) and 65(1)(d) of the FATA]

Treasurer's power to call-in an action

1.71 The Treasurer is able to review a reviewable national security action or a significant action that has not been notified if the Treasurer considers that the action may pose a national security concern. [Schedule 1, item 83, sections 66 and 66A of the FATA]

1.72 From a practical perspective, a review by the Treasurer under the call-in power will operate in a similar way as if the person notified the action under the FATA, such as, a notifiable action. The information required will most likely be similar to the information required as part of a notification, so that the Treasurer has a comprehensive view of the action and persons who are taking, or who have taken the action.

1.73 If the Treasurer reviews an action using the call-in power the Treasurer must give a written notice to the person who proposes to take the action or who has taken the action, of the review. Once the Treasurer has issued the notice, the Treasurer has 30 days to issue a no objection notification (including with conditions) or issue an order requiring the disposal of the investment or prohibiting the investment, depending on whether the action has been taken or not. [Schedule 1, items 83 and 127 to 129, sections 6, 66A, 77 and 77A, and Division 3 of Part 3 (heading) of the FATA]

1.74 This 30 day timeframe leverages the existing 'decision period' in the FATA. This means that the timeframe may be extended at the request of the foreign person. Consistent with other changes being made by Schedule 1 to this Bill the decision period can also be extended at the Treasurer's discretion but not for longer than 90 days. [Schedule 1, items 127 to 129, sections 77 and 77A, and Division 3 of Part 3 (heading) of the FATA]

1.75 Once the Treasurer gives the person a notice of the review, and that action has not been taken yet, the person must not take the action before the earliest of 10 days after the end of the decision period, before the end of the period mentioned in an interim order or the day a no objection notification is given. [Schedule 1, items 140 and 141, section 82 of the FATA]

1.76 A person may commit an offence, contravene a civil penalty provision, or both, if the person takes an action while prohibited from doing so following the exercise of the call-in power. [Schedule 1, items 150, 151, 154, 159, 168, 169 and 171, sections 85 and 92, Subdivision A of Division 3 of Part 5 (heading) and paragraph 92(a) of the FATA]

1.77 If the Treasurer does not make an order or issue a no objection notification before the end of the decision period, the Treasurer's powers are extinguished, with the exception of the last resort power.

1.78 Similar to the existing FATA framework, the Treasurer is able to issue a no objection notification with or without conditions. The Treasurer will consider whether conditions are needed to ensure the action is not contrary to national security. The Treasurer is also able to vary or revoke an existing condition or impose a new condition with the person's consent and if it is not contrary to national security. [Schedule 1, items 19, 113 to 117, 122 and 124, section 4, paragraph 74(1)(a), subparagraph 74(1)(c)(ii) subsection 74(1) and 75(1) and paragraph 76(4)(b) of the FATA]

1.79 The possible orders the Treasurer could make are listed in the following table. The Treasurer is also able to issue an interim order. The Treasurer is able to vary or revoke an order if the Treasurer is satisfied that the variation or revocation is not contrary to national security. [Schedule 1, items 83 to 109, 111, 112, and sections 79L, 79M and 79N, sections 66 and 67, subsections 67(2), 67(3), 68(2), 69(1) 69(2), 69(4), paragraphs 67(1)(a), 69(1)(a), 70(1)(a) and 70(1)(b), sections 71 to 73, and sections 79L, 79M and 79N, and subdivision B of Division 2 of Part 3 (heading) of the FATA]

Table 1.1 - Treasurers powers for called in action

1.80 The orders are made as notifiable instruments and published on the Federal Register of Legislation. [Schedule 1, item 132, section 79M of the FATA]

1.81 The Treasurer is unable to review an action under the 'call-in' power if the person notified the Treasurer of the action or the Treasurer has issued a no objection notification about the action or an exemption certificate. The Treasurer is also unable to review an action if an order, being a disposal order, interim order or prohibition order, has been made about the action. [Schedule 1, item 83, subsection 66A(4) of the FATA]

1.82 In this way, if a person wants certainty that an action being taken, or that has been taken cannot later be reviewed by the Treasurer, with the exception of the last resort power, the person may voluntarily notify the Treasurer of the action. This is also similar to the existing FATA framework where a person may voluntarily notify of a significant but not notifiable action and extinguish the Treasurer's powers.

