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Economics Legislation Committee—Senate Standing—Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 [Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment Bill 2020 [Provisions]—Report, dated November 2020


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November 2020

The Senate

Economics Legislation Committee

Foreign Investment Reform (Protecting Australia's National Security) Bill 2020 [Provisions] and Foreign Acquisitions and Takeovers Fees Imposition Amendment Bill 2020 [Provisions]

© Commonwealth of Australia

ISBN 978-1-76093-143-8 (Printed Version)

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iii

Members

Chair Senator Slade Brockman LP, WA

Deputy Chair Senator Alex Gallacher ALP, SA

Members Senator Andrew Bragg LP, NSW

Senator Jenny McAllister ALP, NSW

Senator Susan McDonald NATS, QLD

Senator Rex Patrick IND, SA

Participating Members Senator Deborah O’Neill ALP, NSW

Senator Kimberley Kitching ALP, VIC

Senator Nick McKim AG, TAS

Senator Peter Whish-Wilson AG, TAS

Secretariat Mr Mark Fitt, Committee Secretary Dr Fiona Allen, Senior Researcher Ms Taryn Morton, Administrative Officer

PO Box 6100 Phone: 02 6277 3540

Parliament House Fax: 02 6277 5719

Canberra ACT 2600 Email: economics.sen@aph.gov.au

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Contents

Members ............................................................................................................................................. iii

Chapter 1—Introduction .................................................................................................................... 1

Chapter 2—Views on the bill.......................................................................................................... 59

Additional Comments by Labor Senators .................................................................................... 83

Additional Comments from the Australian Greens: Still in the dark .................................... 85

Appendix 1—Submissions and additional information ........................................................... 89

Appendix 2—Public hearing ........................................................................................................... 91

1

Chapter 1 Introduction

Referral of the inquiry 1.1 On 28 October 2020, the Senate referred the provisions of the Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020 (the bill) and the Foreign Acquisitions and Takeovers Fees Imposition Amendment Bill 2020 (the

fees imposition bill) to the Economics Legislation Committee (the committee) for inquiry and report by 26 November 2020.

Purpose of the bills 1.2 The bill makes a number of amendments to the Foreign Acquisitions and Takeovers Act 1975 (the Act) and other legislation, including:

 introducing a national security review and providing the Treasurer with a last-resort power to issue a divestment order;  strengthening enforcement powers by increasing penalties, and providing for directions powers, and new monitoring and investigative powers;  closing potential gaps in the foreign investment screening regime;  expanding information sharing arrangements;  establishing a new register for some foreign owned assets, which will

incorporate information in existing registers that will be discontinued; and  adding fees for new types of actions.1

1.3 The date of effect of the changes is 1 January 2021.

1.4 The fees imposition bill amends the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (the Fees Act) to establish authority for the Fee Regulation to charge existing and new fees. As it currently stands, fee amounts are prescribed in the Fees Act and Fee Regulation.2

Background and consultation 1.5 The Treasurer, the Hon Josh Frydenberg MP, announced the reforms on 5 June 2020, stating they would ensure the foreign investment framework ‘keeps pace with emerging risks and global developments, including similar changes

to foreign investment regimes in comparable countries’.3

1 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 3.

2 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 123-124.

3 The Hon Josh Frydenberg MP, Treasurer, ‘Major reforms to Australia’s foreign investment

framework’, Media Release, 5 June 2020.

2

1.6 The announcement followed earlier temporary changes to the foreign investment framework on 29 March 2020 giving the government oversight of all proposed foreign investments. The Treasurer stated reducing the threshold for proposed investments requiring approval to $0 was necessary to safeguard the national interest in light of the impact of COVID-19 on the Australian economy and business. 4 He said:

The government recognises that foreign investment will play an important part in helping many businesses get to the other side—securing jobs and supporting our economic recovery…However, these measures are necessary to safeguard the national interest as the coronavirus puts intense pressure on the Australian economy and Australian businesses…it will give the government greater visibility and scrutiny of foreign investment proposals to ensure that they remain in the national interest.5

1.7 In particular, the reforms announced in June would deal with national security risks, strengthen compliance measures, and streamline approval processes and administrative enhancements.6

