The Australian Government's proposed reforms to our foreign investment framework are a major shake-up and a significant move toward addressing national security risks and strengthening compliance.

In this article, partner Emma Donaghue and lawyer Luke Hefferan explain three key takeaways you should be aware of now:

1. 'National security land' and 'national security business' will be carved out from the moneylending exemption.
2. The Treasurer will have a new power to 'call-in' for review any actions not required to be notified on national security grounds and a 10-year limit for this power is proposed.
3. The revised fee framework means investors face much higher application fees, particularly for higher value deals and investment in agricultural land.

Background

The consultation period for Tranche 2 of the Foreign Investment Reform (Protecting Australia's National Security) package came to an end on 2 October. The Tranche 2 Amendments follow an earlier exposure draft which was released for public consultation in August and propose several changes to the existing Foreign Investment Review Board (FIRB) framework.

Some changes are relatively minor (eg the modernised definition of 'Australian media business' which has now entered the internet age) while others are significant.

If passed, the new laws are expected to come into effect on 1 January 2021.

Australia's national security interests cannot be your security interests

Foreign lenders have previously escaped the FIRB framework because the Foreign Acquisitions and Takeovers Regulations carve out interests in assets held as security for a moneylending agreement or acquired from enforcing such an agreement.

Now, thanks to Tranche 2, foreign lenders will need to seek FIRB approval if the asset is an interest in 'national security land' or a 'national security business' (national security assets). While not defined in Tranche 2, we expect these to be fairly broadly defined and will likely include, for example, service providers under the Telecommunication Act.

As the obligation to obtain FIRB approval extends to those holding security interests, security trustees will also need to be mindful of these regulatory changes.

From a practical perspective, lenders and security trustees will need to ask themselves the following questions:

• Is the holder of the security interest (ie the lender or security trustee) a 'foreign person' for the purposes of the new foreign investment laws?
• Does the security package include national security assets?
• Does the interest amount to a 'significant action', a 'notifiable action', or a 'notifiable national security action'?

If the answer to each of these questions is yes, then FIRB approval will be required. This is likely to add time and costs to the funding arrangement, of which foreign security holders need to be aware.

Call-in power

Tranche 1 of the draft amendments proposes a national security test which will—

• impose a mandatory obligation on foreign investors to notify the Treasurer of notifiable national security actions, such as investment in national security assets, and
• allow the Treasurer to call in any 'reviewable national security actions', that is, any actions not deemed to be notifiable actions determined by the Treasurer to require review on national security grounds.

However, this call-in power will not be available to the Treasurer where a no obligation notice or another form of exemption certificate has already been issued in relation to the action.

The Tranche 2 amendments place a 10-year time limit on these powers of the Treasurer. However, this still gives the Treasurer considerable power to screen any action deemed (on reasonable grounds) worthy of review.

If the Treasurer is satisfied the proposed action or action already taken (in relation to the call-in power) is contrary to the national security interest, then the Treasurer may prevent the transaction or issue a requirement that any investment be disposed of (in relation to the call-in power).

Foreign investors may (in the absence of a no objection certificate or another form of exemption) apply for determination by the Treasurer in relation to any actions they intend to take which they consider may be deemed to be 'reviewable national security actions' (ie allowing an upfront decision before any investment is made).

Although this would of course provide some comfort to foreign investors, a determination made under a voluntary application process does not prohibit the Treasurer from later relying on the call-in power if there is a significant change in circumstances of the investor or national security generally.

The bad news—fees

FIRB's application fees are increasing, particularly for higher value deals and investment in agricultural land, sending a very clear message to foreign investors.

From early 2021, FIRB applicants will be subject to the increased fees set out in the table below.

You can contact the authors or a member of our team to discuss how these proposed amendments impact foreign investment in Australia and your business.