The New World of Foreign Direct Investment
1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?
In the short term, high commodity prices and improved terms of trade will see growth in existing trade patterns continue in Australia. Most of Australia’s primary export partners are in Southeast and Northeast Asia and existing free trade agreements give Australia access to these fast-growing Asian markets.
However, consumer confidence remains pessimistic due to the recent conflict in Ukraine, higher global energy prices, lingering supply chain issues and high cost of living pressures, combined with domestic and global inflationary pressures.
If global inflationary pressures remain the Reserve Bank of Australia may tighten monetary policy more aggressively, with potentially negative implications for consumption, investment, and economic growth more generally in the short term.
2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?
Foreign investment has always been critical to Australia’s economy. In June 2020, the Government announced the most comprehensive reforms to Australia’s foreign investment review framework since the introduction of the Foreign Acquisitions and Takeovers Act 1975.
The reforms update the foreign investment review framework in three broad ways, to:
- address national security risks;
- strengthen the existing system; and
- streamline investment in non-sensitive businesses.
Over the past two-decades, foreign investment has grown by about 8% year on year. Despite droughts, bushfires, COVID-19 lockdowns and, more recently, floods, foreign investment still grew by 2.5%. Overseas investment continues to play a dominant part in Australia’s economic success.
3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?
Australia takes a case-by-case approach to each foreign direct investment proposal as they must be assessed and approved by the Foreign Investment Review Board (FIRB). However, there are several sectors of Australian economy and industries that are classified as ‘sensitive’ structures in which foreign direct investment can be prohibited or restricted. This is on the grounds of it being against Australia’s national interest or security. Therefore, different rules apply for the sectors of transport, telecommunications, media, defence and military related industries, encryption and securities technologies and communications systems, mining, and land (see section 22 of the Foreign Acquisitions and Takeovers Regulation 2015). Whether a proposed foreign investment exceeds certain monetary thresholds also impacts likelihood of FIRB approval.
The Foreign Acquisitions and Takeovers Act 1975 specifies a percentage of interest and monetary threshold available for such investments. For example, foreign persons generally require approval before acquiring a substantial interest (typically being at least 20%), in an Australian entity that is valued above the relevant monetary threshold. For a national security business, the interest is set at 10%, regardless of the value of the business or country of the investor. Investment in land is also specifically regulated, as vacant commercial land and residential real estate require prior FIRB approval regardless of the value of the property. Agricultural land requires prior approval where the land owned by the foreign person is worth more than AUD 15 million.
For investors from counties that have free trade agreements with Australia, such as Chile, China, Japan, Korea, Malaysia, New Zealand, Singapore, Thailand and United States, higher foreign investments thresholds apply. For ‘sensitive’ businesses the standard threshold is AUD 289 million, rather than AUD 1,250 million for less highly regulated businesses.
4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?
The Australian Government has introduced a three-pronged approach in addressing the impacts of worldwide supply chain issues:
- the introduction of a AUD 15 billion National Reconstruction Fund which aims to drive co-investments into projects that address vulnerabilities in critical supply chains;
- a ‘Buy Australia Plan’ that will ensure that the Australian Government can make use of government procurement as a major economic lever to strategically address supply chain risk; and
- a ‘Supply Chain Resilience Initiative’ that provides grants to establish or scale a manufacturing capability or a related activity to address supply chain vulnerabilities for a critical product or input identified in Australia’s ‘Sovereign Manufacturing Capability Plan’.
5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?
Whilst the level of due diligence undertaken is often in response to the size or significance of a venture or acquisition, there are several required searches and considerations for the Australian business landscape. It is highly encouraged that comprehensive searches and investigations be conducted regarding corporate registers, identifying key business contacts, confirming validity of intellectual property rights and licence structuring, past tax returns, any leases or titles over property, current workplace agreements, insurance policies, history of disputes, and IT and privacy agreements.
