Updates to the Australian foreign investment policy framework

The updates to the Policy aim to streamline aspects of the foreign investment review process whilst, at the same time, enhancing scrutiny of foreign investment applications in sensitive areas.  The Foreign Investment Review Board (FIRB) will administratively implement the new Policy.

According to the Treasurer, the changes to the Policy will ensure the federal government adopts a ‘risk-based’ approach to assess FIRB applications and encourage foreign capital into Australia.  While the Policy reforms are, overall, a positive change for foreign investors, it is unclear whether they will materially reduce FIRB application turnaround times in practice.

Key changes to the Policy regime

Streamlining low-risk investment approvals

The government is streamlining its assessment processes for low-risk foreign investment proposals, aiming to reduce turnaround times. The Treasury will assess whether an investment proposal is ‘low-risk’ based on its consideration of the profile of the investor, type of investment and structure of the transaction. The following are indicia of a ‘low-risk’ transaction:

• profile of the investor – investors with a strong track record of compliance with the foreign investment framework, repeat investors who are well known to Treasury and investors who are genuinely passive in nature;
• type of investment – investments in non-sensitive sectors such as manufacturing, professional services, commercial real estate, new housing and mining of non-critical minerals; and
• structure of the transaction – transactions where the ownership structure is clear, the transaction structure is less complex and there is a clear articulation of who will ultimately control the asset, land or entity once the proposed transaction is complete.In our recent experience, some well-known private equity investors with foreign government ownership have faced increased scrutiny of their ownership structure and tax arrangements, despite having previously received FIRB approval for similar transactions.

Reducing administrative burden

In addition to adopting a risk-based approach to assessing FIRB applications, the government is adopting measures which aim to improve the overall efficiency of its consultation and assessment processes for foreign investment proposals. This includes:

• new performance target – adopting a new performance target of processing 50% of investment proposals within the 30-day statutory decision period from 1 January 2025. According to the updated Policy, ‘most foreign investors will see an improvement in the speed of processing from 1 July 2024’;
• refunds for application fees – issuing refunds in respect of FIRB application fees which are paid by unsuccessful foreign bidders in a competitive bid process (to encourage earlier submission of foreign investment applications);
• reducing duplicate information – reducing the need for foreign investors to provide certain duplicate information (e.g. in relation to ownership structures) where such information has not changed since a previous FIRB application and this is advised early in the process;
• Build to Rent developments – allowing foreign investors to buy established Build to Rent developments, and applying lower application fees to this type of investment;
• greater transparency on timing – greater transparency to applicants in relation to when they can expect longer timeframes in the assessment of FIRB applications (e.g. when they involve high tax risks); and

• streamlining consideration of competition issues – reducing duplication in the assessment of competition issues from 1 January 2026, as between the foreign investment framework and the merger control system. According to the Policy, information provided to the Australian Consumer and Competition Commission on competition issues by foreign merger proponents will ‘mostly be sufficient’ in respect of the consideration of competition issues under the foreign investment framework.

More stringent assessment of high-risk and sensitive transactions

Recognising the increased level of national security threats to Australia in a changing geopolitical environment, the updated Policy will, at the same time, strengthen scrutiny of perceived higher-risk investments in a range of sensitive sectors. This includes investments in:

• critical infrastructure assets;
• critical minerals;
• critical technology;
• assets with proximity to sensitive Australian Government facilities; and
• assets which involve holding or having access to sensitive data sets.

Other factors which may increase the level of government scrutiny of a FIRB application include if the investment is in a sector that already has a high concentration of foreign ownership or the proposal contains a particularly complicated transaction structure.

In our experience, FIRB is already broadly applying the above criteria to its assessment of foreign investment applications and consideration of which applications are ‘higher risk’. Accordingly, it is unclear how these Policy changes would, in practical terms, further increase FIRB’s level of scrutiny in relation to investments.

Increasing scrutiny of tax arrangements

FIRB will continue to focus on the tax structures of foreign investors. Additional scrutiny will be applied to foreign investment proposals with complex tax characteristics, including:

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

In our recent experience, private equity sponsors are increasingly required by FIRB to provide tax disclosures and agree to stringent conditions which may apply both when acquiring or divesting Australian assets, even if such foreign investors are well-known to FIRB and compliant with its existing FIRB conditions.

Conclusion

We query whether the Policy provisions aimed at streamlining the FIRB approval process will materially shorten the time required for obtaining FIRB approval, particularly for private equity sponsors. This is because FIRB has, in recent years, already materially increased its level of scrutiny of high-profile transactions and the tax structuring arrangements of foreign investors. Critics have also argued that FIRB’s proposed ‘risk-based approach’ in assessing foreign investment applications is not materially different to the approach previously undertaken by FIRB, even if this was not as clearly articulated under the former policy. The Treasury has, for a number of years, had an increasing focus on sensitive sectors when assessing FIRB applications, particularly following comprehensive legislative changes in 2021 which, amongst other things, introduced a new national security test. Time will tell whether updates to the Policy will have a substantive impact on the rigour and efficiency of the FIRB application process.

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