1.83 However, if a person gives notice of a proposed reviewable national security action the person is prevented from taking the action before a day mentioned in section 82. If the person does take the action before this time the person may commit an offence, contravene a civil penalty provision, or both. [Schedule 1, items 140, 141, 150 to 152, 168, 169, 171, section 82, subsection 82(1), sections 85 and 92, paragraphs 85(b) and 92(a) of the FATA]

1.84 A regulation making power is also included to limit the time period in which the Treasurer may start a review with reference to when the action was taken. [Schedule 1, item 83, subsection 66A(2) of the FATA]

1.85 Existing provisions in the FATA apply to deem when certain actions are taken. In very simple terms these existing provisions typically provide that an action is deemed to have been taken when an agreement has been entered into between the relevant parties.

1.86 For the purpose of determining when an action has been taken and when the time prescribed in the regulations will begin to countdown the amendments disregard the application of existing:

•

Paragraphs 15(1)(b) and 15(1)(c).

•

Paragraphs 17(1)(c) and 17(2)(c).

•

Subparagraphs 19A(1)(c)(ii) and 20(1)(c)(iii). [Schedule 1, item 83, subsection 66A(3) of the FATA]

1.87 This means that a person will not be deemed to have taken an action where the person has a right or option over an interest or asset but that right or option has not been exercised.

1.88 The FATR will be amended to provide that a foreign person may seek an exemption certificate to undertake a program of acquisitions of actions or kinds of actions that would otherwise be reviewable national security actions. Amendments are required to the FATA to support the regulations. The regulations may provide that actions of a kind specified in an exemption certificate are not reviewable national security actions, if they otherwise would be. The Treasurer may vary or revoke an exemption certificate if the Treasurer is satisfied that the variation or revocation is not contrary to national security. [Schedule 1, items 73 to 75, 77, 80, sections 56 and 63, subsections 60(2) and 62(1), paragraph 61(4)(b)of the FATA]

1.89 To assist in the review, the Treasurer can seek information from the person or any other person the Treasurer thinks has relevant information about the action under the existing information gathering powers in the FATA.

1.90 If the Treasurer asks for information, the person will need to provide this information within the period specified by the Treasurer, which may be less than 14 days. This is less than the timeframe allowed in the FATA in other circumstances where the Treasurer asks for information but reflects the need to consider any possible national security concerns promptly. [Schedule 1, items 214 and 215, paragraph 133(3)(a) and subsection 133(3) of the FATA]

Consequential amendments

1.91 The existing anti-avoidance provisions in the FATA are updated to make clear that the Treasurer can consider national security risks when making an order about persons being considered associates. [Schedule 1 items 130 and 131, section 78 and paragraph 79(1)(b) of the FATA]

1.92 The existing record keeping requirements in the FATA are also updated so that a person must make and keep records of every act, transaction event or circumstance relating to a reviewable national security action that was notified to the Treasurer. The record keeping requirements also apply to the disposal of an interest in residential land where the Treasurer called-in the action for review. [Schedule 1, items 193 to 195, 197, 200, 201, and 237, Part 7 (heading), paragraphs 116(a), 117(1)(a), 117(1)(d), 118(a), and section 116, of the FATA]

Application and transitional provisions

1.93 The call-in power can only be used by the Treasurer on actions that are taken or proposed to be taken on or after 1 January 2021. [Schedule 1, items 229 and 233]

1.94 If a person does notify of a reviewable national security action that will be taken on or after 1 January 2021 and the notice is given to the Treasurer before 1 January 2021, the notice will be taken to have been given on or after 1 January 2021. In this way a person who knows that an action will meet the definition from 1 January 2021 does not need to delay notifying if they are seeking reassurance that the action will not be called-in. [Schedule 1, item 228].

