Part 1 of exposure draft legislation released to give effect to key major reforms to Australia’s foreign investment review framework

17 August 2020

In Brief

Following the Commonwealth Treasurer’s announcement of major new reforms to Australia’s foreign investment review framework on 5 June 2020, the Australian Government released part one of the exposure draft of the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 (Cth) on 31 July 2020 and has commenced the public consultation process. Our summary of the Treasurer’s earlier announcement and the proposed reforms is available here.

Broadly, part one of the exposure draft legislation covers the following reforms:

  • new national security test measures, namely:
    • a new framework for the mandatory notification of investments in national security businesses and national security land, regardless of the value of such investments;
    • a new call-in power for the Treasurer to call-in certain investments for review where national security risks emerge; and
    • a new last resort power for the Treasurer to review investments on national security grounds that were previously notified in certain exceptional circumstances;
  • new information collation and sharing mechanisms, including most notably the establishment and maintenance of a new Register of Foreign Ownership of Australian Assets, and an increased ability to share information between Australian Government agencies and international counterparts;
  • new monitoring and investigative powers to enable the Australian Government to more effectively monitor and investigate foreign persons’ compliance with Australia’s foreign investment review framework;
  • additional regulatory powers giving the Australian Government broader powers to enforce compliance with Australia’s foreign investment review framework, including increased civil and criminal penalties; and
  • certain amendments to improve the integrity of the existing foreign investment review framework, namely the introduction of a requirement to notify proportional increases in investments due to share buybacks and capital reductions (even where those increases occur through no action on the part of the foreign person), the extension of the tracing rules to cover unincorporated limited partnerships and the ability of the Treasurer to unilaterally extend the decision period by up to 90 days without issuing an interim order.

We outline some of the key reforms in more detail below.

Part two of the exposure draft legislation is scheduled to be released in September and will deal with the remainder of the legislative changes. This is expected to include the time limit for the exercise of the call-in power, the streamlined review and approval process for certain funds with passive foreign government investors, detailed regulations relating to part one of the exposure draft legislation and various other technical and consequential amendments.

The reforms are intended to come into effect on and from 1 January 2021 and at this stage the temporary COVID-19 measures (such as the AU$0 monetary threshold for all investments) are intended to end immediately before the introduction of the reforms.

Summary of key reforms

New national security test measures

The new national security test related measures described below are intended to strengthen the powers of the Australian Government to address existing and emerging national security risks. The new measures are intended to ensure that, following the end of the interim COVID-19 measures, investments raising national security concerns that previously may have not been screened due to falling below the relevant monetary screening thresholds will now be subject to review.

Notifiable national security actions

Part one of the exposure draft legislation introduces a new category of action, called a ‘notifiable national security action’. A notifiable national security action involves a foreign person acquiring a direct interest in a ‘national security business’, starting a ‘national security business’ or acquiring an interest in ‘national security land’. Such an action must be notified to the Treasurer for review regardless of the value of the investment or whether the action is otherwise a significant action (i.e. a voluntarily notifiable action) or a notifiable action (i.e. a mandatorily notifiable action).

A national security business is one that is carried on wholly or partly in Australia and falls within one of the 12 categories of national security business set out in the exposure draft legislation. Broadly, these categories include businesses that are concerned with critical Australian infrastructure assets, provide telecommunications services or provide critical military-use goods, technology or services to Australian defence and intelligence personnel (including the management of sensitive information).

Importantly, the acquisition of an interest in a national security business must be a ‘direct interest’. This means that the interest to be acquired in the national security business is 10 per cent or more (or 5 per cent or more, where there is a legal arrangement with the target business) or the interest provides the foreign person with the ability to influence or participate in the central management and control of the business or to influence, participate in or determine its policies.

National security land broadly includes defence premises, land in which a national intelligence agency has an interest and land which the Treasurer declares to be national security land.

Each of these categories are broad in their scope and therefore will allow the Treasurer significantly enhanced review powers over foreign investment on national security grounds across a range of businesses and land investments.

If a notifiable national security action is not otherwise required to be screened (e.g. it is not a significant action), then it will be assessed by the Treasurer using the national security test and not the broader, existing national interest test, which includes national security as a relevant factor. If the action is both a notifiable national security action and a significant or notifiable action, then it will be assessed by the Treasurer using the national interest test.

Call-in power

Under the new ‘call-in power’, the Treasurer is able to call-in actions for review which fall under a new category of action, called a ‘reviewable national security action’, and significant actions that are not notified, if the Treasurer considers the action, whether proposed or already taken, poses a national security concern.

Reviewable national security actions include actions to acquire a direct interest in an entity or Australian business, start an Australian business, acquire an interest in Australian land, issue securities in an entity, enter or terminate a significant agreement with an Australian business, enter into an agreement relating to the affairs of an entity or alter a constituent document of an entity.

The Treasurer may seek information about the action from the foreign person undertaking the action or any other person that the Treasurer thinks has relevant information about the action. If asked to provide information, a person must provide a response within the time frame specified (which may be less than 14 days). 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 foreign persons who are taking, or who have taken the action. If the Treasurer reviews an action using the call-in power, the Treasurer must give written notice of the review to the foreign person and, once that written notice has been issued, the Treasurer has 30 days to issue a no objection notification (including with conditions), a prohibition order or a disposal order (as may be appropriate in the circumstances).

