Clifford Chance

The new FIRB policy seeks to streamline the screening process for 'lower-risk' investments, while increasing scrutiny of investments in sensitive sectors such as critical infrastructure, minerals and technology, and investments that have access to sensitive data.

Reboot of FIRB Policy – Unlocking a risk based approach

On 1 May 2024, Treasurer Jim Chalmers announced reforms to streamline and strengthen the FIRB regime. The reforms will be primarily implemented via policy reform rather than legislative amendments – the updated Foreign Investment Policy reflects the proposed reforms. Key changes are set out below.

Faster approvals for 'low-risk' investments by compliant investors

Approvals will be faster for investors with a good compliance record who are investing in non-sensitive sectors. Treasury will assess whether an application is 'low-risk' based on the profile of the investor, the target of their proposed investment and the structure of the transaction. While each investment will be considered on a case-by-case basis, investments with the following features are likely to benefit from a streamlined approval process:

• Profile: Investors with a track record of compliance with FIRB or passive investors who hold no control or influence over the investment. Notably, if these types of investors are investing as part of a consortium with investors who do not meet this threshold, a faster approval is unlikely.
• Target: Investments in non-sensitive sectors such as manufacturing, professional services, commercial real estate, new housing and mining of non-critical minerals.
• Structure: Investments where the ownership structure is clear, including a clear articulation of who will ultimately control the asset, land or entity once the proposed transaction is complete, and transaction structure is uncomplicated.

Increased scrutiny of 'high-risk' investments

Treasury will adopt a more rigorous approach to screening 'high-risk' investments, particularly proposed investments in critical and sensitive sectors of Australia's economy. Sensitive sectors include critical infrastructure, critical minerals, critical technology, as well as investments which involve holding or having access to sensitive data sets, or being in close proximity to sensitive Australian government facilities.

Accordingly, the government has indicated it will dedicate greater resources to scrutinising proposed investments in critical and sensitive sectors of Australia's economy, and will strengthen monitoring and enforcement activities to ensure investors are compliant with conditions imposed on high-risk foreign investments.

The updated policy also notes the following in respect of the national interest test:

• Competition: As part of the assessment of the national interest, FIRB will consider whether a proposed investment may result in an investor gaining control over market pricing and production of a good or service in Australia. Notwithstanding this, due to recently announced reforms to Australia's merger control regime, FIRB will play a less significant role in assessing competition matters, and information provided to the Australian Competition and Consumer Commission (ACCC) by foreign merger proponents will largely be sufficient for FIRB's consideration of competition issues.
• Taxation: FIRB will consider proposals with certain tax characteristics deemed higher-risk through a sharper lens, including:
  • internal reorganisations or intragroup transactions as steps toward avoidance of Australian tax laws;
  • pre-sale structuring that present risks to tax revenue on disposal by private equity or other investors;
  • the use of related party financing arrangements to reduce Australian income tax or avoid withholding tax; and
  • facilitation of migration of assets to offshore related parties with effective low taxation.

The government's increased focus on tax risk is unsurprising given the Treasurer's announcements earlier this year that foreign private equity funds may be asked to provide all tax advice received from Australian accountants and lawyers, including draft advice, and to advise FIRB in advance of any exit. The Treasurer's cautionary message emerges from the backdrop of tax scandals concerning consultancy firms in Australia, notably PWC, and the ATO's failed attempt to freeze profits from the $2.3 billion sale of Myer by US private equity giant TPG Capital in 2009.

Performance target for proposals to be processed within the 30-day statutory period

A new target for processing investment proposals will apply from 1 January 2025, being 50% of all applications processed within the 30-day statutory period. This should result in an improvement in the speed at which applications are processed from 1 July 2024 as Treasury works to meet that target.

This goal may be assisted by the proposed changes in Australia's merger control regime which will introduce a mandatory notification process and suspensory regime (see our blog post here), making FIRB's consideration of competition issues more limited in scope. Currently FIRB approval is typically delayed pending completion of any ACCC assessment. Under the new FIRB regime, we anticipate that if a foreign investment does not meet the mandatory merger thresholds (which are still subject to consultation and yet to be set) FIRB will no longer be required to consult with the ACCC. This should increase the speed of FIRB's assessment for transactions that do not have competition implications.

Additionally, to improve transparency, Treasury will communicate to investors when they can expect longer timeframes in the assessment of investment proposals.

Finally, under the updated policy FIRB will now provide refunds of application fees for foreign investments that do not proceed where the investor was unsuccessful in a competitive bid process. This is a significant shift from the current approach whereby FIRB fees are nonrefundable, resulting in foreign bidders only seeking FIRB approval once they are successful with their bids. The proposed reform will allow for foreign bidders to submit FIRB applications earlier in the auction process, significantly reducing any potential regulatory risk or delay.

Bolstering the Net Zero Transformation
The government has stressed it is dedicated to attracting investment in key areas such as investments which help deliver net zero transformation, support the objectives of Australia's Critical Minerals Strategy and the development of critical technologies. Investments with these features are likely to be the beneficiary of more favourable consideration from FIRB.

Consultation on exempting inter-funding from mandatory foreign investment notification
As part of the 2023–24 Budget, the Australian Government announced that it would exempt interfunding transactions from mandatory notification requirements and fees under the Foreign Acquisitions and Takeovers Act 1975. Interfunding refers to transactions between investment entities (such as unit trusts) that are managed by the same responsible entity or a related responsible entity. Treasury is currently consulting on exempting interfunding from mandatory foreign investment notification.