1.8 The bill’s Explanatory Memorandum identifies rapid technological developments and changes in the national security environment as key drivers of the growing risk posed by some potential foreign investment to Australia’s national interest.7 Additional details on the changes and how the legislation will address these factors were provided in the Treasury’s publication, Foreign Investment Reforms (June 2020), released on the day the reforms were announced.8

1.9 As part of the reforms, the Treasurer and the Commissioner of Taxation will attain a range of enforcement, monitoring and investigative powers beyond that which they hold currently. The need for these powers was expanded upon in the Treasury’s policy document, which stated:

…there is a need to expand Treasury’s and the ATO’s compliance monitoring and enforcement tools. Other than in relation to residential property investments, the Treasurer’s enforcement powers are limited to seeking a civil penalty order or criminal prosecution. This is inhibiting the

4 The Hon Josh Frydenberg MP, Treasurer, ‘Changes to foreign investment framework’, Media Release,

29 March 2020.

5 Alice Uribe, ‘Coronavirus: foreign investment scrutiny tightened in FIRB revamp’, The Australian,

30 March 2020, https://www.theaustralian.com.au/business/economics/coronavirus-foreign-investment-scrutiny-tightened/news-story/cab47063dc8d978dbe924cd740f1929a (accessed 17 November 2020).

6 The Hon Josh Frydenberg MP, Treasurer, ‘Major reforms to Australia’s foreign investment

framework’, Media Release, 5 June 2020.

7 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 8.

8 Treasury, Foreign investment reforms, June 2020.

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government’s ability to respond proportionally to issues of non-compliance. For example, court action has to be taken to enforce conditions, even if the breach of conditions was only minor. Additionally, the existing tools are out of step with those of comparable Australian market regulators.9

1.10 Treasury undertook two rounds of consultation on the draft legislation and associated regulation in August and September 2020. In the first round of consultation from 31 July to 31 August 2020, 54 submissions were received, including 14 confidential submissions.10 In the second round, from 18 September to 2 October 2020, 26 submissions were received.11

1.11 Following consultation, the Treasury states amendments were made with regard to:

 adding safeguards to the use of the last-resort power;  modifying notification requirements for investors in circumstances of passive increases; and  consolidating overlapping registration obligations.12

Temporary zero dollar threshold 1.12 Schedule three of the draft regulations released by the Treasury, Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020, will reinstate the thresholds, subject to a final decision that considers the

ongoing impact of the pandemic on the economy and whether there remains an ongoing risk foreign investment in Australia could occur in ways that would be contrary to the national interest.13

Person 1.13 The Act and the bill make extensive references to ‘person’ or ‘persons’. The Acts Interpretation Act 1901 defines persons:

2C References to persons

(1) In any Act, expressions used to denote persons generally (such as ‘person’, ‘party’, ‘someone’, ‘anyone’, ‘no-one’, ‘one’,

‘another’ and ‘whoever’), include a body politic or corporate as well as an individual.

9 Treasury, Foreign investment reforms, June 2020, p. 15.

10 Treasury, Major reforms to the foreign investment review framework, 31 July 2020,

https://treasury.gov.au/consultation/c2020-99761 (accessed 3 November 2020).

11 Treasury, Major reforms to the foreign investment review framework—September 2020,

18 September 2020, https://treasury.gov.au/consultation/c2020-113460 (accessed 16 November 2020).

12 The Treasury, Submission 12, p. 5.

13 Exposure Draft, Foreign Investment Reform (Protecting Australia’s National Security) Regulations

2020, Schedule 3; Draft Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020, Explanatory Statement, p. 3.

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Current operation of the Act

Monetary thresholds 1.14 Under current legislation, monetary thresholds are the primary (but not only) mechanism for determining whether a proposed investment is subject to an assessment and approval process.

1.15 While for foreign government investors this is a zero dollar threshold, for private investors the threshold is ordinarily $275 million or almost $1.2 billion for investors from countries with which Australia has a free trade agreement. Other thresholds apply to land and agribusiness.14

1.16 As noted above, draft regulation accompanying the bill proposes to reinstate the pre-existing monetary thresholds. Until such time the $0 threshold remains for all investments.