Last Resort Power

Detailed explanation of new law

1.95 Schedule 1 to the Bill introduces a new division that gives the Treasurer powers 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. [Schedule 1, item 132, sections 79E, 79G, 79H, 79J and 79K of the FATA]

1.96 The Treasurer must conduct a national security review of an action before using the last resort power. The foreign person is able to seek merits review of the outcome of the review. [Schedule 1, items 132 and 207, sections 79A and 130A of the FATA]

Review of Actions

1.97 The Treasurer is required to review an action before the last resort power may be available. [Schedule 1, item 132, sections 79C and 79F of the FATA]

1.98 Schedule 1 to the Bill limits the circumstances in which the Treasurer may exercise the last resort power by specifying that the Treasurer may only review actions if the Treasurer is satisfied that particular conditions are met. [Schedule 1, item 132, subsections 79A of the FATA]

1.99 The first condition is that any of the following circumstances has been met:

•

that the Treasurer has given a no objection notification or an exemption certificate about the action (or is deemed to have given one because a response to a notice of an action or an application for an exemption certificate was not provided within the decision period);

•

a notice imposing conditions under an earlier exercise of the last resort power has been given; or

•

an interim order was made, but no further orders were made after the time period expired.

[Schedule 1, item 132, paragraph 79A(1)(a) of the FATA]

1.100 The second condition is that at least one of three factors needs to be present. The three factors are:

•

a statement or omission that was false or misleading in a material particular was made orally or in the notification of the action or application for the exemption certificate, or that statement or notification omitted a matter or thing without which the statement was misleading in a material particular. This would include any subsequent communication by the investor about the statement or notification;

•

the business, structure or organisation of the person has, or the person's activities have, materially changed;

•

the circumstances or the market relevant to the action have materially changed. [Schedule 1, items 121 and 132, subsection 74(8) and paragraph 79A(1)(b) of the FATA]

1.101 If the conditions described above are met, the Treasurer may review the relevant action.

Example 1.4

Company F, a foreign person, was approved to acquire a controlling stake in an online gambling company operating in Australia. At the time of the application, Company F failed to declare the connection of several directors to money laundering crimes. This omission was material and misleading. The Treasurer may review this action.

Example 1.5

Company G, a foreign person, was approved to acquire a small data centre that hosted public news websites. Since the firm did not have active plans or a strategy to host more sensitive data, limited conditions were included in the no objection notification. After several years, a number of competitors go out of business, and Company G decides to expand its operations into other sectors, securing contracts to host sensitive intellectual property and customer records of a number of Australian banks. The Treasurer is able to review the action.

1.102 In reviewing an action, the Treasurer must decide whether a national security risk exists about the action. In doing so, the Treasurer must have received and considered advice from a relevant agency in the national intelligence community about the national security risks related to the action. [Schedule 1, item 132, subsection 79A(2) of the FATA]

1.103 To ensure that the person is aware of the review and is able to provide information to the Treasurer if they choose to, the Treasurer must notify the person of the review in writing unless doing so would prejudice Australia's national security interests. [Schedule 1, item 132, paragraph 79A(3)(a) of the FATA]

1.104 If the Treasurer gives a person a notice that a review is being conducted, and the person has not yet taken the action, then the person must not take the action until the review is completed and the Treasurer gives effect to the outcome of the review (by giving a no objection notification, a notice imposing conditions, an order or by notifying that further action will not be taken). This also applies to actions or kinds of actions covered by an exemption certificate. [Schedule 1, item 132, paragraph 79A(3)(b) and subsection 79A(4) of the FATA]

1.105 A person who takes an action while prevented from doing so because a review is being conducted, may be committing an offence, contravening a civil penalty provision, or both. [Schedule 1, items 155, 172 and 176, subsections 85A and 92A, and section 95 of the FATA]

1.106 If the Treasurer gives a person a notice that a review is being conducted and the person has taken the action, then the Treasurer may include in the notice a direction to the person about the action or a related activity that the Treasurer considers necessary to address the national security risk. [Schedule 1, item 132 subparagraph 79A(3)(c)(i) of the FATA]

