EXPLANATORY STATEMENT

 

Select Legislative Instrument 2006 No. 364

 

Issued by the Authority of the Parliamentary Secretary to the Treasurer

 

Foreign Acquisitions and Takeovers Act 1975

 

Foreign Acquisitions and Takeovers Amendment Regulations 2006 (No. 3)

 

Section 39 of the Foreign Acquisitions and Takeovers Act 1975 (the Act) provides that the Governor-General may make regulations, not inconsistent with the Act, prescribing all matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The Act provides the legislative underpinning for the Australian Government’s foreign investment screening regime to ensure that foreign investment in Australia is consistent with the ‘national interest.’ Further details of the legislative framework are in Attachment A.

The purpose of the Amendment Regulations was to increase certain thresholds at which the screening regime is triggered for United States investors. This was intended to complement recent amendments to the thresholds that apply generally to the screening process for foreign investment under the Act.

In the Foreign Acquisitions and Takeovers Regulations 1989 (the Principal Regulations), thresholds for the level at which investment by United States investors, both government and non-government, are prescribed in regulations 6 and 7 respectively.

The Amendment Regulations increased the threshold that applies to US investment in foreign corporations that operate in sensitive sectors from $100 million to $200 million. This was amended recently to $100 million along with thresholds that apply more generally to all corporations, in regulation 5. However, since this threshold applies to foreign rather than domestic corporations, it was considered more appropriate to ensure consistency with the $200 million threshold in regulation 4 that applies to takeovers of foreign corporations by non-US investors.

This increase was intended to reduce the extent to which Australia’s screening regime imposes unnecessary compliance costs on what are essentially foreign business transactions. The existing threshold of $800 million (indexed) continues to apply where the sector is not sensitive.

The amendments to regulation 7 raised the thresholds that apply to US government investment in Australian business to $100 million, and to US government investment in foreign companies to $200 million, for consistency with the thresholds that apply more generally. The increased thresholds will reduce the costs of complying with screening obligations in relation to proposals that are routinely approved.

Further details of the Regulations are in Attachment B.

The Regulations are a legislative instrument for the purposes of the Legislative Instruments Act 2003 (Legislative Instruments Act).

In relation to section 17 of the Legislative Instruments Act, extensive consultation with stakeholders was undertaken, as outlined in the Regulation Impact Statement (attached at Attachment C).

The Regulations commenced on the day after they were registered on the Federal Register of Legislative Instruments.

ATTACHMENT A

Further details of the legislative framework

 

Sections 18 and 19 of the Act give the Treasurer discretionary powers in relation to acquisitions by foreign persons of substantial interests in ‘prescribed corporations’, or Australian businesses run by ‘prescribed corporations’, where such acquisitions are deemed not to be in the national interest. In addition, sections 20 and 21 of the Act give the Treasurer similar powers in relation to arrangements that would give control of Australian corporations or businesses to foreign persons. Under section 26 of the Act, foreign persons must notify the Government of certain classes of investments that may give rise to the Treasurer’s discretion under section 18.

Section 13 of the Act defines the ‘prescribed corporations’ to which sections 18 and 19 relate. A foreign corporation is a ‘prescribed corporation’ where, for example, it has interests in particular Australian assets that are valued at more than a prescribed amount (paragraph 13(1)(d)), or it is a holding company of an Australian corporation (or corporations) whose assets are valued at more than a prescribed amount (paragraph 13(1)(e)).

Regulation 4 of the Foreign Acquisitions and Takeovers Regulations 1989 (the Principal Regulations) sets the asset threshold amount for the purposes of paragraphs 13(1)(d) and (e). The threshold applying to these foreign companies is currently $200 million.

Section 13A of the Act sets out the corporations and businesses that are exempt for the purposes of sections 18-21 and section 26 of the Act. Under section 13A, a foreign person who acquires shares in a prescribed corporation (other than the type of prescribed corporation in paragraphs 13(1)(d), (e) or (f)) or control of a business is exempt from these requirements if the total asset value of the corporation or business is below a threshold amount.