National interest test 1.17 If an investment proposal is subject to review (that is, it meets the various thresholds and requirements), the Treasurer examines the proposal against the national interest. The national interest ‘test’ is framed negatively, meaning there

is a presumption foreign investment proposals should proceed, unless found contrary to the national interest. Treasury states:

…the framework operates not by approving proposed foreign investments based on their expected benefits, and instead by prohibiting investments if they are considered to be contrary to Australia’s national interest.15

1.18 As a negative test it is not necessary to prove an investment is in the national interest only that it is not against the national interest. According to the Treasury, factors considered as part of the national interest ‘are not limiting factors’.16

1.19 While being central to Australia’s foreign policy framework, there is no definition of the ‘national interest’ in the Act. The key foreign investment framework policy document, Australia’s Foreign Investment Policy, explains the national interest consists of a range of factors; the weight given to each varies depending on the nature of the enterprise and investor.17

14 See: Treasurer, Australia’s Foreign Investment Policy, 24 April 2020.

15 Senate Economics References Committee, ‘Inquiry into foreign investment proposals’,

The Treasury, Submission 6, p. 2.

16 Mr Roger Brake, Head of Foreign Investment Division, The Treasury, Estimates Hansard,

5 March 2020, pp. 93-94.

17 Treasurer, Australia’s Foreign Investment Policy, 24 April 2020, pp. 7-11.

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1.20 These factors are:

 national security—the extent to which an investment could affect Australia’s ability to protect its strategic and security assets;  competition—whether an investment could result in an investor gaining control over market pricing and production of a good or service in

Australia, or whether an investment could affect the make-up of a global industry and/or distort competitive market outcomes;  other Australian government policies—the impact on, amongst other things, taxation revenues or the environment;  economy and community—whether a restructure is proposed, how the

investment will be funded, the level of Australian participation after acquisition, and how the investor will develop the project to ensure a fair return for the Australian people; and  character of the investor—the extent to which the investor operates on a transparent commercial basis and is subject to adequate regulation and supervision, its corporate governance practices, and whether it complies with the spirit and letter of Australian laws and acts in good faith in complying with conditions.18

Significant and notifiable actions, and the Treasurer’s powers 1.21 The Act defines two types of actions (or foreign investments): significant actions and notifiable actions. Most significant actions are subject to voluntary notifications; notifiable actions are subject to mandatory notifications—that is,

the Treasurer must be notified and approve the action before it can be taken.19

1.22 The Act contains a number of conditions to determine whether a proposed foreign investment is a significant action (section 40) or notifiable action (section 47), including a threshold test and change in control test. The Act’s Regulations also specify certain significant actions are also notifiable actions. If a foreign person chooses to notify the Treasurer regarding a proposed significant action, it becomes a notifiable action.20

1.23 Regardless of whether a significant action is notified, the Act gives the Treasurer powers to:

 prohibit a proposed significant action (section 67);  require a significant action to be undone (section 69); and

18 Treasurer, Australia’s Foreign Investment Policy, 24 April 2020, pp. 7-11.

19 Although not all significant actions must be notified, to obtain certainty some foreign investors

notify the Treasurer voluntarily of a proposed significant action in order to obtain a no-objection notification from the Treasurer—see paragraph 1.22.

20 Foreign Investment Review Board, ‘Significant actions and notifiable actions’, Guidance Notes, no. 35,

1 July 2017.

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 if a significant action has been taken about which the Treasurer was not notified, and the Treasurer subsequently determines the action is contrary to the national interest, the Treasurer may make a disposal order to unwind the action, or impose legally enforceable conditions.21

1.24 The Treasurer has the power to:

 for an action that is notified, provide a no objection notification not imposing conditions (section 75);  for any action (significant or notifiable), provide a no objection notification imposing conditions (section 74); or  decide the action would be contrary to a the national interest and make an

order prohibiting the proposed significant action (section 67).22

1.25 In a limited number of circumstances, the Treasurer can order the disposal of an asset whose acquisition the Treasurer has previously approved. These circumstances (section 70) broadly include the person not complying with conditions attached to the no objection notification and subsequently being convicted of an offense or being the subject of a civil penalty order; and having an order under section 19B of the Crimes Act 1914 made against the person.23

1.26 Under current legislation, the powers of the Treasurer to assess a foreign investment proposal are largely limited to a single point in time—typically the point at which the proposal is made. There are no provisions in the Act for any ongoing assessment of investments by individuals or organisations against the national interest or national security.

