Major reforms to Australia’s foreign investment rules are anticipated to come into effect on 1 January 2021. Under the new laws, those foreign investments that are not in the national security interest, regardless of value or size of the transaction, will require mandatory review and FIRB approval, under a new national security test. These are contained in the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, which is currently before Parliament.
The proposed reforms is intended to balance Australia’s desire to encourage foreign investment against the nation’s need to protect its security in a rapidly evolving global technological environment.
Foreign investment into Australia is reviewed by the Treasurer, taking advice from the Foreign Investment Review Board (FIRB). These proposed new laws are a continuation from the temporary changes introduced during the COVID-19 pandemic, which required FIRB approval for all foreign investments. Those were introduced to protect Australian businesses and perceived national interest during a period of unprecedented economic volatility and potential vulnerability induced by the COVID-19 pandemic. These proposals restore some balance to the foreign investment framework as they relate only to matters involving national security.
There are also proposed massive increases to the civil and criminal penalties for non-compliance with the law. These penalty hikes are designed to deter deliberate flouting of the FIRB rules by entities for whom the previous penalties were not particularly onerous. The maximum fine for civil penalties will be in the range of $41.05 million to $525 million for individuals (previously $52,000). For corporations, the maximum civil penalties will increase from $262,500 to the range of $10.5 million to $525 million. There will also be a larger toolkit of enforcement and compliance measures. For example, the government will expand the range of infringement notices for less serious breaches, and the government will have powers to prevent or address suspected breaches of conditions of the foreign investment laws in a more timely and targeted way.
FIRB believes that only a small number of transactions will be affected by the new laws, and that for most foreign investors the Australian market will remain “open, transparent and welcoming”. We consider below the key changes to be introduced, and consider what effects they may have on foreign transactions in Australia.
What are the changes? 
- Mandatory notification under a new ‘National Security Test’
If the new law is adopted, any investment that comes under the definition of a new national security test must be notified to the Treasurer for review, irrespective of the size or value of the investment.
The definition of the national interest test will not be legislated, however the government will provide indicative guidance material.
This test creates a new category of notifiable security actions, which include a foreign person:
- acquiring an interest in national security land;
- acquiring a direct interest in a national security business; or
- starting a national security business.
A national security business includes, but is not limited to, any business that:
- is regulated under the Security of Critical Infrastructure Act 2018 or the Telecommunications Act 1997;
- is involved in the manufacture or supply of defence or national security-related goods, services or technologies, or any business that can create vulnerabilities in the security of Defence and national security supply chain, the Defence estate and/or other core Defence interests;
- is situated or has land that is situated in or proximate to Defence or national security installations; and
- owns, stores, collects or maintains sensitive data relating to Australia’s national security and/or defence.
Some commentators have suggested one possible focus will be health startups. The huge amounts of data stored in health records may have a national security element, at both individual and epidemiological (population) health levels. The sensitivity of health data was flagged in 2019 during discussions regarding the Chinese owned Jangho Group’s proposed takeover of Healius, a health care company owning 2400 pathology laboratories and 70 medical centres. Although the takeover did not proceed because the offer was withdrawn, the proposal highlighted the relationship between health record data and national security. Under the proposed reforms, any business that deals in large amounts of data should consider if the new National Security test would apply. It is not yet clear what data will be subject to the new test until guidance is published. While it is hoped that the regulations (yet to be published) will give more guidance with regards to data, any business that deals in large amounts of data collection should consider the implications of the reforms.
- ‘Call-in’ power
The Treasurer will have a new call-in power, enabling him or her to review on a case-by-case basis any foreign investment that otherwise would not have to be notified. The call-in power will be time-limited. The government has stated that the vast majority of investments will not be called for review under this power, and will issue guidance as to the types of investments, or actions, to which the call-in power will apply.
If the Treasurer considers the action to be contrary to national security, then the Treasurer may:
- issue a no objection notification for the action, which may be subject to conditions;
- prohibit the action; or
- require divestment of assets.
The Treasurer will not be able to call in an action that has been notified to the Treasurer or for which a no objection notification or exemption certificate has been issued.
- ‘Last resort’ review power
The new last resort power enables the Treasurer to reassess approved foreign investments, when subsequent national security risks are identified. Under this power, the Treasurer can impose conditions, vary existing conditions, or require the divestment of foreign interests.
The last resort power will not be retrospective, and will only apply to any foreign investments acquired after introduction of the new laws.