1.107 The Treasurer may give further orders in writing for the same purpose until the review is complete. [Schedule 1, item 132, subparagraph 79A(3)(c)(ii) of the FATA]

1.108 The effect of these powers is that during the review the Treasurer may pause a particular action or activities following an action. However, the Treasurer is not able to require the disposal of interests until a review is completed and the full process for giving orders under the last resort power is followed. [Schedule 1, item 132, subsection 79A(5) of the FATA]

1.109 If, after reviewing an action, the Treasurer decides a national security risk exists, the Treasurer must give the person notice of this and the reasons for this decision. However, if the Treasurer considers that no national security risks exist, the Treasurer must give the person a notice to this effect. [Schedule 1, item 132, subsection 79B(1) of the FATA]

1.110 This notice may be redacted in part or in full on grounds of national security. [Schedule 1, item 132, subsections 79B(2) and (3) of the FATA]

Merits Review

1.111 A person may apply to the Administrative Appeals Tribunal for review of the Treasurer's decision that a national security risk exists. [Schedule 1, items 6, 20, 24 and 207, section 4 and subsection 130A of the FATA]

1.112 The application must be considered by the Security Division of the Administrative Appeals Tribunal. [Schedule 1, item 207, section 130E of the FATA]

1.113 The processes in place for the operation of the Security Division are already tailored to decisions made on national security grounds, and to dealing with matters of a sensitive national security nature.

1.114 Schedule 1 to the Bill sets out the manner in which a person can apply for a review of a decision, requires that the Treasurer is notified of the application and requires the Treasurer to lodge certain material with the Administrative Appeals Tribunal. [Schedule 1, item 207, sections 130B, 130C and 130D of the FATA]

1.115 Schedule 1 to the Bill also sets out the procedure for review, publication of material and allows for material to be withheld. [Schedule 1, item 207, sections 130F, 130G and 130H of the FATA]

1.116 Schedule 1 to the Bill also sets out the process for the treatment of the Administrative Appeals Tribunal's findings, places restrictions on the Treasurer's powers after the Administrative Appeals Tribunal has made findings, provides for the payment of costs and provides that certain provisions of the Administrative Appeals Tribunal Act 1975 do not apply. [Schedule 1, item 207, sections 130J, 130K, 130L, 130M and 130N of the FATA]

Last Resort Power: Orders, Notices and Variations

1.117 No objection notifications and exemption certificates given after 1 January 2021 will inform persons that the last resort power will be available for actions covered by the notification or the exemption certificate. [Schedule 1, item 123, subsection 76(1) of the FATA]

1.118 The last resort power may be exercised in different ways, appropriate to the nature of the action that poses the national security risk and which takes into account whether the action has been taken and whether the Treasurer has given any notices relating to the action prior to the review. The different ways are based on the same principle that the Treasurer should be able to prevent or, in extraordinary circumstances undo, an action that poses an unforeseen and unacceptable national security risk that cannot be adequately reduced in other ways.

1.119 The possible ways are:

•

making an order prohibiting a proposed action [Schedule 1, item 132, section 79D of the FATA];

•

making a disposal order [Schedule 1, item 132, section 79E of the FATA];

•

varying a no objection notification to revoke, vary or impose a new condition [Schedule 1, items 19 and 132, sections 4 and 79G of the FATA];

•

giving a notice imposing conditions [Schedule 1, item 132, section 79H of the FATA]; and

•

varying a notice imposing conditions [Schedule 1, item 132, section 79J of the FATA].

1.120 Before using the last resort power, the Treasurer must be satisfied that:

•

a review has been conducted and found that a national security risk exists about the action [Schedule 1, item 132, paragraphs 79C(a) and 79F(a) of the FATA];

•

the exercise of the last resort power is reasonably necessary to reduce or eliminate the national security risk [Schedule 1, item 132, subparagraphs 79C(c)(ii) and 79F(c)(ii) of the FATA];

•

reasonable steps have been taken to negotiate in good faith to eliminate or reduce the national security risk to avoid giving the order [Schedule 1, item 132, subparagraphs 79C(c)(i) and 79F(c)(i) of the FATA]; and

•

other regulatory systems of the Commonwealth, States and Territories would not adequately eliminate or reduce the national security risk [Schedule 1, item 132, subparagraphs 79C(c)(iii) and 79F(c)(iii) of the FATA].