1.27 Although the Treasurer has the power to vary or revoke conditions made in a no objection notification imposing conditions (section 74(4)), this may only be done if the person consents to the new condition or variation, or if the new condition or variation does not disadvantage the person (section 74(6)).

Provisions of the bills 1.28 The bill contains three schedules with each schedule containing multiple parts:

 Schedule 1 amends several pieces of legislation to introduce new actions, a national security review and last-resort provisions, as well as measures related to the integrity of the foreign investment regime, and some compliance and enforcement measures;

 Schedule 2 deals with new compliance and enforcement powers; and

21 Foreign Investment Review Board, ‘Significant actions and notifiable actions’, Guidance Notes, no. 35,

1 July 2017.

22 Foreign Investment Review Board, ‘Significant actions and notifiable actions’, Guidance Notes, no. 35,

1 July 2017.

23 This is a general description of the power—see the Act for a full explanation of the conditions

applying to the use of this power. Foreign Acquisitions and Takeovers Act, s. 70.

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 Schedule 3 provides for the Register of Foreign Ownership of Australian Assets.

1.29 The provisions of the fees imposition bill will be discussed under the Fees section below.

1.30 Given the length and complexity of the bill, the following discusses only the key amendments, and does so thematically, providing references to the item number in the bill in each schedule.

Definition of national security and other terms

National security 1.31 The term ‘national security’ is used in different contexts in the bill, and is not defined. This is similar to the use of the ‘national interest’. For instance, it is used in the following ways:

 contrary to national security;  prejudice Australia’s national security interests;  national security risk; and  national security concern.24

1.32 Under the draft regulations, the definition of ‘national security’ is made in the National Security Information (Criminal and Civil Proceedings) Act 2004 and the Australian Security Intelligence Organisation Act 1979 (ASIO Act), with a minor modification.25 This definition is made for the purpose of the Regulation defining ‘national security business’ only, and is not the definition for ‘national security’ in the bill.

1.33 The National Security Information (Criminal and Civil Proceedings) Act 2004 defines:

 national security means Australia’s defence, security, international relations or law enforcement interests;  security has the same meaning as in the Australian Security Intelligence Organisation Act 1979;  international relations means political, military and economic relations with

foreign governments and international organisations; and  law enforcement interests includes interests in avoiding disruption to law enforcement, protecting law enforcement technologies, and protecting

informants.26

24 See, for instance the following proposed provisions: 62(1A); 79A(3)(a); 130H(2)(a); Division 3—Last-resort powers: orders to deal with national security risks arising after an initial assessment; 3 Simplified outline of this Act; and 55C, amongst others.

25 Exposure Draft, Foreign Investment Reform (Protecting Australia’s National Security) (National

Security Business) Regulations 2020, Item 1.

26 National Security Information (Criminal and Civil Proceedings) Act 2004, ss. 8-11.

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1.34 The bill’s draft regulations slightly modify this definition by specifying the reference to ‘international relations’ means political, military and economic relations with foreign persons and international organisations.27

1.35 The ASIO Act defines security as including the protection of the people, Commonwealth, and states and territories from: espionage; sabotage; politically motivated violence; promotion of communal violence; attacks on Australia’s defence system; or acts of foreign interference.28

1.36 The bill provides no guidance on how the national security ‘test’ will be operationalised to require an assessment or be the basis of an assessment of whether an investment may be contrary to national security.

Other terms 1.37 Other terms are used in the bill without a specific definition being provided. These include: public interest; and national interest.

