As part of its Family Offices Insights series, the international law firm considers real estate investments by foreigners into the Australian market.

The following commentary, originally released by law firm Squire Patton Boggs, the US-based law firm, is reproduced here with the US-based organization's permission. The article is part of the law firm's Family Office Insights series. The editors are grateful to the firm for being able to use this article; as always, the editors do n0t necessarily agree with all views of guest contributors. Email the editor at tom.burroughes@wealthbriefing.com

Introduction

The Australian government recognises that foreign investment plays an important and beneficial role in the Australian economy (1). The current approach of the Australian government is to strike a balance between encouraging foreign investment while ensuring foreign investment is not contrary to national interest (2).

Despite this general approach, foreign investment into agricultural land assets has been a contentious issue that has often prompted public debate on the matter in Australia. This, in part, has led to recent changes to Australia’s foreign investment rules for agricultural land assets. These changes include:

--   Reducing the screening threshold for agricultural land assets that triggers the requirement to seek prior foreign investment approval;

--  In some cases, approval for a proposed acquisition may not be given if the asset was not offered for sale as part of an “open and transparent sales process”; and

--  All acquisitions of agricultural land assets need to be recorded in the Australian Register of Foreign Ownership of Agricultural Land (regardless of their value)

Reduction in the Foreign Investment Review Board (FIRB) Approval Screening Threshold

A “foreign person” who proposes to acquire an agricultural land asset in Australia will need to notify, and seek a no objection ruling from, the Australian treasurer (commonly referred to as “FIRB approval”) if the screening threshold is met. There are limited exemptions from this general rule.

Prior to 2015, the threshold was A$252 million ($179 million) per acquisition. The current screening threshold for most foreign investors is if the cumulative value of all agricultural land holdings of that investor exceeds A$15 million. (3) This significant reduction has resulted in a larger number of smaller agricultural land transactions by foreign investors requiring FIRB approval.

In addition, foreign investors will need to calculate all of their holdings in Australian agricultural land when determining whether a particular target acquisition requires FIRB approval (and not just consider the value of the proposed acquisition in isolation). The concept of Australian agricultural land has a wide meaning under Australia’s foreign investment rules. Without providing an exhaustive outline, it includes direct and indirect holdings, an interest in a fund that holds Australian agricultural land assets and a leasehold interest with a term of over five years (including extensions or renewals).

Open and Transparent Sale Process Is Now Part of FIRB’s National Interest Assessment
The Australian treasurer can refuse a foreign investment application if, in the treasurer’s view, it is contrary to national interest. The treasurer may also apply conditions to any FIRB approval granted to address any national interest concerns.

Earlier this year, a new national interest test was introduced for certain agricultural land assets. As part of this new national interest test, FIRB said that it will assess whether there was an opportunity for Australian investors to acquire the particular agricultural land asset. It will also have regard to whether the proposed acquisition by the foreign investor was offered for sale as part of an “open and transparent sales process”. (4)

FIRB’s published guidance states that a sales process for an agricultural land asset is likely to be open and transparent if it is conducted as follows:

--   There was a public marketing or advertising campaign for the asset, using channels that Australian bidders could reasonably access (for example, the asset was advertised on a widely used real estate listing site or in a large regional/national newspaper);

--   The sale of the asset was marketed for at least 30 days within the six-month period prior to the proposed acquisition; BS

--   There was equal opportunity for bids or offers to be made for the asset while the asset was still available for sale.

This is likely to limit the ability for off-market transactions to occur between foreign investors and local Australian vendors if the foreign investor would need FIRB approval for the particular transaction.

There are certain exceptions when this national interest test will not be applied. Examples include:

--   Where the asset is already held by a foreign person and there is no change in control (for example, internal reorganisations); and

--   Acquisitions that allow Australian investors to participate in a significant way (for example, where the applicant is majority Australian controlled or where Australians or Australian entities have the opportunity for significant participation in the business).

Register of Foreign Ownership of Agricultural Land
The Register of Foreign Ownership of Agricultural Land (Register) was established on 1 July 2015 and is administered by the Australian Taxation Office. A foreign person is required to register an interest in agricultural land (regardless of its value) within 30 days of acquiring, or disposing of, the interest. Details of individual foreign investors listed on the Register are not publicly available. However, published reports contain aggregate data on the amount of foreign ownership in Australian agricultural land.

Conclusion
Foreign investors considering an investment into agricultural land in Australia should consider early on in the transaction whether FIRB approval will be required (and, if so, whether the open and transparent sales process applies to the particular transaction). FIRB has 40 days to provide a decision to an applicant, but it can (and often does) request an extension of this time.

Appropriate conditions precedent should be included in all agreements where FIRB approval is required, but not granted, at the time transaction documents to acquire the asset are entered into (even if settlement of the acquisition is scheduled for a later date).

Footnotes

1. Foreign Investment Review Board Annual Report 2016-17, page vii.

2. Foreign Investment Review Board Annual Report 2016-17, page 7.

3. There are higher thresholds for investors from some of Australia’s free trade agreement partners. For a foreign government investor, the threshold is AU$0, meaning that all acquisitions of Australian agricultural land will require FIRB approval.

4. FIRB reviews foreign investment applications and provides advice on these applications to the treasurer. The treasurer ultimately makes the decision on a foreign investment application.