We are now 6 months into the life of the new Foreign Investment Regime which came into effect on 1 December 2015 and some initial observations on the regime can be made.
The Foreign Investment Regime was passed by Parliament as part of a package of legislation to amend the Foreign Acquisition and Takeovers Act 1975 (as amended, the Act) and strengthen the foreign investment legislative framework. The overall aim of the legislation, which introduced new concepts, thresholds and penalties, is to strengthen enforcement in the foreign investment arena and to increase transparency of foreign ownership in Australia. Key changes include:
- An increase in the substantial interest threshold from 15% to 20% to align with the corporate takeover regulations under the Corporations Act 2001 (Cth).
- The introduction of the new concept of Australian land which is defined as ‘agricultural land, commercial land, residential land and a mining or production tenement’ (note that an area of land may comprise one of more of these types)
- The establishment of a register of foreign ownership in agricultural land which records the location and size of the property and the size of the interest acquired
Acquisition of a Mining Tenement – a significant or notifiable event?
Transactions that are subject to the Act now fall into one of two categories: significant actions or notifiable actions. Significant actions are actions which trigger the power of the Treasurer to make certain orders under the Act and include the acquisition of interests in Australian entities, the assets of Australian businesses and Australian land. A significant action requires voluntary notification to the Treasurer. Notifiable actions are a sub-category of significant actions and require mandatory notification to the Treasurer prior to entering into an agreement to take the notifiable action.
Whether foreign investment approval is required for the acquisition of a tenement by a foreign person depends on a range of factors including the type of tenement. Under the Act, a distinction is made between exploration and prospecting tenements and mining and production tenements. An exploration or prospecting tenement is generally not considered an interest in Australian land under the Act unless the tenement is reasonably likely to exceed 5 years (including any renewals and extensions) and gives the tenement holder the right to occupy the underlying land. In that case, the acquisition of the interest in the tenement may be a significant and notifiable action.
A mining or production tenement is considered a type of Australian land under the Act. A foreign person’s acquisition of an interest in a mining or production tenement is therefore a significant and notifiable action under the Act unless the tenement is acquired directly from the Australian government. There is no monetary threshold applicable to these types of acquisitions, meaning a $0 threshold applies, except for non-government investors from certain free trade agreement countries (Chile, New Zealand and the US – a threshold of A$1,094 million applies).
As interests in mining and production tenements are considered interests in Australian land under the Act, Australian mining companies may also be considered Australian land corporations for the purposes of the Act. This means that an acquisition of securities in an Australian mining company may be a significant and notifiable action. In addition, further regulation applies to the acquisition of mining tenements by foreign government investors.
Substantial application fees have been introduced under the Act and must be paid before the application will be considered. In connection with an application to acquire an interest in a mining or production tenement the fee is $25,000, with the important qualification that if the fee otherwise would be more than 25% of the consideration for the interest to be acquired, a de minimis rule lowers the fee to $1,000.
In practice
The first 6 months of the legislation has seen some teething problems with both the regulator and investors coming to terms with the application of the somewhat labyrinthine Act. Generally speaking, FIRB staff seem to have increased their scrutiny of transactions including transactions relating to mining tenements. A number of Guidance Notes have been issued by FIRB to help investors understand the application of the legislation with Guidance Note 24 dealing specifically with foreign investment in mining tenements. The Guidance Notes can be accessed on the FIRB website.
In view of the very high application fees, together with the stronger criminal penalties, it is strongly recommended that close analysis be undertaken to determine whether a transaction involving a mining tenement falls under the Act and is in any way a significant or notifiable action.
Standard taxation conditions for Foreign Investment recently released
Following consultations between Treasury, the ATO and industry, a revised set of standard tax conditions was released on 3 May 2016 as part of the Federal Budget. These standard conditions apply to foreign investment approvals and make clear the requirements and expectations for investors. They effectively target foreign investments which pose a risk to Australian revenue. The revised conditions are available at https://firb.gov.au/files/2016/05/Tax_conditions.pdf
The Water Rights Register is coming
Do you hold water rights in connection with mining? The government has recently issued a consultation paper in relation to a Water Rights Register which it proposes to introduce later this year. The register would contain information on foreign ownership of water access entitlements. If implemented, any mining companies with a foreign investment component holding water rights as part of their tenement will need to register those rights in the Water Rights Register.
Please contact us at McGuinnLegal if you would like further information or need specific advice on any of these matters.