1.38 Item 18 inserts a definition in section 4 for ‘national intelligence community’, specifying it has the same meaning as in the Office of National Intelligence Act:

national intelligence community means the following agencies:

(a) ONI;

(b) each intelligence agency;

(c) each agency with an intelligence role or function.29

1.39 Item 11 defines a ‘core Part 3 action’, which is required for later provisions dealing with variations and exemption certificates (section 62B); contravening conditions (section 93); and civil penalties (including sections 98B, 98C, 98D, 98E and 98F). A core Part 3 action is:

 a significant action;  a notifiable national security action that is not a significant action;  an action in respect of which the Treasurer has given notice under subsection 66A(4) (national security review of actions: notice of review); and

 a reviewable national security action notified to the Treasurer.

27 Exposure Draft, Foreign Investment Reform (Protecting Australia’s National Security) (National

Security Business) Regulations 2020, Item 1.

28 Australian Security Intelligence Organisation Act 1979, s. 4.

29 Office of National Intelligence Act 2018, s. 4.

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National security review, call-in power, and last-resort power

Overview and rationale 1.40 Under current arrangements, investments that fall under thresholds cannot be assessed, and there is limited ability to rescind or alter an approval once it is provided (see discussion above). The government states this is problematic

because:

…risks to Australia’s national interest, particularly national security, are increasing as a result of a confluence of developments—including rapid technological change and changes in the international security environment.30

1.41 The proposed amendments will have the effect of bringing the majority of foreign investments, including investments that currently are not assessed because they fall below relevant thresholds, under the purview of the Act. This does not mean all investments will be assessed under the Act, rather, investments will be capable of being assessed under the Act against the national interest or national security.

1.42 Under the proposed amendments, in some circumstances the Treasurer will attain the ability to assess a proposed investment regardless of its value; to assess risks to national security over time; and in some situations force the divestment of an asset. The Treasurer will also have the ability to review a previously approved proposal if certain requirements are met (subject to application and transitional provisions discussed below).

Table 1.1 Overview of new actions and powers

Current law New law

Notifiable national security actions

A foreign person must notify the Treasurer before taking a notifiable action.

A foreign person must notify the Treasurer before taking a notifiable national security action or a notifiable action.

Call-in powers

The Treasurer has powers for significant actions assessed against the national interest.

The Treasurer has powers for reviewable national security actions or significant actions not notified, if the action poses a national security concern. This power can be used for ten years after the investment.

30 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 12-13.

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Current law New law

A person may voluntarily notify of a proposed action. A person may voluntarily notify of an action that could be reviewed

under the call-in power. If the action is approved by the Treasurer, the call-in power is extinguished for that action.

Last-resort powers

The Treasurer cannot unilaterally amend a no objection notification or any conditions in the no objection notification if it is detrimental to the foreign person or without the foreign person’s consent.

The Treasurer can only order an action be undone after it has been approved in limited circumstances.

The Treasurer is able to give orders to reduce national security risks if:

 there has been a material misstatement or omission in information provided to the Treasurer; or

 relevant circumstances or the activities of the person have changed; and

 all other options, including good faith negotiation and other regulatory powers, have been exhausted.

Source: Explanatory Memorandum 31

Notifiable national security action 1.43 The bill introduces a new type of action—a notifiable national security action that operates according to the type of investment, not the value of the investment. A notifiable national security action may also be a significant action

or a notifiable action.

Meaning 1.44 Item 72 of the bill defines the meaning of this type of action:

55B Meaning of notifiable national security action

(1) An action is a notifiable national security action if the action is taken, or proposed to be taken, by a foreign person and the action is any of the following:

(a) to start a national security business;

(b) to acquire a direct interest in a national security business;

31 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 15.

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(c) to acquire a direct interest in an entity that carries on a national security business;

(d) to acquire an interest in Australian land that, at the time of acquisition, is national security land;

(e) to acquire a legal or equitable interest in an exploration

tenement in respect of Australian land that, at the time of

acquisition, is national security land.

1.45 Item 18 inserts definitions at section 4 for ‘national security business’ and ‘national security land’ that specify they have the ‘meaning prescribed by the regulations’.