1.121 Where the person made a false or misleading statement the Treasurer must be reasonably satisfied that the misstatement directly relates to the national security risk. [Schedule 1, item 132, paragraphs 79C(b) and 79F(b) of the FATA]

1.122 Where the business, structure or organisation of the person has materially changed, the Treasurer must be reasonably satisfied that the national security risk that has emerged as a result of this change could not have been reasonably foreseen at the time of the original approval or the likelihood of the risk arising was remote. [Schedule 1, item 132, paragraphs 79C(b) and 79F(b) of the FATA]

1.123 Where the market in which the action is taken has materially changed, the Treasurer must be reasonably satisfied that the change altered the nature of the national security risk posed at the time the decision was made. [Schedule 1, item 132, paragraphs 79C(b) and 79F(b) of the FATA]

1.124 Once the requirements described above are satisfied or the relevant consideration given, the Treasurer is able to use the last resort power in a manner appropriate for the status and circumstances of the action or proposed action. The Treasurer may give orders and impose, revoke or vary conditions, or where a no objection notification had not been previously issued, issue a notice with conditions.

1.125 As described above, the Treasurer's making of orders and the exercise of other last resort powers is constrained by the requirement to take reasonable steps to negotiate in good faith with the relevant person to reduce the national security risk.

1.126 This obligation provides an important safeguard that embodies the principles that will apply in the wide variety of possible situations where the orders and powers may be considered by the Treasurer. It is sufficiently flexible to accommodate particular circumstances of each national security risk that may be difficult to foresee but remains connected to a well understood common law principle that applies to commercial agreements.

1.127 The incorporation of the common law concept of good faith avoids the creation of a difference between the common law and an alternative concept in legislation that could potentially grow wider as the common law concept is refined by the courts. If necessary this could be supplemented by additional guidance for applicants.

1.128 The good faith concept is frequently used in Commonwealth legislation to impose obligations or standards on persons. This standard will be familiar to the types of entities expected to be affected by these amendments to the FATA. While the negotiations are intended to promote a mutually agreed resolution and forestall any legal proceedings, the good faith obligation is consistent with the Commonwealth's model litigant obligations in the Legal Services Directions 2017.

Orders

1.129 If the Treasurer is satisfied that a proposed action would be contrary to national security, the Treasurer may, by notifiable instrument, make an order which would prohibit all or part of the proposed action. [Schedule 1, item 132, sections 79D and 79M of the FATA]

1.130 The details of possible orders prohibiting proposed actions are set out in the table in section 79D of the FATA. Additional orders that can be made about some types of actions if an order prohibiting the action are also set out in section 79D of the FATA.

1.131 If the Treasurer is satisfied that the result of an action that was taken is contrary to national security, the Treasurer may, by notifiable instrument, make an order which would require the person to dispose of interests acquired by taking the action or to act (or not to act) in a particular way. [Schedule 1, item 132, sections 79E and 79M of the FATA]

1.132 The details of possible disposal orders corresponding to types of actions that have been taken are set out in the table in section 79E of the FATA.

