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New compliance approach for Australia’s foreign investor tax condition reporting
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  • 5 minute read
  • May 31, 2024

The Treasury has adopted a new approach to managing Foreign Investor Compliance by issuing "Non-Compliance Detection Letters" to notify foreign investors of suspected breaches of FIRB tax conditions or other foreign investor compliance obligations.

There is a heightened need for foreign investors to proactively monitor and comply with FIRB conditions and foreign investor obligations, and an opportunity for organisations to review their FIRB governance processes against the Treasury's Guidance.

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In brief

The Treasurer has announced a new Foreign Investment Policy whereby foreign investors will be subject to enhanced monitoring and enforcement activity, including by dedicating greater resources to assure compliance with conditions imposed on high risk foreign investment and continuing to take proportionate enforcement action. 

Consistent with this new compliance approach, the Treasury has commenced issuing "Non-Compliance Detection Letters" to notify investors of suspected breaches of Foreign investment Review Board (FIRB) tax conditions or other foreign investor compliance obligations.

There is a heightened need for foreign investors to proactively monitor and comply with FIRB conditions and foreign investor obligations, and an opportunity for organisations to review their FIRB governance processes against the Treasury's Guidance.

The Treasury’s updated compliance approach comes ten months after the new ‘Register of foreign ownership of Australian assets’ was introduced with effect from 1 July 2023. 

Penalties for non-compliance with FIRB reporting conditions can be as high as $15 million. A raft of other compliance measures are also available such as disposal orders or poor compliance history may negatively impact future investment approvals.

In detail

Who is impacted by this new compliance approach?

Investors subject to FIRB conditions or other Foreign Acquisitions and Takeovers Act 1975 (FATA) compliance obligations will be impacted by this new compliance approach. This will broadly cover foreign entities, and Australian entities that are: 

  • 20%+ foreign owned by one foreign investor for an entity, or
  • 20%+ foreign owned by one foreign investor (including associates of a person) for a trust, or'
  • 40%+ foreign owned by aggregated foreign investors (Note that in the case of publicly listed entities, interests that are below 5% are not taken into account).

Where the Treasury suspects an investor is in breach of FIRB conditions, the investor may receive a Non-Compliance Detection Letter. 

Escalated compliance approach

In line with the newly released Foreign Investment Policy the Treasury has commenced issuing Non-Compliance Detection Letters to investors who it suspects have breached FIRB tax conditions or other foreign investor compliance requirements. The Non-Compliance Detection Letter is the first step in the Treasury’s strengthened foreign investor compliance program, and is essentially a notification requiring foreign investors to provide further information regarding the suspected non-compliance. 

We are aware the Treasury may issue a detailed request for information from the investor, including: 

  • a request for a 'fulsome report' explaining the circumstances around breaches of FIRB tax conditions that are known to the Treasury (such as failure to lodge on time an annual tax condition report), 
  • a request for the steps that will be taken to ensure a breach does not occur in future, 
  • a request for evidence to substantiate that the investor does comply with the five standard tax conditions as set out in its FIRB approval letter. 

Penalties for failing to comply with conditions vary with the type of condition but can be very significant. For failing to comply with standard or special tax conditions the maximum penalty can be $15 million. However, there are other significant commercial consequences such as an increased risk of having future investment applications rejected or increased conditions being imposed. 

The Treasury is specifically focusing on high risk transactions. Whether or not a transaction was considered high risk is not always apparent when approval is granted, and is indicated by a combination of risk factors and conditions imposed. 

How will The Treasury identify and assess potential non-compliance?

Guidance Note 13 issued by the FIRB outlines the factors that Treasury will have regard to when assessing non-compliance with FIRB conditions, which include:

  • timeliness of annual tax condition reporting,
  • accuracy and completeness of information reported,quality, depth and relevance of information and evidence provided,
  • content of attestation provided by the signatory of FIRB tax condition reports, and 
  • seniority of signatory of tax condition reporting, (currently this is required to be an officer of the investor, such as a director of a company or trustee of a trust).
Reminder of FIRB asset register rule change 1 July 2023

We are almost at the 12 month mark since the new ‘Register of foreign ownership of Australian assets’ (FIRB asset register) commenced on 1 July 2023. 

Under these new rules the scope of assets and the circumstances in which they need to be registered was significantly expanded, such that a number of assets are required to be registered even where no FIRB approval is required. The key type of assets that must be registered are water interest, land (including freehold and leasehold), exploration tenements, businesses and entities.  

The FIRB asset registration requirements capture ‘foreign persons’ under the FATA, which broadly covers foreign entities and Australian entities with upstream foreign ownership (as set out earlier). 

Businesses have 30 days in which to update the FIRB asset register for acquisitions, disposals and certain changes to assets they hold. 

The current penalty for non-compliance / late registration is approximately $78,000 or significantly higher for repeated breaches. 

The FIRB asset register is accessed through the ATO’s Online Services for Foreign Investors portal.

The takeaway

It is recommended that all foreign investors start preparing for the new compliance expectations and obligations. Specifically, foreign investors should be able to:

  • implement, document and be able to explain FIRB governance processes that proactively monitor compliance with FIRB conditions and foreign investor compliance obligations, and
  • assess and report on historical FIRB and FATA compliance and steps taken to ensure non-compliance will not occur again, and 
  • implement systems and processes to ensure that the FIRB asset register is updated for acquisitions, disposals and certain changes to assets they hold. 

PwC has services available to assist with foreign investor compliance, click here for more information.

Contact us

If you would like to further discuss this alert, reach out to our team or your PwC adviser.

Sean Lee

Partner, Tax Reporting and Innovation, PwC Australia

+61 412 658 228

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Charlotte Brierley

Director, Tax, Sydney, PwC Australia

+61 438 300 790

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Gordon Wu

Manager, Tax, Sydney, PwC Australia

+61 2 8266 0124

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