1.46 Draft regulations provide the meaning of national security business that encompass twelve broad types of business. These include businesses that:

 hold critical infrastructure assets within the meaning of the Security of Critical Infrastructure Act 2018 (SOCI Act);  are carriers or carriage service providers under the provisions of the Telecommunications Act 1997;  develop, manufacture or supply critical goods or critical technology

intended for military end-use by defence and intelligence personnel (Australia or another country);  provide critical services to defence and intelligence personnel (Australia or another country);  store or have access to information that has a security classification; and  store, maintain or collect personal information collected by defence or

intelligence agencies.32

1.47 No definition of ‘national security land’ has yet been made in draft regulation. The Explanatory Memorandum states it will encompass land that is defence premises and land where a national intelligence agency has an interest, and that interest is publicly known or confirmable.33

1.48 Item 27 inserts section 8A that defines the meaning of ‘starts a national security business’ as a ‘foreign person starts to carry on a national security business’. It does not include a situation where a person already carries on a national security business and establishes a new entity that carries on the same national security business.

1.49 Items 81 and 82 apply the notifiable national security action to stapled entities.

32 Exposure Draft, Foreign Investment Reform (Protecting Australia’s National Security) (National

Security Business) Regulations 2020, reg. 10A.

33 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 17 and 160.

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Notification requirements 1.50 Items 133 to 136, and 139 to 141, repeal, and modify and apply existing notification requirements in sections 80 to 82 of the Act to a notifiable national security action.

1.51 Specifically, Item 134 repeals and substitutes a new simplified outline to specify a foreign person:

 must give the Treasurer a notice before taking a notifiable national security action;  must not take an action during a certain period unless given a no objection notification; and  may be prevented from taking the action.

Offences and civil penalties 1.52 Items 143, 147 and 159 modify and apply existing offences and civil penalty provisions to notifiable national security actions. Specifically, Item 147 modifies section 84 to make it an offence to take a notifiable national security action before

receiving a notice from the Treasurer.

1.53 Item 163 applies the existing provisions and penalties in section 91 for failing to give notice, to notifiable national security actions; and Item 173 applies the provisions in section 94 in relation to residential land.

1.54 Several items modify and apply existing offences for taking action before being permitted by section 82 of the Act, and apply a range of civil penalties.34 These penalties have been increased by amendments elsewhere in the bill (see discussion below).

Powers of the Treasurer 1.55 A number of items amend Part 3 of the Act to give the Treasurer certain powers with regard to notifiable national security actions, including the ability to review an action, prohibit an action, order an action to be undone, provide a no

objection notification, and impose conditions.35

1.56 Specifically, amendments to section 67(1A) of the Act (particularly Items 85 and 87) allow the Treasurer to make orders with regard to a notifiable national security action that is not a significant action (for instance, it falls under monetary and other thresholds), according to whether it would be contrary to national security, rather than contrary to the national interest. If a notifiable national security action is also a significant action, it is reviewed on national interest grounds and any orders are made on national interest grounds.

34 See Items: 150-152, 159, 168-169, 171, and 174.

35 See Items: 83-85, 87-90, 93-97, 100-101, 103, 106-109, 111-112, 114, and 116-119.

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1.57 The bill is silent as to what constitutes an assessment on national security grounds and how this differs from an assessment on national interest grounds. As discussed above, one of the national interest factors is national security.

1.58 Under amendments made by Item 120, the Treasurer has the power under section 74 to vary a notification imposing conditions for a notifiable national security action by revoking a condition, imposing a new condition, or varying an existing condition. However, this is subject to section 74(6) that allows new or varied conditions only if the person consents or if the Treasurer is satisfied new or varied conditions do not disadvantage the person.

Application and transitional provisions 1.59 The following application and transitional provisions apply:

 notification of notifiable national security actions is required for actions taken on or after 1 January 2021;  actions notified before this date because the action is a significant action, but a decision has not been made, will be considered under the Act against the

national interest test; and  if a person notifies the Treasurer before 1 January 2021 of a notifiable national security action that will be taken on or after 1 January 2021, and the

action is not a significant action or notifiable action, the notice will be taken to have been given on or after 1 January 2021.36

Call-in power 1.60 In addition to the ability to review notifiable national security actions on national security grounds, through a call-in power the Treasurer will also have the ability to review other actions that may raise national security concerns:

 reviewable national security actions; and  significant actions that are not notifiable actions or notifiable national security actions (that is, significant actions not notified).37

Reviewable national security action 1.61 Reviewable national security actions are not actions related to a national security business, entity or land; they are actions in any sector or of any value that may raise national security concerns and are reviewable against Australia’s national

security.