Regulation 5 of the Principal Regulations prescribes the general asset threshold amount for the purposes of section 13A. The current general threshold amount is $100 million.

Section 17A of the Act provides an exemption to sections 18-21 of the Act with respect to prescribed foreign investors. Section 17B specifies the types of prescribed corporations and businesses in relation to which a prescribed foreign investor is not treated as a foreign person. Section 17C specifies the types of prescribed corporations and businesses in relation to which a prescribed foreign government investor is not treated as a foreign person.

Regulation 6 sets out the thresholds that apply to investment by prescribed foreign investors. Regulation 7 sets out the thresholds that apply to investment by prescribed government investors.

 

 

 

ATTACHMENT B

Details of the Foreign Acquisitions and Takeovers Amendment Regulations 2006 (No. 3)

Regulation 1 - Name of Regulations

This regulation provides that the title of the Regulations is the Foreign Acquisitions and Takeovers Amendment Regulations 2006 (No. 3).

Regulation 2 - Commencement

This regulation provides for the Regulations to commence on the day after they are registered on the Federal Register of Legislative Instruments.

Regulation 3 - Amendment of Foreign Acquisitions and Takeovers Regulations 1989

This regulation provides that the Foreign Acquisitions and Takeovers Regulations 1989 (the Principal Regulations) are amended as set out in Schedule 1.

Schedule 1 – Amendments

Item [1] – Regulation 6, table, item 2, column 3, paragraph (aa)

This item increases the asset threshold in item 2, with respect to the type of corporations to which paragraph 17B(1)(c) of the Act relates, to $200 million from 2007.

This amendment ensures that from 2007, prescribed foreign investors who invest in prescribed corporations covered by paragraphs 13(1)(d), (e) or (f) which carry out business in sensitive sectors are not considered foreign persons for the purposes of sections 18, 20 and 26 of the Act if the relevant corporation has total assets of $200 million or less. This amount will continue to be indexed annually. This amendment is consistent with regulation 4, which sets out the threshold that applies to investment in foreign corporations more generally, and with the obligation not to discriminate against United States investors as contained in the Australia United States Free Trade Agreement.

Item [2] – Regulation 7, table, item 1, column 3, paragraph (a)

This item increases the asset threshold in item 1, with respect to the type of corporations to which paragraph 17C(1)(a) of the Act relates, to $100 million from 2007. It also specifies that the 2006 amount remains at the current level ($52 million, which is the indexed amount from the previous year).

This amendment ensures that from 2007, prescribed foreign government investors who invest in prescribed corporations covered by paragraphs 13(1)(a), (b), (c), (g) or (h) are not considered foreign persons for the purposes of sections 18, 20 and 26 of the Act if the relevant corporation has total assets of $100 million or less. This amount will continue to be indexed annually. This amendment is consistent with the general asset thresholds in regulation 5, and with the obligation to not discriminate against United States investors as contained in the Australia United States Free Trade Agreement.

Item [3] – Regulation 7, table, item 2, column 3, paragraph (a)

This item increases the asset threshold in item 2, with respect to the type of corporations to which paragraph 17C(1)(b) of the Act relates, to $200 million from 2007. It also specifies that the 2006 amount remains at the current level ($52 million, which is the indexed amount from the previous year).

This amendment ensures that from 2007, prescribed foreign government investors who invest in prescribed corporations covered by paragraphs 13(1)(d), (e) or (f) are not considered foreign persons for the purposes of sections 18, 20 and 26 of the Act if the relevant corporation has total assets of $200 million or less. This amount will continue to be indexed annually. This amendment is consistent with regulation 4 and with the amendments to regulation 6, which set out the thresholds that apply to investment in foreign corporations more generally, and with the obligation not to discriminate against United States investors as contained in the Australia United States Free Trade Agreement.

Item [4] – Regulation 7, table, item 3, column 3, paragraph (a)

This item increases the asset threshold in item 3, with respect to the type of businesses to which subsection 17C(2) of the Act relates, to $100 million from 2007. It also specifies that the 2006 amount remains at the current level ($52 million, which is the indexed amount from the previous year).

