Jurisdiction - Australia
Reports and Analysis
Australia – Higher Investment Thresholds For Free Trade Partners: What Does It Mean In Practice?

18 November, 2014

 

 
  • Some of Australia’s free trade partners benefit from a higher threshold for Foreign Investment Review Board (FIRB) approval – investments do not require FIRB approval unless they meet the AUD 1,078m threshold, which is significantly higher than the default monetary threshold of AUD 248m
  • The Australian Government this year agreed to extend the higher threshold to Japanese and South Korean investors 
  • Investors should be alive to the practical limitations of the higher threshold and circumstances in which it will not apply

 

Overview


Foreign investors from a number of Australia’s free trade partners enjoy favourable treatment under Australia’s foreign investment regulations. One such favourable treatment is the AUD 1,078m investment threshold which is afforded to some of Australia’s free trade partners, notably the United States (US) and New Zealand (Higher Threshold Exemption).
The Higher Threshold Exemption increases the monetary threshold for transactions requiring FIRB approval from AUD 248m (which is the default monetary threshold) to AUD 1,078m. 


However, those seeking to rely on the Higher Threshold Exemption should be mindful of its limitations. In practice, these limitations can result in the exemption not being available for the desired transaction structure. 


In particular, the Higher Threshold Exemption (as it currently stands for US and New Zealand investors) does not apply where the proposed investment:

 

  • is by a foreign government related investor; 
  • is in a sensitive sector, (such as media and telecommunications); 
  • is made by a ‘US enterprise’ or ‘New Zealand enterprise’ which does not satisfy the upstream ownership requirements; or
  • is made through an entity which is not incorporated in the US or New Zealand (including an Australian entity).
 

Practical Limitations


Foreign investors seeking to access the Higher Threshold Exemption should note some of the practical limitations of this exemption. 


The Higher Threshold Exemption only applies to investments by private investors, not foreign government related investors. The more onerous requirements of Australia’s Foreign Investment Policy continue to apply to foreign government related investors from the US and New Zealand.


Investments in sensitive sectors such as media, telecommunication and transport are not entitled to rely on the exemption. 


Finally and most significantly, the Higher Threshold Exemption is only available when the investing entity has a specific connection with the relevant foreign country. Currently, the Higher Threshold Exemption is only available to a ‘US national’, ‘US enterprise’, ‘New Zealand national’ or ‘New Zealand enterprise’. A ‘US national’ or ‘New Zealand national’ includes a citizen and permanent resident of the US or New Zealand (as applicable). A ‘US enterprise’ or ‘New Zealand enterprise’ is:

 

  • an entity constituted under the laws of the US or New Zealand (as applicable); or
  • a branch of that entity that is (amongst other things) located, and carries on sufficient business activities, in the US or New Zealand (as applicable).
 

The Higher Threshold Exemption is not available if the Treasurer decides that a ‘US enterprise’ or ‘New Zealand enterprise’ does not meet certain upstream ownership requirements. For example, the Treasurer may decide that the Higher Threshold Exemption does not apply if the entity or branch is owned or controlled by one or more persons from a country other than the US or New Zealand, and:

 

  • Australia does not maintain diplomatic relations with that country, or adopts or maintains measures in relation to that country or a person of that country that have the effect of prohibiting transactions with the relevant entity or branch; or
  • the entity or branch has no substantial business activities in the US or New Zealand as applicable).
 

The Higher Threshold Exemption is also not available if a US or New Zealand national or enterprise invests in Australia through an intermediate holding company or special purpose vehicle which is incorporated in any jurisdiction other than the US or New Zealand (as applicable). 


In our experience, this is often how overseas investors (including those that are based in the US and New Zealand) tend to structure their investments in Australia. However, by virtue of the fact that the US or New Zealand nationals or enterprises themselves are not making the investment, then they do not get the benefit of the Higher Threshold Exemption.

 

Implications For Japanese And South Korean Investors


The Higher Threshold Exemption is often described as a key part of Australia’s overall offering to facilitate greater access to investment in Australia by our favoured free trade partners. 


This year, as part of the signed Australia-Korea Free Trade Agreement (KAFTA) and the Japan-Australia Economic Partnership Agreement (JAEPA), the Australian Government agreed to provide South Korean and Japanese investors with the benefit of the Higher Threshold Exemption.This exemption will come into effect once these bilateral trade agreements have been ratified by each country’s domestic legislation. There has also been speculation that a free trade agreement with China would have a similar outcome.


The Explanatory Memorandum to Australia’s proposed ratification legislation for the KAFTAdeclares that by raising the FIRB monetary threshold, the free trade agreement
will ‘promote an increase in the flow of Korean investment into Australia and affirm Australia’s attractiveness to Korean investors’.


Under the KAFTA and JAEPA, South Korea and Japan will enjoy favourable treatment which is equivalent to that provided to Australia’s other free trade partners in respect of investments in Australia. Therefore, similar restrictions as discussed above will likely to apply to South Korean and Japanese investors who seek to benefit from an equivalent AUD 1,078m threshold when those free trade agreements become effective. 


Under the KAFTA and the JAEPA, Australia has also reserved the right to apply a significantly lower monetary threshold for foreign investment proposals in the agricultural sector (AUD 15m for agricultural land and AUD 53m for agribusinesses).

 

End Notes:

 

2. The KAFTA was signed on 8 April 2014 and the JAEPA was signed on 8 July 2014. Implementing legislation for KAFTA (Customs Amendment (Korea-Australia Free Trade Implementation) Bill 2014 (Cth)) was passed by the Australian Parliament on 1 October 2014. Australia and Korea are aiming to complete their domestic treaty processes towards the end of 2014. When these processes are complete, KAFTA will enter into force. Australia’s treaty making process in respect of the JAEPA is still in progress. The JAEPA is currently expected to be implemented in early 2015.


3. The Customs Amendment (Korea-Australia Free Trade Implementation) Bill 2014 (Cth).

 

herbert smith Freehills

 

For further information, please contact:

 

Belinda Fan, Partner, Herbert Smith Freehills
belinda.fan@hsf.com

 

Homegrown International Trade Law Firms in Australia

 

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