1.133 If the Treasurer makes a disposal order that has effect for a specified period, the Treasurer may extend the order before it ends. [Schedule 1, item 132, subsection 79E(4) of the FATA]

1.134 The process and requirements for making an order under the last resort power do not apply to variations or revocations of the order because the order making power is excluded from the application of subsection 33(3) of the Acts Interpretation Act 1901. [Schedule 1, item 132, subsection 79L(4)of the FATA]

1.135 Orders prohibiting actions, additional orders and disposal orders must be registered on the Federal Register of Legislation within 10 days after being made. [Schedule 1, item 132, paragraph 79M(1)(b)of the FATA]

1.136 Orders prohibiting actions, except additional orders, commence on the day they are registered. [Schedule 1, item 132, paragraph 79M(2)(b) of the FATA]

1.137 Disposal orders and additional orders commence on the day specified in the order (but not earlier than 30 days after they are registered). [Schedule 1, item 132, paragraph 79M(2)(a) of the FATA]

1.138 If an action could be subject to more than one kind of order because it is an action of more than one kind, the Treasurer may make any of the orders about the action. [Schedule 1, item 132, section 79N of the FATA]

1.139 Where the Treasurer makes an order prohibiting or requiring disposal of an action subject to a no objection notification or a notice imposing conditions, the no objection notification or notice imposing conditions is revoked on the day the order commences. [Schedule 1, item 132, subsections 79D(4) and 79E(5) of the FATA]

Notices and variations

1.140 If the last resort power is available to the Treasurer it may be used to revoke, vary or impose new conditions in a no objection notification that was given to a person about an action. [Schedule 1, items 19 and 132, sections 4 and 79G of the FATA]

1.141 The last resort power (when available) may also be used to impose conditions by notice on actions that do not have an existing no objection notification that can be amended. Such notices may themselves be varied. [Schedule 1, items 20, 132, 198 and 202, sections 4, 79H and 79J, and paragraphs 117(1)(c) and 118(b) of the FATA]

1.142 Similar to how no objection notifications operate, the Treasurer must issue the notice imposing conditions before the end of 10 days after the decision is made. The notice imposing conditions must be given to a person at an address including via email. The content of the notice imposing conditions must specify an action or multiple actions it relates to, a requirement that it must be taken before the end of a specified period (usually 12 months, unless the Treasurer considers a long time period to be not contrary to national security or the national interest), and that the Treasurer in some circumstances, may review the actions to which the notification relates to. The notice imposing conditions may specify a foreign person or a foreign person that is yet to be incorporated or a trustee of a trust not yet established if applicable. [Schedule 1, items 132, 175 and 216, section 79H, subsection 95(5) and paragraph 135(3)(b)of the FATA]

1.143 A notice imposing conditions may be varied other than by using the last resort power either because the person has applied for the variation, consented to the variation or the Treasurer is satisfied that the variation will not disadvantage the person. Before making the variation, the Treasurer must be satisfied it is not contrary to national security. [Schedule 1, item 132, sections 79P and 79Q of the FATA]

1.144 A person may commit an offence, breach a civil penalty or both if the person engages in conduct that contravenes a condition included in a notice imposing conditions. [Schedule 1, items 156, 157, and 177 to 179, subsections 96(1), 96(3) and 97(1), and paragraphs 87(a) and 87(b) of the FATA; Schedule 2, item 10, section 93 of the FATA]

Consequential amendments

1.145 The Administrative Appeals Tribunal Act 1975 is amended to allow for subsequent modifications to support the review of decisions made that a national security risk exists under the FATA. [Schedule 1, items 221 to 224, subsections 25(6) and 46(2) and paragraphs 46(1)(a) and 46(3)(a) of the Administrative Appeals Tribunal Act 1975]

1.146 The Security of Critical Infrastructure Act 2018 allows the Minister of Home Affairs to issue directions if there is a risk of an act or omission that would be prejudicial to security. However the direction can only be issued if the Minister is satisfied no other Commonwealth regulatory system could be used. As Schedule 1 to this Bill introduces the Treasurer's last resort power, the Security of Critical Infrastructure Act 2018 is amended to provide that Act with priority over the last resort power, that is the Minister of Home Affairs is able to issue directions under section 32 of the Security of Critical Infrastructure Act 2018. [Schedule 1, item 225, subsection 32(3A) of the Security of Critical Infrastructure Act 2018]

Application and transitional provisions

1.147 The Treasurer's last resort power is only available for actions that were notified to the Treasurer (or taken, if they were not notified) on or after 1 January 2021. [Schedule 1, item 234]