This amendment ensures that from 2007, prescribed foreign government investors who invest in businesses are not considered foreign persons for the purposes of sections 19 and 21 of the Act if the total assets of the business are $100 million or less. This amount will continue to be indexed annually. This amendment is consistent with the general asset thresholds in regulation 5 and with the obligation not to discriminate against United States investors as contained in the Australia United States Free Trade Agreement.

 

ATTACHMENT C

 

Regulation Impact Statement

proposals to update treatment of offshore takeovers involving Australian assets and the A$50 million general asset threshold

BACKGROUND

Purpose of Australia’s Foreign Investment Screening Regime

The primary purpose of Australia’s foreign investment screening regime is to ensure that foreign investment in Australia is consistent with the ‘national interest’ and takes account of community concerns about foreign ownership of Australian assets. The term ‘national interest’ does not have a precise definition. However, it includes such considerations as the existing whole-of-government policy and law, national security interests, and economic development. This broad but important policy would make it very difficult to try to quantify the benefits of screening foreign investment proposals for national interest risks.

The Foreign Acquisitions and Takeovers Act 1975 (the FATA) provides the statutory basis for Australia’s screening regime and determines which proposed transactions are screened. Under the FATA the Treasurer has the power to block or unwind transactions where the outcome is considered to be contrary to national interest, or impose conditions on a proposed transaction to ensure that it would be consistent with the national interest.

The FATA allows a period of 30 days[1] to examine transactions to determine whether they may be contrary to the national interest. For transactions that are not deemed to raise significant national interest concerns, a notice of no objection must be issued within 10 days of a decision being made. Where no decision is made on a proposal within the 40 day approval period, it will be deemed to have been approved.

Current Regulatory Framework for Foreign Business Investment

Two sets of key thresholds determine the range of business transactions that are covered by the FATA.

The first is the ‘asset value threshold’ that is used to exempt low‑value businesses from screening. Since 1999, this threshold has been set at A$50 million meaning that businesses valued below this are not subject to the FATA screening requirements. In practice, however, currently notifications relating to businesses valued at between A$50 million and A$100 million are not generally subject to any detailed examination. Typically, these proposals are simply noted and a non‑objection notice is issued.

This A$50 million threshold generally applies to all business investors, except in the case of US investors who are subject to a higher asset value threshold — currently A$831 million. The higher threshold of A$800 million (indexed to the GDP deflator) was negotiated under the Australia‑United States Free Trade Agreement (AUSFTA) and came into effect in January 2005.

Other exceptions to the scope of the FATA apply to proposals involving: direct investments by foreign governments and their agencies and the establishment of new businesses involving expenditure of A$10 million or more. Each of these are not subject to the Act: in the former case, a sovereign government (with the exception of a US government) is not defined as a 'foreign person' under the FATA and hence not bound by its provisions; while for the latter, the FATA applies to share and asset acquisitions but not to establishment investments in newly created business ventures and entities. The FATA also does not apply to direct investments by foreign persons in the media (and proposed portfolio investments of 5 per cent or more) below the A$50 million and A$52 million[2] exemption thresholds set by the FATA. Under Australia’s foreign investment policy, these three categories of transactions are each required by the policy, but not by any legally binding statutory requirement, to notify and receive prior foreign investment approval. These policy-based screening requirements will continue to apply regardless of changes made to: the FATA’s general asset value threshold; its threshold for offshore takeovers involving Australian assets; and, its US‑specific sensitive sector thresholds (including the application of the FATA to US government investors under the US sensitive sector threshold).[3] For the purpose of this Regulation Impact Statement, references made to potential changes in thresholds are in the context of the FATA’s thresholds other than the general US‑specific asset value threshold (currently A$831 million).

The second set of thresholds relate to the number of shares that a foreign person or persons are permitted to hold an interest in before being subject to the FATA. This ‘FATA control threshold’ is currently set at 15 per cent for individual foreign persons or 40 per cent for groups of associated foreign persons. This means that foreign persons are deemed to hold a substantial interest in an Australian company at either 15 per cent at the individual level or 40 per cent at the aggregate level. Proposals that involve acquisitions of substantial interests (as defined by these thresholds) are subject to compulsory notification[4] and screening if they satisfy the relevant asset value test (that is, they are valued above the A$50 million threshold).

