Proposed changes to foreign investment in Australia

 

Proposed changes to foreign investment in Australia

David Chu, Head of International Business, discusses the Foreign Investment Review Board's plans to tighten approvals for foreign investment into Australia.

2020-07-08

David Chu, Head of International Business, recently joined Thomas Sung (host) on the SBS Radio Cantonese Program to discuss the Foreign Investment Review Board's plans to tighten approvals for foreign investment into Australia. Listen to the podcast episode in Cantonese or read the transcript of his interview in English below.

English transcript:

Host: David, the Foreign Investment Review Board (FIRB) recently said that it will make some important changes in 2021, which may cause pains to many companies that want to invest in Australia. What are the changes? How are they different from the past?

David: Actually, in the past, foreign businesses who wanted to invest in Australia did not need approval if their investment did not exceed a certain amount. For example, for certain commercial investments, or even for commercial real estate, if the consideration did not exceed $230 million, no approval was required. Approval was indeed required for transactions of more than $230 million. If farmland was purchased, no approval was required if the purchase did not exceed $50 million; however, if it did go beyond $50 million, approval was required. The regulations on what needs to be approved have been changed from time to time, but there is always a threshold for approval.

On 29 March, the Treasurer announced that no matter the amount of investment, even if it is $1, approval would be required. He said that due to the pandemic, many businesses or real estate sectors had had a price fall, leading to concerns that Australian properties or businesses will be acquired by foreign investors for an unreasonably low price. The Treasurer also indicated that this was not targeted against any country. That makes sense. Of course, you may have observed that there have been more buyers from China in the past ten years, but the United States and other countries have equally invested heavily in Australia. In March, the media reported that there was $10 billion of funds ready from the United States to buy cheap assets in Australia. It therefore makes sense that this proposed requirement might not necessarily target against China. When it comes to stock of foreign investment, the United States accounts for 20%, Japan and Canada 10% each, and China only 5%.

Host: Five percent, right?

David: Yes, that is why the Treasurer said that the policy change is not targeted against China. If even investments of $1 needs to be approved, there will certainly be a long waiting list. Therefore, the Treasurer  also said that the approval might take 6 months. From the perspective of foreign investors, many may not be prepared to wait for six months.

Host: Things change rapidly.

David: Yes, if the price rises in six months, sellers will be reluctant to sell, and if the price falls then buyers will be reluctant to buy. Many changes can occur while an investor is waiting, so foreign investment may be affected. On 5 June the Treasurer issued a new notice. Starting from January 2021, there will be a new regime of approval rules and regulations. The biggest change is that they will consider national security factors in the approval process. In the past, it was only national interests, but now national security is considered. That means, if certain projects involve national security, the Treasurer has the right not to approve them.

However, some projects might not have national security concerns when they were approved. For example, some high-tech and innovative projects may involve one to two million dollars or 20 to 30 million dollars when they make initial investment. Their initial plan was just to serve the general public with day-to-day technology. However, technology is technology. If one day, the same invention can be used in national defence, communications or media, then the Treasurer  has the right to review the investment, and consider whether additional information is needed. If the Treasurer finds it to be posing a threat to national security, they may even have the right to ask the investor to divest.

Host: This is harsh. For a foreign investor that has just arrived in Australia, they may have no clue whether their project will be used for defence purposes in the future. This will bring about more uncertainty, right?

David: Yes. Therefore, in this regard, experts, including accountants and investment banks, now hope that the Treasurer will give a clear definition of "national security" when the exposure draft is released. The Treasurer also said that the draft legislation will be published in July, and then there will be a six-week consultation period. If people in the industry and the general public have any comments on the proposed changes, they must submit their opinion to the Treasurer within six weeks. After the legislation is passed, it will be effective as of 1 January 2021. Therefore, many foreign investors who invest in real estate or businesses or other assets in Australia are advised to pay special attention to this upcoming legislation.

Host: Will this new legislation affect the business of some partners? For example, if I am a foreign investor, and I need to collaborate with an Australian company to operate a business, but only hold 20% stakes, will I be affected?

David: Yes. Some people in the investment community also expressed their view that this particular change will not have a large impact on foreign investment. Some investors hold a very small percentage in the business with no influence at all on the management of the business. There are even sovereign funds from other countries. They are willing to invest passively in some projects, and would like to see some relaxation to make things less complicated. However, we need to wait for the details, that is, to wait for the exposure draft to be released. Please stay tuned.

Host: So to speak… I heard that FIRB’s new regulations will affect some foreign investors who come to invest in properties in Australia, right?

David: One of the many proposed changes is quite special. You may have also noticed that if Australians or Australian residents buy residential property, there was no need for approval. For foreigners, such as international students or temporary visa holders who come to buy residential properties in Australia,  approval is required for existing properties. Usually FIRB will approve it, but with a condition that it shall be sold once the visa expires or once the international student has left Australia. This time there is a very special change - even if you are an Australian resident, but you buy the property with funds borrowed from a non-resident parent or a non-resident spouse, it may not be approved. So pay attention to this.

Usually the young Asian people or people who have just finished school and started to work, may not be able to afford a home, and they buy with money from their parents. Of course, parents may gift this money to their children or by granting loans. This change will affect the loan case. The Treasurer explained that he does not like seeing situations where only one person in the family is an Australian resident, and this person borrows money from his/her non-resident parent or spouse to buy more than a dozen houses, which leads to land banking. This is the reason given by the Treasurer. If viewed from another angle, if this person is not borrowing money from his spouse, will the purchase  be approved? If he/she borrows from a foreign bank, will that be approved? This is a bit of room for discussion. As for how the proposed changes would look, we need to wait for the details to understand further.

Host: Great, David. We may need to call it a day. It is now July. This draft is believed to be under heated discussed by all walks of life. In time we should have you here again to analyse the situation. Big thanks to David, Head of International Business of ShineWing Australia, for sharing with us the new developments of the FIRB regulations. Thank you!

David: Thank you Thomas! Thanks everybody.

Get in touch

David is attuned to the Asian listed company market, international taxation issues, corporate regulations and various stock exchange requirements and is highly regarded in the market place. Reach out below to discuss how we can support your business during this challenging time.

David Chu

E dchu@shinewing.com.au


This podcast was originally published on SBS Cantonese Radio on 8 July 2020.

Disclaimer: The material contained in this page is in the nature of general comment and information only and is not advice. The material should not be relied upon. ShineWing Australia, and related entity, or any of its offices, employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in the publication.