Specifically, this would include searching:
- the Australian Securities and Investment Commission’s public registers to determine the identity of shareholders, directors and officers;
- the Personal Property Securities Register to determine whether there are any registered security interests over the assets of the target business;
- the local land office, for example the NSW Land Registry, to determine the title to real property;
- IP Australia’s public register of registered trademarks, patents and designs to confirm ownership of intellectual property rights;
- the local court register, such as the NSW Caselaw site, for any current litigation or winding up proceedings;
- the work health and safety obligations and the business’ register of notifiable incidents; and
- if relevant, the environmental status of the land, to establish if land has been contaminated by a hazardous industry and if there are clean-up costs, as the different state environment protection authorities have strict requirements and sanctions.
Australia also has specific protections and considerations regarding the disclosure of information between companies. The seller has no positive duty to disclose information to a buyer, however they can face liability under the Corporations Act 2001 (Cth) or Schedule 2 of the Competition and Consumer Act 2010 (Cth) for engaging in any misleading or deceptive conduct. Insider trading laws also prohibit a seller from providing information that is material, price sensitive, and not generally available to the public, so, if an investor was aware of such information, they could not acquire shares.
6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?
Effective Tax Structuring
There are various structures utilised to acquire assets in Australia, including:
- multiple individuals as joint tenants (non-divisible shares) or tenants in common (divisible shares);
- company in its own right; and
- individual(s) or company in the capacity as trustee of a trust (e.g. unit, fixed, hybrid or discretionary/family trust).
The purpose of the acquisition influences any advice given by the purchaser’s tax advisor regarding the most effective ownership structure to manage direct taxes including income tax, capital gains tax, company tax, land tax and transfer duty.
Ownership structures have little or no influence on indirect taxes, such as GST (Australia’s value added tax). However, GST is exempt from certain real estate acquisition transactions including existing residential properties, farming properties and properties the subject of leasing enterprises, or which include an operating business.
The desire to protect wealth and assets from matrimonial breakdown, litigation against the owner or an insolvency event influences ownership structures. For instance, if a property is owned in an individual’s name, such property can be used to satisfy judgment against that individual. However, the discretionary/family trust structure can be used to protect assets from becoming embroiled in litigation against individuals with a potential interest in the trust.
In Australia, the Foreign Acquisitions and Takeovers Act 1975 governs foreign acquisition and investment. Certain acquisitions of property (both residential and commercial) and business interests require approval by the Australian Government. The application fee is a factor of the price to be paid for the property. It is a significant fee. There are strict constraints such as milestones, timing, reporting and disposal. A foreign person will need to consider whether approval is required, and if required approval must be obtained prior to acquiring the property or, alternatively, the contract must be conditional upon approval being granted.
Foreign persons are levied with a surcharge on some direct taxes including land tax and transfer duty. The surcharge is a significant cost.
7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?
The Privacy Act 1988 is a key law that governs the collection, use, disclosure and transfer of personal and health information in Australia. However, there is also state-based legislation that should be considered, for example the Health Records and Information Privacy Act 2002 in the state of New South Wales. The Spam Act 2003 and the Do Not Call Register Act 2006 also regulate commercial electronic messages and telemarketing in Australia.
Under the Privacy Act, there are a set of Australian Privacy Principles that help guide businesses on the correct way to deal with such information. The Australian Privacy Principles apply to private-sector organisations with an annual turnover of more than AUD 3 million and their related companies, as well as some other types of organisation, including health service providers and organisations that trade in personal information. The Australian Privacy Principles also apply to Australian Federal government agencies. The 13 Australian Privacy Principles regulate the manner in which any regulated organisation can collect, store, use and disclose personal information. Special provision is made with respect to health and other sensitive information.
Foreign investors should be aware of the differences between ‘personal information’ and ‘sensitive information’. Personal information is defined under the Privacy Act as information or an opinion about an identified individual, or an individual who is reasonably identifiable, whether the information is true or not and whether the information or opinion is recorded in a material form or not. Sensitive information is subject to stronger protection under the Privacy Act and refers to information that one would ordinarily expect to be singled out for special treatment and information or opinion about an individual’s racial or ethnic origin, political opinion, religious beliefs, sexual orientation or criminal record, provided the information or opinion otherwise meets the definition of personal information.