1.1                   Review of Australia’s foreign investment screening regime

A review of Australia’s foreign investment screening regime in relation to business investment was recently completed in accordance with the Australian Government’s AUSFTA commitments. Under the AUSFTA, the Australian Government undertook to conduct a review (within 18 months of entry into force of the agreement) of the treatment of several types of foreign business investment under the FATA.

The purpose of the review was to analyse whether application of the current foreign investment screening regime to certain business transactions (including portfolio investment,[5] internal corporate reorganisations and foreign‑to‑foreign takeovers) imposes unnecessary compliance costs on foreign business investors.

The broad objective of the review was to better focus Australia’s foreign investment regime on transactions that are most likely to raise significant national interest concerns. Such streamlining of the regime would reduce unnecessary screening of proposed business transactions and the associated compliance costs for stakeholders, while maintaining the regime’s effectiveness.

The review also took into account concerns about the scope of the FATA highlighted by the Taskforce on Reducing the Regulatory Burden on Business (the Banks Taskforce). This Taskforce recommended, in part, that the Government should raise the thresholds for approval of non-real estate acquisitions under Australia’s foreign investment screening regime (Recommendation 5.58(b)).

The review consulted with relevant stakeholders including foreign investors, financial market participants, peak industry bodies and Australian business representatives.

This Regulation Impact Statement does not deal with all the issues considered during the review. Rather, it focuses on the specific issues of the treatment of offshore takeovers involving Australian assets and the A$50 million general asset value threshold. However, the review’s findings on the operation of the FATA provide broader context for consideration of this specific issue.

Review’s findings on the operation of the FATA in the current economic context

The review focussed on whether the scope of the FATA was too broad in relation to a number of business-related foreign investment proposals, imposing unnecessary compliance costs and not achieving its objective of screening foreign investment proposals only where they may raise national interest issues. The review concluded that the FATA was too broadly cast. A key part of the problem is that the FATA regime needs updating to handle the current economic environment of increased foreign investment flows, new complex commercial structures and investment vehicles.

The review suggested that in the context of growing global economic activity and increased cross‑border investment flows, this problem is increasing in scale. These economic trends and complexity of the regime will continue to increase the already substantial FATA compliance costs for business, amplifying the risk of reducing Australia’s attractiveness as a destination for foreign investment.

The following analysis demonstrates the scale and frequency of these problems.

Statistical analysis of casework — frequency of problem of regulating proposals where there are no national interest issues

In terms of the risk of national interest issues arising, the review found that the overwhelming majority of foreign business-related proposals do not raise any national interest concerns and receive approval within the total 40‑day period available. This suggests that the scope of Australia’s screening regime is currently too broad and significant scope exists for streamlining the regime.

This is reinforced by the relatively small number of non-real estate proposals that have been blocked since 1992, compared with the high volume of proposals screened. The last business investment proposal to be blocked on national interest grounds was Shell’s proposed acquisition of the North West Shelf gas project in April 2001. Between 1992-2000, nine non-real estate foreign investment proposals were blocked on the grounds that they would be contrary to the national interest. No substantive proposals have been blocked since 2001 and only a small number of approvals have been subject to conditions.[6] As an example of the number of business-related notifications, 345 business-related proposals were notified for screening in 2005.

International comparisons — scale of problem of Australia’s regime being uncompetitive in attracting foreign investment

The review’s comparison of screening regimes indicates that Australia screens a significantly wider range of business transactions than either Canada or New Zealand.[7] For example, while the FATA contains thresholds of A$50 million (general asset value threshold) and 15 per cent (individual control threshold in a relevant corporation), the Canadian regime is based on thresholds of C$265 million (equivalent to more than A$300 million) and 33 per cent and the New Zealand regime is based on thresholds of NZ$100 million (equivalent to around A$85 million) and 25 per cent.

