The ‘new normal’: impacts of the current foreign investment regime on funds in Australia

Funds, managers and investors are likely to be aware that Australia’s foreign investment regime places limits on funds’ activities in Australia and on foreign investment in those funds.

However, with the temporary changes to that regime in place since March this year to deal with the COVID-19 pandemic, participants in the funds space are currently likely to be subject to more stringent foreign investment rules.

Here is a quick recap of the ‘new normal’ for foreign investment in the funds sector.

What is the current state of play?

The temporary changes to Australia’s foreign investment regime (FIRB) reduce all foreign investment monetary thresholds to zero. This means that any actions by a fund with substantial foreign ownership, or any investment by a foreign person in a fund, may require foreign investment approval regardless of the value of the relevant transaction.

In broad terms, the temporary changes currently mean that:

• A fund with 20% or more foreign ownership will need foreign investment approval to acquire:
  • any interest in Australian land, including any interest in an Australian land entity (i.e. a corporation or trust with interests in Australian land exceeding 50% of its total assets); or
  • an interest of 20% or more in an Australian corporation or trust.
• A foreign investor looking to invest in a fund will need foreign investment approval to acquire:
  • any interest in a fund that is an ‘Australian land trust’ (i.e. a fund with interests in Australian land exceeding 50% of the trust’s total assets); or
  • an interest of 20% or more in any other Australian fund.

Exemptions

The temporary changes to Australia’s foreign investment regime do not affect certain exemptions that may be relevant to the funds sector. For example, foreign investment approval exemptions may be available in relation to:

• acquisitions by a foreign person of an interest of less than 10% in a listed fund, or less than 5% in an unlisted fund, where the foreign person is not in a position to influence or participate in the unit trust’s central management and control or determine its policy;
• foreign custodians of funds;
• foreign superannuation funds with businesses in Australia; and
• acquisitions by foreign registered managed investment schemes which are primarily for the benefit of Australian scheme members.

Where to from here?

The temporary changes to Australia’s foreign investment regime are likely to last until the start of 2021, when a major revamp of the regime is set to commence (including new monetary thresholds).

You can read more about the proposed 2021 changes in the following articles:

1. Happy New Year: 1 January 2021 Overhaul of Australia’s Foreign Investment Regime (Part 1 – National Security)
2. Happy New Year (Again): 1 January 2021 Overhaul of Australia’s Foreign Investment Regime (Part 2 – Integrity, Penalties, Register and Fees)

This article is part of the 2020 Financial Services Newsletter, click here to download.

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