United States Leads the Way With Recent Foreign Investment Into Australia

Jones Day

In Short

The Background: The Australian Treasury has released its first quarterly report ("Report") for the 2023-24 financial year covering the regulation of foreign investment in Australia.

The Result: The Report shows a slight decrease in the number of commercial investment proposals compared to the prior reported quarter (1 April 2023 – 30 June 2023), however the dollar value of commercial investment proposals materially increased for the quarter ended 30 September 2023. The United States was by far the leading foreign investor into Australia, with mineral exploration and resources being the most popular industry sector by value.

Looking Ahead: Given the current strength of the USD / $A exchange rate and other macro factors, we do not expect to see material changes in terms of the origin of the larger foreign investors into Australia in the short term. Having said that, we have recently seen some large, Japanese-led public M&A deals being announced—subject to FIRB approval—so these will likely see Japan rebound as a large foreign investor. In terms of industry sectors, Q4 2023 and Q1 2024 saw deals being announced across a range of sectors, so it will be interesting to see whether resources remains the dominant sector in Treasury's next round of statistics.

The Australian Treasury, which administers Australia's foreign investment framework, recently released its first quarterly report for the 2023-24 financial year covering the regulation of foreign investment in Australia. The report provides a range of insights and performance data concerning the operation of Australia's foreign investment regulatory framework. In this Commentary, we summarise a number of Treasury's key findings with regard to in-bound commercial investment proposals:

United States most dominant foreign investor by significant margin. The United States was, by far, the most active foreign investor into Australia during the survey period, with 119 proposals amounting to an aggregate value of A$31.3 billion (materially up from A$3 billion in the prior quarter). Even though the massive increase in value is primarily attributable to Newmont's (approximately) A$26 billion acquisition of Newcrest Mining, the number of commercial investment proposals originating from the United States was materially ahead of any other jurisdiction.

  • The United States was followed by France, as the second highest jurisdiction for foreign investment into Australia, which saw a material increase in investment (A$4.7 billion compared with A$0.1 billion in the prior quarter)—again, we note an increase in public M&A activity from French bidders during the review period. In contrast, investment proposals from Japan materially decreased during the review period, from A$11.7 billion down to A$0.5 billion. This trend will likely be reversed in future statistics, with the recent announcement of multiple, Japanese-led public M&A deals, which are subject to FIRB approval.
  • Foreign investment proposals from Canada remained relatively steady with the prior quarter, with 72 proposals for an aggregate amount of A$2.0 billion, and, likewise, foreign investment into Australia from the United Arab Emirates was relatively steady in value terms, although there was a marked decrease by number of proposals.
  • Commercial investment proposals originating from China remain generally subdued—however, there was an increase in value to A$1.6 billion (from A$ 0.8 billion in the prior quarter), despite the number of proposals decreasing. China remains, by a significant margin, the largest foreign source of investment into Australian residential real estate, both by value and number of proposals.

Minerals and resources attracting significant foreign investment. Mineral exploration and development attracted the most foreign investment during the review period, with A$28.5 billion, compared with the services sector, which attracted a total investment of A$9.4 billion. Leaving aside residential real estate, the most popular sector by number of proposals was commercial real estate, followed again by investments in the services sector. Agriculture saw a decrease in foreign investment, both in terms of value and the number of proposals, as did manufacturing. Once again, the finance and insurance sectors attracted the least foreign investment activity.

Proposals approved with conditions remain steady. Treasury's statistics show a level of consistency in terms of commercial investment proposals which were approved subject to conditions. In terms of number of proposals, nearly 40% of approved proposals were approved subject to conditions, and in value terms, just over 80% were approved subject to conditions across the two most recent reporting periods. Interestingly, since back in 2022-23, the majority of both voluntary and mandatory national security investment proposals have been approved without conditions.

  • Whilst we expect that the majority of the conditions relate to the "standard tax conditions", it would be insightful if Treasury reported on the other types of conditions imposed or at least indicated whether the conditions applied were "standard" or "bespoke". Conditions relating to data security and usage, physical access restrictions (to national security properties) and maintaining a local physical presence in Australia are other examples of conditions.

National security actions increasing. As is borne out in practice, there are an increasing number of foreign investment proposals which attract the operation of Australia's national security laws, with Treasury reporting that nearly 5% of the foreign investment proposals for the recent quarter related to national security actions which would not have been captured prior to the January 2021 national security foreign investment rule changes. Interestingly, approximately 25% of the national security investment proposals for the recent quarter were voluntary notifications.

Processing times have stabilized. We have generally observed a slight shortening in application processing times, over the past year, for proposals which do not relate to national security actions. This is borne out in Treasury's statistics, with 37 days being the median for the recent quarter (vs. 36 days for the prior quarter) and 41 days back in 2022-2023. However, it should be noted that the number of commercial investment proposals decreased marginally (from 297 to 283) between the last two quarters.

  • Treasury reports that, for commercial proposals, approximately 40% are processed in 30 days or less, around 35% between 31 and 60 days, 13% between 60 and 90 days, and just over 10% are processed within 91 days or more. Interestingly, that last figure has been broadly consistent going back to 2022.
  • Foreign investment applications involving a complex ownership structure, foreign government investment, or national security are often more complex, and in our observation, are more likely to take around 60 days to process.

Treasury eyes a shift towards using more enforcement powers. Treasury comments that its regulatory approach in detecting and responding to non-compliance with Australia's foreign investment legislation is maturing. For the recent quarter, the number of condition mandated reports (where a prior approval was subject to ongoing reporting requirements) assessed by Treasury increased by nearly 50%. Treasury notes that, whilst its primary compliance tool remains educating foreign investors on their obligations, Treasury has shifted towards using more enforcement powers in response to non-compliance, including the power to issue infringement notices. Despite this, Treasury reports that it has not yet issued any infringement notices in the 2023-2024 financial year (compared to one infringement notice in the previous financial year).

  • Treasury does not comment on its assessment of applicants' level of compliance with the requirements of the recently introduced Register of Foreign Ownership of Australian Assets—which we understand, anecdotally, has presented technical and administrative challenges for some applicants.

Four Key Takeaways

  1. The United States remains, by some margin, the leading foreign investor into Australia—both in terms of value and number of deals. Levels of investment by Canadian investors and those from the United Arab Emirates have remained relatively consistent for the past two quarters, whilst there has been a slight uptick in commercial investment proposals from China.
  2. The resources sector was the most attractive for foreign investment for the last quarter, followed by services. Commercial real estate was the second most attractive sector by number, although aggregate value has fallen.
  3. Processing times for commercial investment proposals appears to have stabilized—being around 37 days for the last two quarters, with around 35% of applications taking between 31 and 60 days to process. Proposals involving complex ownership, foreign government investment, or national security actions are often more complex and, in our observation, are more likely to take 60 days to process.
  4. Treasury notes that whilst their primary compliance tool involves educating foreign investors on their obligations, Treasury is shifting towards using more enforcement powers in response to non-compliance. Treasury has materially increased its rate of review of compliance reports submitted by investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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