Australia also screens categories of transactions (such as internal corporate reorganisations and offshore takeovers) that are not screened in either Canada or New Zealand. This suggests that Australia’s screening regime is relatively more restrictive and onerous than comparable regimes, which risks reducing Australia’s competitiveness as a destination for foreign investment.

 

Consultations – scale of business’ compliance costs

Consultations indicated that the cost of complying with Australia’s foreign investment screening regime is significant, deriving from three main sources:

·        the need for foreign persons to monitor the size of their interests in relevant companies to determine whether or not a proposed acquisition of additional shares will cause them to cross the FATA control threshold;

·        the need for foreign persons to prepare and submit a notification setting out required information in relation to a proposed transaction; and

·        the need for foreign persons to delay a proposed transaction until it has been approved.

A peak industry body and a major financial services corporate group provided an estimate of average costs per FATA notification in the range of US$25,175 to US$35,000. The following is a breakdown of the minimum aggregate costs (in terms of US$).

The legal cost for each application is between $8,000-$10,000 (ie average of $9,000). In addition, it is estimated that each application involves approximately 32 hours of compliance monitoring time, which costs approximately $16,174 per application of internal time.  This results in an average per application cost of $25,175.

A rough break down of the costs in relation to each task is as follows (per application):

·        cost of applying for/maintaining approvals: $10,046 ($9,000 legal, $1,046 monitoring)

·        notification requirements: $248

·        education requirements: $1,918

·        purchase (eg obtaining company reports and accounts): $124

·        record keeping: $9,482

·        procedural: $3,357

The above cost estimates do not take into account the additional systems‑related costs. One foreign custodian recently spent approximately A$330,000 on system purchases to assist with FATA compliance.

Consultation also indicated that these costs can be particularly significant for large foreign portfolio investors (including those that are part of larger financial services groups) and foreign custodians that hold large numbers of shares in Australian companies in the course of providing nominee and custodial services. For these investors, compliance costs can account for a substantial proportion of the total cost of carrying out a transaction.

 

ISSUE: FATA treatment of offshore takeovers involving Australian assets

Identification of Specific Issue

An offshore takeover is a transaction under which a foreign person indirectly acquires control of an Australian business as a consequence of acquiring a foreign parent corporation. This can be contrasted with a direct takeover, which involves a direct acquisition of an Australian business.

Although the FATA does not contain any special provisions relating to such transactions, it currently applies to all offshore takeovers involving Australian businesses that exceed the relevant asset value threshold (generally A$50 million).[8] The FATA applies to such transactions regardless of the foreign parent’s share of Australian assets as a percentage of the total business assets.

Offshore takeovers involving Australian business assets involve a change in the identity of those assets’ effective foreign controller. Such transactions could therefore raise national interest issues but only where the Australian business assets involved are significant.

A problem with the FATA’s current application to such offshore transactions is that it results in excessive screening of offshore takeovers proposals, because it screens transactions that do not involve significant Australian businesses. Similar to the FATA’s general asset value threshold discussed later in this Regulation Impact Statement, the A$50 million threshold for offshore takeovers no longer reflects what would be considered as a significant Australian business. These thresholds are not indexed and have not kept pace with general growth in the value of business assets. Subsequently, the scope of these FATA provisions has gradually broadened to encompass a wider range of businesses transactions than is necessary to achieve their primary purpose (which is to only screen proposals which may raise national interest concerns). As a result, the FATA is currently screening proposals in excess of those that would now be considered significant enough to potentially raise national interest concerns. This excessive screening suggests a significant degree of an unnecessary business compliance burden.

Contributing to this excessive screening is the problem that the FATA currently provides no minimum threshold in relation to the share of Australian assets in a proposal that is subject to screening. As a result all proposals over the asset value threshold are screened regardless of the share of Australian assets as a percentage of the foreign parent’s total business assets. This means that a proposal would be examinable even where the Australian assets constitute less than 1 per cent of the total business assets. This is a relevant consideration in the context of ensuring that Australia’s screening regime does not act as an undue obstacle to foreign transactions that have only a limited jurisdictional nexus to Australia.