The time limit for exercising the call-in power will be included in part two of the exposure draft legislation to be released in September.

Importantly, the Treasurer is prevented from calling-in an investment if the foreign person has already received a no objection notification or has an exemption certificate for its investment, or if a disposal, interim or prohibition order has already been made. We anticipate that the broad discretion of the Treasurer to review investments may lead a number of foreign persons who are seeking transaction certainty to voluntarily notify the Treasurer of an action. The action then cannot be later reviewed by the Treasurer, except if exercising the last resort power. The call-in power can only be used for actions taken or proposed to be taken after 1 January 2021.

Last resort power

The new ‘last resort power’ gives the Treasurer a final opportunity to review actions for which no objection notifications, exemption certificates or notices imposing conditions under an earlier exercise of last resort power have already been given, if exceptional circumstances arise. These circumstances are: if the nature of the foreign person changes, the foreign person’s circumstances change, the broader market circumstances change, or the Treasurer becomes aware of a relevant material omission or misstatement by the foreign person.

Before exercising the last resort power, the Treasurer must conduct a review, consider relevant advice from 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.

If the Treasurer gives a person notice of review and the foreign person has not yet taken the action in question, they must not take the action until review is completed and the Treasurer gives effect to the outcome. If the foreign person has already taken the action, the Treasurer may give directions about the action or related activity that the Treasurer considers necessary to address the national security risk, including to pause actions, but cannot require divestment or disposal of interests until the review is completed and the full process for giving orders is followed.

If the conclusion of the review is that a national security risk arises in connection with the action, the Treasurer may exercise its last resort power by imposing or varying conditions, prohibiting the whole or part of the investment, or requiring the foreign person to divest the investment within a specified time.

A foreign person may seek merits review of the outcome of a national security review conducted under the last resort power by applying to the Security Division of the Administrative Appeals Tribunal. The last resort power applies to actions notified (or taken if not notified) after 1 January 2021.

Other key reforms

Register of Foreign Ownership of Australian Assets

The first part of the exposure draft legislation also introduces a new, single register of foreign ownership of specified Australian assets, called the ‘Register of Foreign Ownership of Australian Assets’.

Foreign persons will be required to register their interests arising in respect of certain events, including:

  • acquiring or ceasing to hold an interest in land or water – which is defined broadly and includes a ‘registrable interest in land’, being an interest in land that is in Australia, or the seabed of the offshore area, a mining or production tenement or an exploration tenement that is not an equitable interest, an exploration tenement, a registrable water entitlement or a contractual water right as defined in the Register of Foreign Ownership of Water or Agricultural Land Act 2015 (Cth);
  • acquiring or ceasing to hold certain interests in an Australian business, agribusiness or entity;
  • becoming or ceasing to be a foreign person while holding certain interests in an Australian entity; and
  • an event that relates to a no objection notification or exemption certificate.

Foreign persons will also be required to register certain changes in relation to those interests. For example, where an interest, particularly in land, changes to another kind of interest (e.g. agricultural land becomes residential land) and where the interest in an Australian entity changes by 5 per cent or more.

Importantly, corporate liquidators are required to notify the Registrar where a corporation that is required to give a notice is wound up before giving such notice.

Interests must be registered within 30 days of the event requiring registration.

We expect that these new obligations will create significant, additional compliance burdens for foreign persons who hold or acquire interests in relevant Australian assets, and we will be monitoring the development of this aspect of the new laws closely.

Increased penalties

The Australian Government has significantly increased the maximum penalties for certain offences for individuals and corporations under the revised foreign investment review framework. The increased penalties are intended to reflect the seriousness of the offences, act as a deterrent, ensure consistency with other regulators, safeguard Australia’s national interest and maintain the integrity of the foreign investment review framework.

Maximum criminal penalties will go up to 10 years imprisonment or 15,000 penalty units (AU$3.33 million)* for individuals, and 150,000 penalties units (AU$33.3 million)* for a corporation.

Maximum civil penalties will go up to the greater of (i) 5,000 penalty units (AU$1.11 million)* for an individual and 50,000 penalty units (AU$11.1 million)* for a corporation; or (ii) 75 per cent of the value of the consideration or market value of the interest or benefit obtained capped at 2.5m penalty units (AU$555 million)*.

Maximum penalties for acquiring an interest in residential land without giving a notice under section 81, or where a notice has been given, taking an action before the day mentioned in section 82 of the Foreign Acquisitions and Takeovers Act 1975 (Cth), will increase to the greater of 25 per cent of the consideration for the residential land acquisition; or 25 per cent of the market value of the interest in the relevant residential land.

Maximum penalties for failing to make and keep records and failing to comply with notices to provide information necessary for the Treasurer to exercise their powers will go up to 250 penalty units (AU$55,500)* for an individual and 2,500 penalty units (AU$555,000)* for a corporation.

* Based on a penalty unit value of AU$222 as at the date of this document.

The takeaway

You may provide your views and feedback on part one of the exposure draft legislation by writing to before 5.00pm on 31 August 2020. Further information regarding the public consultation process and how to respond is available here.

Following the release of part two of the exposure draft legislation in September, public consultation will continue in line with the Implementation Roadmap available here.

Following the conclusion of the public consultation process, the final Bill is expected to be introduced into Parliament in the Spring sitting.