The last resort power will only be used when certain conditions are satisfied, and there has been a change in circumstances since the issue of a no objection notification. For example, situations in which the last resort power might be used include:
- the applicant submitted to the Treasurer a material misstatement or omission, which directly relates to the national security risk identified;
- the investor’s activities have changed substantially, and now pose a national security risk that was not reasonably foreseeable at the time of approval;
- a material change has occurred in the operating environment that alters the nature of the security risk compared to the time of approval;
- national security risks have emerged in relation to the acquirer or the target, which could not be foreseen at the time of approval.
The government has sought to provide some reassurance to foreign investors that these powers will not be used inappropriately or heavy-handedly. The last resort power will only be available if and when an investor has been called in for review, or when an investor has made a mandatory or voluntary notification of an acquisition (or intended acquisition). In other words, where an investment did not require mandatory notification and was not called in for review within the specified timeframe, the acquisition will not be subject to future action.
Additionally, the powers will only be used when:
- no other regulatory actions are available to rectify the security risk;
- the Treasurer has taken reasonable steps to negotiate in good faith with the foreign investor to eliminate or reduce the risk; and
- action under the Foreign Acquisitions and Takeovers Act 1975 is reasonably necessary to eliminate or reduce the identified risk.
The purpose of the last resort power is to provide a means to protect national security when conditions change after point-in-time approvals, for example, due to rapid technological change, or when the nature of the national security risk changes after approval was granted.
- Voluntary notification
Investors will be able to make a voluntary notification of an acquisition (or pre-acquisition), and the Treasurer will have a time-limited period in which to exercise (or not to exercise) the call-in power to review the transaction on national security grounds. This is designed to give the investor some sense of certainty at an early stage of a transaction, while retaining flexibility for the Treasurer to assess security issues on a case-by-case basis.
In view of the risk of being called in to be screened, investors contemplating any transaction that may be related to a sensitive national security business should consider a voluntary notification to FIRB early in negotiations.
- Investor-specific exemption certificates
Investors may apply for an exemption certificate which will allow them to make acquisitions without each transaction being screened. Depending on the circumstances stated in the application, the certificates will be valid for a range of time-periods and values, and may include conditions. The exemption certificates aim to encourage foreign investment by reducing the regulatory load and cost, especially when there are multiple acquisitions.
- Streamline less sensitive investments
Foreign government investors, who invest in foreign private equity, institutional funds (and similar) with investments in non-sensitive businesses, may be exempted. This exemption will apply when the foreign government investor has no control or influence, or could not be perceived to have control or influence, over the investment or the operational decisions of any entity or any of its assets. The intention is to streamline the process for foreign government investors and to reduce the administrative burden.
- Improved collection and sharing of information
The government will create a new register for all foreign investments, amalgamating existing registers. There will also be increased scope of information sharing provisions across government agencies. These measures are intended both to reduce administrative load within the foreign investment framework, and to share protected information when national security considerations are relevant.
What are the anticipated effects on foreign investment in Australia?
In its 2018-2019 annual report, FIRB notes that more than 8,500 applications were approved, amounting to a potential $231 billion in foreign investments. Furthermore, many sectors underwent growth, including the services sector, commercial real estate, manufacturing, electricity and gas. In 2018-19, only one proposed foreign investment was prohibited from proceeding.
Unsurprisingly, FIRB anticipates that the main areas potentially affected by these laws are those that relate to sensitive assets such as critical infrastructure, or large holdings of personal information.
FIRB also encourages early engagement to identify, assess and manage any national interest concerns. Under the new rules this will be formalized through the voluntary notification process. Once a voluntary notification is made, the Treasurer had a specified time limit in which to respond and hence provide investor certainty. This provides certainty the investment will not then later be reviewed under the call in or last resort powers.
Key Takeaways | How do businesses maximise certainty under the proposed reforms?
Foreign investors should:
- be aware of these proposed reforms;
- consider whether any acquisition of Australian business or assets comes within the new national security test. If there is any possibility the investment might be captured within the new test, then foreign investors should consider voluntary notification during the early stages of negotiation.
 Source: The Australian Government the Treasury
 This is a brief summary of the changes, and is not comprehensive.
 Source: The Australian Government the Treasury
 Source: The Australian Government the Treasury
 Such as through the Telecommunications Act 1997 or Security of Critical Infrastructure Act 2018.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please also note that the law may have changed since the date of this article.