The FATA’s current coverage of these transactions could also reduce Australia’s attractiveness as a destination for foreign investment, particularly given that offshore takeovers are exempt from screening in other countries such as Canada and New Zealand. As a result, some foreign investors may chose to invest in such less restrictive environments.

Size of the problem

In 2005, 30 offshore takeovers approved under the FATA which involved compliance costs for business of at least US$750,000 (excluding other potential costs from delays in transactions and lost business opportunities). These problems are likely to increase in size and complexity. As global economic and cross-border investment activities expand, the frequency and volume of offshore takeovers involving Australian business assets is likely to continue to rise substantially.

Objective

The objective is to better focus the FATA to screen foreign offshore takeover proposals, involving Australian business assets, only where they raise significant national interest concerns. This would contribute to the broader objective of streamlining Australia’s foreign investment regime to reduce unnecessary business compliance (and Government administration costs).

Options

The following options were considered under the Review to address these issues:

option 1: exempt all offshore takeover transactions from screening:

option 2: exempt all offshore takeover transactions where the Australian assets are valued at A$200 million or less and account for less than 50 per cent of the foreign parent’s total assets; and

option 3: maintain the status quo — no change in the asset threshold (of A$50 million).

Impact analysis

Option 1: exempt all offshore takeover transactions from screening

Benefits

Under Option 1’s blanket exemption, the FATA would only apply to direct acquisitions of Australian corporations. This would effectively exempt all offshore takeovers (except those involving acquisitions by foreign governments and of media investments).

The benefit of Option 1 would be the business compliance costs savings resulting from the reduction in unnecessary screening. Based on 2005 data, a blanket exemption could be expected to reduce a significant number of proposals unnecessarily screened. For example it would have removed the need to screen 28 of the 30 offshore takeovers approved in 2005. Based on costing estimates provided by a key industry association, a reduction of 28 proposals could have saved business investors up to US$700,000. Two of the offshore takeover proposals in 2005 would have still needed to be notified under the Government’s foreign investment policy (rather than due to FATA requirements) as they involved sensitive sectors (one in the media sector, the other was a subsidiary of a foreign Government-owned corporation).

Costs

The key cost associated with Option 1 would be a high risk of not screening a proposal which may raise national interest concerns. The gravity of this risk would need to be weighed against any benefits from a blanket exemption for offshore takeovers involving potentially significant Australian assets.

Option 2: exempt all offshore takeover transactions where the Australian assets are valued at A$200 million or less and account for less than 50 per cent of the foreign parent’s total assets

Benefits

This option with its thresholds would ensure that the FATA only screens proposals involving significant Australian assets which may raise national interest issues. While Option 1 would remove FATA compliance costs associated with offshore takeovers, Option 2 would reduce these business compliance costs by offering an exemption where certain thresholds are not met. In 2005, 12 of the 30 offshore takeover proposals approved involved foreign corporations with more than 50 per cent of their assets overseas and less than A$200 million of assets in Australia. Based on this data, the business compliance savings from Option 2 could be around US$300,000 per annum.

Costs

The cost associated with Option 2 would be the risk of not screening a proposal which falls below the thresholds and raises national interest concerns. This is a highly unlikely risk because the combination of thresholds will ensure that the FATA will continue to screen a change in foreign control of any significant Australian business assets for national interest concerns.

Option 3: maintain the status quo — no change in the asset threshold

Benefits

Option 3 would result in all offshore takeover transactions involving Australian assets in excess of A$50 million being screened for national interest concern, with the associated compliance costs for business. Option 3’s key benefit would be the ability for the FATA to continue to screen offshore takeover proposals involving significant and relatively insignificant Australian assets.

Costs

The key costs of Option 3 would be the ongoing business compliance burden, including business opportunity costs from transactional delays. There is also the broader potential cost to the Australian economy from the loss of foreign investment capital deterred by what is perceived to be an onerous screening regime, particularly in comparison with those of New Zealand and Canada which exempt offshore takeovers.