Relevantly for foreign investors, the Privacy Act extends to the activities of foreign companies in Australia and the activities of foreign companies outside of Australia, where such companies carry on business in Australia, and collect or hold personal information in Australia. The Privacy Act also includes a scheme for notification of ‘eligible data breaches’ so foreign investors should make sure that they seek specific advice in relation to their business dealings in Australia.
The Australian Federal Government is in the process of reviewing Australia's privacy regulations given the increase in large corporate data breaches. Foreign investors should anticipate an increase in regulatory obligations and investigations by the Office of the Australian Information Commissioner in 2023, along with an increase in penalties for non-compliance.
Regarding intellectual property protection generally, as Australia is a signatory to several international conventions regarding intellectual property registration and protection, foreign investors should find protecting and enforcing IP rights in Australia to be quite straightforward. IP Australia is the regulatory body that administers the registration of trademarks, designs, patents, and plant breeders’ rights. Action to enforce these rights is usually taken in the Federal Court of Australia.
8 . Describe the most common legal structures used by foreign investors when doing business in your country.
The most common legal structure for foreign investors setting up a business in Australia is either registering as a foreign company carrying on business in Australia or establishing an Australian subsidiary which also operates as an Australian company. The Australian company structure is an incorporated business that is also a distinct legal entity which comes with legal protection via limited liability for members and can have more suitable tax implications. It is important to set up a company, as unincorporated bodies and corporations sole that were formed outside Australia cannot hold property and cannot sue or be sued in accordance with the law of their place of formation.
To carry on business as an Australian branch of a foreign company, the company must register as a foreign company with the Australian Securities and Investments Commission (ASIC), the authority responsible for the administration and enforcement of Australian company law. Upon registration as a foreign company, ASIC will issue a unique nine digit identifying number known as an Australian Registered Body Number (ARBN). The name of the foreign company, followed by ‘ARBN’ and the unique number must be quoted on every public document issued, signed or published by, or on behalf of, the foreign company. ASIC outlines several other requirements for foreign companies, such as reserving a company name, making an application, providing a certified copy of the entity’s constitution, appointing a local agent, lodging copies of financial statements, as well as other continuing notification obligations.
Alternatively, if foreign investors have a foreign company registered outside Australia and choose to incorporate an Australian subsidiary company to conduct business in Australia, they do not need to register as a foreign company. They instead register the subsidiary as a new company with ASIC and begin the process from there. Incorporating a local Australian subsidiary proprietary limited company, or purchasing an existing company, is usually the preferred method of establishing a business presence in Australia for foreign investors.
9 . What are the most attractive opportunities for foreign investors in your country at this time?
Historically, investments have been largely oriented towards the mining sector, manufacturing, real estate, wholesale and retail trade, construction, and communication. Australia’s resources sector has traditionally been attractive for foreign investment.
However, Austrade, the Australian Government’s investment promotion agency aiming to inform investors of future growth opportunities, lists the most attractive growth opportunities in agribusiness and food, digital technologies, fintech, major infrastructure, materials science and technologies, medical science and technologies, resources and energy and tourism infrastructure.
10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?
The protection of direct foreign investors is the remit of Austrade which provides coordinated government assistance to attract and facilitate productive foreign direct investment (FDI) into Australia.
In the first instance, Australia’s foreign investment policy provides guidance for all foreign investors on the Government’s approach to administering the Foreign Acquisitions and Takeovers Act 1975 (FATA). Specific types of investment proposals are required to be notified to the Government even if the FATA does not appear to apply. Investors also need to be mindful of separate legislation that covers Australia’s banking sector, airports, shipping industry and telecommunications sectors when it comes to foreign investment. In addition, investors should be aware of the role that the Australian Federal Treasurer ultimately plays in reviewing investment proposals to decide if they are contrary to the Australian national interest.
The Australian Government and state and territory governments do provide support mechanisms to assist investors establish and run a business in Australia. These mechanisms, and forms of assistance available, will vary by location, industry, and the nature of the business activity. However, assistance can include business grants, finding and training employees, R&D tax incentives, major project facilitation, and for exporting.