In Short

The Situation: The Australian government has restated its commitment to foreign investment and announced procedural reforms to Australia's foreign investment framework. The government aims to attract the significant foreign capital inflows needed to support its priorities, while also protecting the national interest in an increasingly complex economic and geopolitical environment.

The Result: The government will increase its scrutiny of investments in various "sensitive" sectors, while streamlining the assessment process for "lower-risk" investors and investments—repeat investors, with a good compliance record, investing in non-sensitive sectors. Other key measures include: (i) refunding application fees for unsuccessful bidders in competitive processes; (ii) lower fees for foreign investors in established "build to rent" developments; and (iii) an exemption from mandatory notification for passive or low-risk interfund transactions.

Looking Ahead: The renewed policy measures are expected to be well received by the corporate sector, and in part, reflect trends and themes which have emerged within Australia's foreign investment regime in recent times. Although the streamlining measures will be welcomed, these will be counter-balanced by the government's doubling-down on national interest priorities.

Emergence of a Two-speed Regime: Balancing the Competing Tensions of Strengthening yet Streamlining Australia's Foreign Investment Policy

Under Australia's foreign investment legislation, foreign investors must notify the Treasurer of proposed investments meeting specific criteria, with provisions for voluntary notification or exemption. The Treasurer, advised by the Foreign Investment Review Board ("FIRB"), may prohibit or impose conditions on investments deemed contrary to national interests or security. Final decision-making rests with the Treasurer.

The Australian government's position is that the escalation of national security threats amid heightened geopolitical competition necessitates a re-evaluation of Australia's approach to foreign investment. In response, the government plans to increase scrutiny on investments in "sensitive" sectors, whilst simultaneously simplifying the approval process for "low-risk" investments to ensure Australia remains attractive for foreign capital.

Greater scrutiny of sensitive sectors. Consistent with the global theme of governments applying greater scrutiny to foreign investments into sensitive sectors whilst ensuring that Australia can keep pace with the changing security environment and emerging risks, the Australian government will increase its focus on foreign investments across the following sensitive sectors: critical infrastructure, critical minerals, critical technology, investments in proximity to sensitive Australian government facilities, and investments involving access to sensitive data.

Market practitioners have experienced FIRB's increased attention in recent years on these types of investments (noting the sweeping changes in January 2021 requiring mandatory notification of investments in national security businesses and land), and accordingly, these types of investments will likely continue to cause protracted timelines in the assessment process.

A streamlined assessment process for lower-risk foreign investors: Who, what and how. For particular investors, the government will streamline the FIRB assessment process, to enable low-risk capital to flow more quickly. Although investments will continue to be assessed on a case-by-case basis, proposals meeting the following new criteria may attract a faster assessment:

• Who: Repeat investors who are known to Treasury, investing alone and not with unknown investors; and/or investors with a strong track record of compliance with Australian laws and passive investors who can demonstrate no control or influence over an asset.
• What: Investments in non-sensitive sectors (e.g., manufacturing, professional services, commercial real estate (and other properties not near sensitive government facilities), new housing and mining of non-critical minerals.
• How: Clear ownership structures, including clear articulation of the ultimate controller of the investment.

Additionally, new administrative improvements include less need to provide duplicate information for repeat investors (to the extent no changes have arisen) and greater transparency amongst FIRB personnel and applicants—to flag when longer assessment timeframes may be expected.

From 1 January 2025, Treasury is targeting processing 50% of investment proposals within the 30-day statutory decision period. Although encouraging, we expect to see a dual speed process emerging—applications with a 'national security' element will be held up, whilst straightforward applications by repeat investors should proceed more smoothly. FIRB's most recent quarterly report (30 September 2023) reports the median processing time for commercial investment proposals was 37 days, with around 40% of proposals being assessed in 30 days or less.

Other streamlining measures to encourage foreign investment:

• Refund of fees for unsuccessful bidders: Refunding application fees for foreign investments that do not proceed because the investor was unsuccessful in a competitive bid process. This has long been an irritation in the FIRB process, and we expect corporate advisers in particular will welcome this initiative as bringing more competition into auction processes;
• Lower fees for "Build to Rents": As recently announced, lower fees for foreign investors to buy established "Build to Rent" developments; and
• Low risk inter-funding exemptions: Lower-risk and passive transactions between investment entities that are managed by the same responsible entity, conducted in the ordinary course of adhering to an investment mandate, would be exempt from mandatory notification requirements and foreign investment fees.

Increasing Prominence of National Interest Factors—Taxation and Competition—in the FIRB Assessment Process

Leaving aside national security priorities, other national interest considerations—in particular, taxation and competition—will take on increased prominence under the reform package.

Taxation. Our observation is that, since the end of the COVID-19 pandemic, the role of the Australian Taxation Office ("ATO") in the government's assessment of foreign investment proposals has become more prominent. Consistent with global themes of ensuring that entities pay the right amount of tax in countries in which they operate and where value creation occurs, additional scrutiny will be applied to foreign investment proposals with tax characteristics which may be perceived as higher risk, including:

• Internal reorganisations or intragroup transactions which may be indicative of a planned broader arrangement resulting in avoidance of Australian tax;
• Pre-sale structuring of Australian assets that present risks to tax revenue on disposal by private equity or other investors;
• Related party financing arrangements to reduce Australian income tax or avoid withholding tax (noting recent strengthening of Australia's thin capitalisation rules); and
• Facilitation of migration of assets (for example, intellectual property) to offshore related parties in jurisdictions with effective low taxation.

The Treasury will also focus on investments structured through effective low or no tax jurisdictions where limited relevant economic activity is occurring. Additionally, the government intends to take appropriate and proportionate action to mitigate identified tax risks through applying conditions on the transaction.

Competition. As one of FIRB's 'consult partners', and combined with the recently announced reforms to Australia's merger control system, the Australian Competition and Consumer Commission ("ACCC") has and will continue to become more prominent in the assessment of foreign investment proposals in Australia's national interest. The government will consider the impact of a proposed investment on the composition of a global industry—a particular concern arises where an investment may allow an investor to control the global supply of a product or service.

In a welcome streamlining measure, from 1 January 2026, Treasury announced that information provided to the ACCC by foreign merger proponents will be largely sufficient for the consideration of competition issues under the foreign investment framework.

Four Key Takeaways

1. The government has announced procedural reforms which reflect trends and themes which have emerged within Australia's foreign investment regime—to strengthen and streamline Australia's foreign investment policy—following the COVID-19 pandemic. Those reforms are influenced by, and intended to bring Australia into alignment with, global themes.
2. The streamlining measures will likely be well received, although the proof will be in whether assessment time frames for 'low risk' capital investments do, in fact, reduce.
3. The increased scrutiny on investments with national security or sensitive characteristics is not surprising, and practitioners should expect the assessment for those types of investments to become even more involved.
4. The ATO has become more prominent in the FIRB assessment process in recent times, and increasing scrutiny on proposals with higher tax characteristics is a clear priority of the government.