 

Consultation

Consultation with stakeholders indicates that foreign investors and key industry groups believe that the current threshold is outdated and is too low relative to the risk of a proposal raising national interest concerns. Stakeholders advocate that raising the threshold to a level greater than A$200 million and where the Australian assets account for less than 50 per cent of the foreign parent’s total assets would be more appropriate. They consider that a threshold of greater than A$200 million would reflect the growth in the size of the Australian economy and taking into account that sensitive sectors would be dealt with separately under the regime. Stakeholders suggested a threshold of A$250 million, arguing this would also reduce the margin of preference that US investors have under the AUSFTA. However a threshold of above A$200 million would create risks of not screening offshore takeovers involving significant Australian assets for national interest issues. It would also move too far away from the proposed general asset value threshold of A$100 million. An A$250 million threshold may therefore raise community concerns that the FATA is not effectively protecting the national interest.

Conclusion and recommended option

Option 2 is the recommended option because it can achieve the objectives of better focusing the FATA to only screen foreign offshore takeover proposals, involving significant Australian business assets for national interest concerns. This option would also contribute to the broader objective of streamlining Australia’s foreign investment regime to reduce unnecessary business compliance (and Government administration costs) and enhancing Australia’s attractiveness as a destination for foreign investment. A threshold of A$200 million, rather than stakeholders’ desired A$250 million would ensure that the regime continues to screen any proposal involving significant Australian assets.

Option 2’s combined exemption thresholds of Australian asset values below A$200 million and which account for less than 50 per cent of the foreign parent’s total assets would ensure that screening only applied to transactions involving significant Australian assets. This combination would also ensure that Australia’s screening regime does not act as an undue obstacle to foreign transactions that have only a limited jurisdictional nexus to Australia. Only under Option 2 would this benefit be achieved without introducing an increase in the level of risk to the regime’s effectiveness.

Option 1 is undesirable because it introduces the high risk of not screening any offshore takeovers involving significant Australian business assets which may raise national interest issues.

Option 3 is also an undesirable option because it does not achieve the objective of better focusing screening of offshore takeovers with the purpose of the FATA, and continues to impose the costs of the business compliance burden.

ISSUE: FATA’s A$50 million asset value threshold

Identification of Specific Issue

As explained in the Background section of this paper, the FATA’s general asset value threshold is a threshold below which transactions are exempt from the FATA. Currently the threshold is set at A$50 million meaning that proposals of acquisitions valued at more than A$50 million are subject to the regime.

The problem with the A$50 million asset value threshold is that, because it is not indexed, it has not kept pace with the general growth in the value of business assets. Subsequently, the scope of Australia’s screening regime has gradually broadened to encompass a wider range of businesses transactions than is necessary to achieve the primary purpose of the Australian government’s foreign investment policy. The primary purpose is to only screen proposals which may raise national interest concerns. However the threshold has become quite low relative to the value of assets which would now be considered significant enough to potentially raise national interest concerns. As a result foreign business investors are currently bearing unnecessary compliance costs.

Size of the problem

This problem is substantial and increasing, as many foreign investment business‑related proposals will exceed A$50 million in asset value and cross‑border economic activity and investment increases.

Objective

The objective is to better focus the regime on screening foreign investment business‑related proposals which are significant enough to potentially raise national interest concerns, thereby removing unnecessary screening, compliance costs and regulatory complexity for business.

Options

The options considered in the review are as follows:

option 1: raise the asset value threshold from A$50 million to A$100 million;

option 2: raise the asset value threshold to a level greater than A$100 million; and

option 3: maintain the status quo – no change in the asset threshold.

Impact analysis

Option 1: raise the asset value threshold from A$50 million to A$100 million

Benefits

The key benefit of Option 1 would be the reduction in the business compliance burden resulting from the reduction in the number of business investment proposals screened. Under Option 1, this would be equivalent to the compliance costs for foreign direct investors in businesses valued between A$50 million and A$100 million. For example, based on the estimated compliance cost figures provided by a key industry association the screening of the 34 transactions within this range in 2005 would have cost business investors at least US$850,000.

