‘Two-Track’ Approach: Changes to Australia’s foreign investment framework

The administrative burden on repeat investors will also be reduced, where ownership information has not changed since their previous FIRB application. 

In an effort to expedite assessments, Treasury will also implement a new performance target of processing 50% of investment proposals within the statutory 30-day decision period, effective from 1 January 2025. For reference purposes, the median processing times for commercial investment proposals was 37 days and 4 days for residential real estate investment proposals for the quarter ending 30 September 2023.

This will be supported by Treasury being more transparent and informing foreign investors when they can expect longer assessment timeframes – for example, when it involves a complex acquisition structure or high tax risks. 

Factors that are likely to be high risk from a tax perspective include:

• internal reorganisations or other intragroup transactions which may be perceived to be initial steps of a broader arrangement resulting in avoidance of Australian tax; 
• pre-sale structuring of Australian assets that present risks to tax revenue on disposal by private equity or other investors;
• the use of related party financing arrangements to reduce Australian income tax or avoid withholding tax; and
• facilitation of migration of assets (for example, intellectual property) to offshore related parties in jurisdictions with effective low taxation. 

Foreign investors may also refer to the updated FIRB policy, which sets out sensitive sectors and national interest factors that may attract more intense scrutiny.

Incentives

In addition to streamlining the processing of low-risk foreign investments, the Government will introduce several incentives to attract foreign investment into Australia – acting as the ‘carrot’ to the increased scrutiny ‘stick’. These will include: 

• providing a fee refund for foreign investment applications where the foreign investor was unsuccessful in a competitive bid process;
• allowing foreign investors to purchase established build-to-rent properties to build demand and incentivise construction of new projects;
• releasing draft regulations to exempt interfunding transactions¹ from foreign investment approval processes, to make it easier for institutional investors to manage their portfolios;
• removing unnecessary regulatory duplication in the assessment of competition issues under the proposed merger reforms; and
• clarifying that Pacific Australia Labour Mobility (PALM) scheme employers can buy established residential properties for their PALM employees to support Australia’s agricultural workforce.

Implications of proposed reforms

Increased scrutiny on sensitive sectors – the status quo?

The Government’s reforms reflect Australia’s continued laser focus on national security, and the global trend in developed economies toward improving economic security in the face of continued geostrategic competition. 

The increased focus on foreign investment in sensitive sectors should be seen as a confirmation, rather than an extension or overhaul, of existing FIRB policy and practice. In our experience, increased scrutiny from FIRB and its consultation partners on investment proposals in sensitive sectors, such as those involving critical infrastructure or critical minerals, has been evident for some time. This often results in longer processing times and more conditions on approvals. As the Treasurer has indicated that these changes will not need to be legislated, the reinforcement of this focus from a policy perspective will act to strengthen or formalise the existing FIRB framework. This will therefore be something for foreign investors to be aware of as part of a FIRB application relating to a sensitive sector. 

The Fast-Track Lane

The proposals to streamline low-risk investments, together with increased incentives to facilitate foreign investments, are a welcome reform. 

Australia’s foreign investment regime has become complex and costly for investors to navigate. Reducing transaction risk and cost for repeat investors from ‘friendly’ jurisdictions, such as passive institutional investors from North America, are sensible and welcome changes, particularly as we need to incentivise jurisdiction agnostic foreign capital.

Nevertheless, it remains to be seen how effective this streamlining will be in reducing processing timeframes in practice, particularly for repeat private capital investors. FIRB often takes a conservative view of risk in transactions, which may mean repeat investors (who are not ‘passive’ and have ‘control or influence’ over an asset) will still face significant scrutiny, even if they otherwise have a strong compliance record and are from ‘friendly’ jurisdictions.

The interaction between these changes and the Government’s proposed merger reforms (refer to our Insight here) remains to be seen. Therefore, heightened competition concerns are unlikely to result in faster processing times for large transactions – even from investors in ‘friendly’ jurisdictions.

The incentives included in these reforms may help counterbalance some of these potential issues. In particular, the fee refund for applications involved in unsuccessful competitive bids and availability to purchase established build-to-rent properties will help facilitate foreign capital into Australia and the non-sensitive manufacturing, professional services, commercial real estate sectors and new housing (where it is particularly needed).

What next?

The Treasurer will deliver the Budget on 14 May 2024, where further details of these policy changes will be detailed.

Investors will likely first feel the impact of these changes to Australia’s foreign investment framework from 1 July 2024.

We have also just launched our Australian Foreign Direct Investment Guide. Click on the below link to explore it.

1. Interfunding transactions are transactions between investment entities (such as unit trusts) that are managed by the same responsible entity or a related responsible entity.