"Open for business" - the new Australian government's position on foreign investment and trade
Corporate eBulletin - 8 October 2013
The September 7 Australian federal election saw the Liberal-National coalition take power under leader Tony Abbott. The new government is already seeking to signal to foreign investors that Australia is "open for business", with the creation of a new trade and investment portfolio, and a pledge to address the "sovereign risk" issue that has at times hampered Australia's reputation as a target for foreign investment.
Despite these pronouncements, the Coalition government has also indicated its intention to increase scrutiny on the level of foreign ownership of agricultural land and agribusiness.
This promise of a tighter regulatory environment is expected to loom large in the early days of the new government, particularly given the increased interest of foreign investors in Australian land and corporate assets, particularly from Asia which continues a surging growth in consumption.
In this eBulletin we discuss some of the key areas which are likely to be impacted by the new Australian government's approach to foreign investment in Australia.
- Foreign Investment Review Board
- Foreign investment in the agricultural sector
- GrainCorp: the "national interest" test
- Free Trade Agreements: back to the drawing board?
- Re-ignition of investment in the commercial property sector
- Taxes axed: changes to the carbon and mining policy
- The "infrastructure Prime Minister
- Further information
The Foreign Acquisition and Takeovers Act 1975 (Cth) regulates certain foreign investments into Australia, in particular those that exceed prescribed monetary thresholds, those in sensitive industries, and any investments by foreign government-owned entities. Investment in these cases requires submission of a proposal for review by FIRB, which examines the proposal and advises the Federal Treasurer whether the investment triggers any objection under the government's policy.
Key factors in whether a proposal must be submitted to FIRB are monetary value, the nature of the investment and the type of investor. FIRB applies a "national interest test" in making its recommendations to the government.
The Coalition members of the Senate's Rural and Regional Affairs and Transport References Committee tabled a report on Australia's foreign investment framework in June 2013 (Senate Report).
The Senate Report made the following recommendations:
- a reduction of the monetary threshold for FIRB scrutiny of foreign investment in agricultural land to $15 million from $248 million;
- FIRB approval to be required once cumulative purchases of agricultural land amounting to $15 million have been reached by a foreign investor;
- FIRB approval to be required for a foreign investment of greater than 15% in
an agribusiness valued at more than $248 million, or if the investment exceeds $54 million;
- the establishment of a register of foreign ownership of rural land, and that there be no minimum threshold for reporting foreign ownership on the Register.
By proposing these lower thresholds, the Coalition appears intent on addressing apprehensions in the agricultural sector over foreign ownership by increasing investment scrutiny and ensuring the "national interest" is protected. However, some commentators have expressed concern that foreign investors may be deterred by a perceived increase in uncertainty, cost and delay in the FIRB process.
The forthcoming decision of Treasurer Joe Hockey on US agri-giant Archer Daniels Midland's $3 billion bid for GrainCorp is expected to shed further light on the new government's approach to foreign investment.
Some commentators predict that Mr Hockey will approve the GrainCorp bid, being reluctant to send a negative message to other potential foreign investors at such an early stage in the government's term. Also awaiting approval is an application by State Grid of China for the multi-billion dollar purchase of a stake in energy distribution businesses SP AusNet and Jemena from Temasek.
Successive Australian governments have been striving to finalise FTAs with a number of Asian partners, including China, Japan, South Korea, Indonesia and India. These bilateral arrangements are seen as crucial for increasing export opportunities and securing market gains.
Australia's foreign investment review processes have presented a sticking point in the long-running FTA talks with China. Talks commenced in 2005 and proposed terms included an abolition of all tariff and non-tariff barriers. The slow progress of the discussions has been attributed in part to Chinese demands for relaxation of foreign investment rules, particularly the existing arrangements under which any investment by a government-owned foreign enterprise faces FIRB scrutiny. Tony Abbott's opposition to investment by state-owned companies and tightening of foreign investment screening in the agricultural sector appear to pose significant hurdles in securing the FTA with China.
Similarly, the Australian business community has expressed concern that a reduction in FIRB thresholds could further complicate negotiations for a Japan-Australia FTA, which the Department of Foreign Affairs and Trade has estimated could generate a $19 billion boost to the Australian economy over 20 years. The long-running discussions with Japan have already stalled over Tokyo's refusal to give ground on beef imports and Australia's reluctance to cut auto import tariffs.
Despite these hurdles, the Minister for Trade and Investment has expressed a commitment to the swift finalisation of these FTAs, and has told the media that the government will be focusing on regaining the trust of foreign investors by cutting the carbon and mining taxes and slashing red and green tape.
One area of the economy that is hopeful of increased foreign investment under the new government is the commercial property sector, which is the target of at least $18.5 billion in offshore investment.1
Property Council of Australia chief executive Peter Verwer recently told The Australian newspaper he was hopeful that a lowering of the withholding tax rates for managed investment trust schemes and a firming of the thin capitalisation rules under a Coalition government would open the gates for foreign funds.
While Prime Minister Abbott made a pre-election commitment to revive the 2010 Johnson Report that recommended a reduction in the withholding tax rate, no comment has yet been made about implementing any cuts.
The Coalition has also been silent on changes made by the previous government to the thin capitalisation regime that included a reduction of the safe harbour debt amount that is used by foreign entities when making an investment in an Australian entity or property.
Government announcements on these matters will allow the commercial real estate market to gauge how accommodating the Coalition will be for foreign investment in this sector of the economy.
The new government has promised to abandon the carbon price mechanism and mining resource rent tax. This is welcome news for many in the mining industry which already relies heavily on foreign investment.
While the industry may be hopeful that the removal of the carbon tax and mining tax will bolster foreign investment, it remains possible that an obstructionist Senate could keep the carbon price mechanism in place until 2015.
With continued speculation of a slow-down in the mineral and resources industries, infrastructure is increasingly seen as a key sector for stimulating economic activity in Australia.
Tony Abbott has already stated that he wants to be known as an "infrastructure Prime Minister", and has identified projects worth around $11 billion around the country. These comments will no doubt be embraced by the Australian Trade Commission (Austrade), tasked with promoting Australian investment opportunities to foreign investors.
Austrade has long been attracting foreign direct investment in Australian infrastructure on the back of the mining and resources boom. The Prime Minister's recent comments bode well for the continued promotion of foreign investment in infrastructure construction and private infrastructure financing.
1. Research by international real estate company Cushman & Wakefield, titled “Capital Flows: How heavy is the weight of money?”
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