Costs

The costs associated with Option 1 would be a risk that the screening regime does not capture a proposal with asset value of less than A$100 million, that could potentially raise significant national interest concerns. Screening under the current arrangement however suggests that this risk would be extremely low under Option 1. Proposals of this nature are generally considered not to raise national interest concerns — for example, none of the proposals screened between the A$50 million and A$100 million range in 2005 were rejected.

Option 2: raise the asset value threshold to a level greater than A$100 million

Benefits

Under Option 2, an asset value threshold higher than A$100 million would also reduce compliance costs for business as less proposals would be subject to the regime. The higher this threshold, the greater the beneficial reduction in compliance costs. This option would also help reduce the public administrative burden by reducing the screening caseload quota. A higher asset value threshold would also bring the Australian regime more into line with the asset value thresholds of Canada and New Zealand’s regimes and also reduce the margin of preference available in Australia’s regime to US investors under the AUSFTA. These factors would help enhance Australia’s attractiveness as a destination for foreign investment.

Costs

The costs associated with Option 2 would be an increasing risk that the screening regime does not capture a proposal that could potentially raise significant national interest concerns. This risk increases the more the threshold is raised.

Option 3: maintain the status quo — no change in the asset threshold

Benefits

A perceived benefit of Option 3 may be that the FATA can continue to screen a large number of business proposals for national interest concerns. However given that the statistics show that most proposals valued between A$50 million and A$100 million raise no national interest concerns, it could be argued that this benefit is illusory.

Costs

The direct costs associated with Option 3 would be significant business compliance and current public administration costs from screening a larger number of proposals which generally do not raise national interest issues. There are also costs in terms of business opportunity costs and delays in transactions proceeding. There are broader associated costs to the Australian economy if this burden reduces Australia’s attractiveness as a foreign investment destination.

Consultation

Consultation with stakeholders indicates that foreign investors and key industry groups believe that the current asset value threshold is outdated and has become too low relative to the value of assets that would be considered significant enough to potentially raise national interest concerns. Stakeholders advocate that raising the threshold to more than A$50 million would more appropriately reflect the value of a transaction that may raise national interest concerns. They consider that a threshold of greater than A$200 million would reflect the growth in the size of the Australian economy and reduce the margin of preference that US investors have under the AUSFTA. Stakeholders consider that this would reduce the unnecessary business compliance cost that result from the outdated threshold. A key industry association suggested raising the general asset value threshold to A$250 million (as an example for a new threshold under Option 2), with the regime dealing with sensitive sectors separately.

However a threshold of above A$200 million would create risks of not screening offshore takeovers involving significant Australian assets for national interest issues. It would also move too far away from the current general asset value threshold of A$50 million. The proposed threshold of A$100 million is selected with the confidence of screening experience that proposals between A$50 million and A$100 million of Australian assets generally do not raise national interest issues. A value asset threshold of over A$200 million may therefore raise community concerns that the FATA is not effectively protecting the national interest.

Conclusion and Recommended Option

The recommended option is Option 1 because it will achieve the desired effect of reducing business compliance costs and is unlikely to jeopardise the effectiveness of Australia’s screening regime. The benefit of reduced compliance costs can therefore be achieved through this option while the cost associated with the risk (discussed above) is minimised. This is because it is highly unlikely that foreign control over businesses valued between A$50 million and A$100 million would raise significant national interest concerns. A threshold of A$100 million, rather than stakeholders’ desired A$250 million would ensure that the regime continues to screen any proposal involving significant Australian assets.

Option 2 on the other hand could unnecessarily increase the risk that a proposal with national interest implications would not be covered by the FATA. Therefore while the benefits of Option 2 in terms of compliance costs may be larger, these may be outweighed by the cost associated with increased risk. Subsequently this option is considered to be less desirable than Option 1.

Option 3 would be considered less desirable than Option 1 as continuing to screen proposals under A$100 million would be inconsistent with the FATA’s purpose as such proposals do not raise significant national interest issues.