1.62 The term ‘reviewable national security action’ encompasses actions that are not captured by other parts of the Act and would not be otherwise subject to the Act. That is, an action cannot be a reviewable national security action if it is a

36 See Items: 227, 230-233, and 235-236; Foreign Investment Reform (Protecting Australia’s National

Security) Bill 2020, Explanatory Memorandum, p. 19.

37 See Items: 2-3, and Item 83 that repeals and substitutes a new section 66 and 66A into the Act.

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significant action, a notifiable action or notifiable national security action. Neither can an action be a reviewable national security action if it has been previously approved by the Treasurer.38

1.63 The provisions appear designed to deal with actions, regardless of size, that would provide some sort of control or influence (or additional control or influence) over an entity, and that may raise a national security concern. These actions, because they fall below relevant monetary thresholds, would not be otherwise encompassed by the Act and not be reviewable.39

1.64 The Explanatory Memorandum states there are nine scenarios where a reviewable national security action may arise. Generally, these actions include:

 acquiring a direct interest in an entity or business (of any percentage), land, or shares;  issuing securities;  entering into an agreement relating to the affairs of an entity;  altering a constituent document of an entity;  acquiring an interest in assets of an Australian business;  entering or terminating a significant agreement with an Australian business;

and

 proposing to start an Australian business.40

1.65 As a consequence of the action:

 the foreign person may be in a position, or more of a position, to influence or participate in central management and control;  the foreign person may be in a position, or more of a position, to influence or participate in, or determine policy; or  one or more senior officers of the entity will be under an obligation to act in

accordance with the directions, instructions or wishes of a foreign person who holds a direct interest.41

1.66 Other provisions specify the type of entity or land to which the type of action applies.

1.67 A number of other amendments are made to provide for this action, including several items specifying the meaning of ‘acquire an interest of a specified percentage in a business’ (Item 34 and Item 41).

38 See Item 72. The definition is spread over several proposed sections: 55C, 55D, 55E, and 55F.

39 See discussion in the Explanatory Memorandum: Foreign Investment Reform (Protecting

Australia’s National Security) Bill 2020, Explanatory Memorandum, p. 20.

40 See Item 72; Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020,

Explanatory Memorandum, pp. 20-21.

41 See Item 72.

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Review of a reviewable national security action 1.68 The Treasurer’s call-in power is provided for in proposed section 66 (Item 83). The simplified outline details the Treasurer’s powers if an action is proposed to be taken or has been taken and the action is a reviewable national security action

or a significant action that is not a notifiable action or notifiable national security action.

1.69 Under proposed section 66A—National security review of actions, the Treasurer may review these actions if the Treasurer considers the action may pose a national security concern. It is not clear what the trigger for such a review might be, what information the Treasurer might rely on, or how the national security test might be applied.

1.70 The Treasurer has the power to make orders to:

 prohibit the action;  make an interim order before deciding whether to make an order prohibiting the action;  order the action be undone.42

1.71 The Treasurer can also vary or revoke an order if satisfied it is not contrary to national security.43 Orders made by the Treasurer are notifiable instruments.44

1.72 Proposed subsection 66A(2) states the Treasurer may only start a review of an action that has been taken within the time prescribed by the regulations. The draft regulations specify the Treasurer can use the call-in power for ten years from when the action is taken.45

1.73 Proposed subsection 66A(4) specifies the Treasurer must give written notice of the review. Subsection 66A(5) specifies a number of instances where the Treasurer cannot review an action under the section, including:

 the action has been notified to the Treasurer;  the person was given a no objection notification in relation to the action; or  the action is specified in an exemption certificate.46

1.74 Item 129 repeals and substitutes a new section 77 that sets time limits for making orders and decisions. The amendments have the effect of requiring the Treasurer to make a decision within 30 days of the decision period starting (specified at section 77(6)). The person may request the decision period be extended; and the

42 See Items: 83-109, 111, and 112.

43 See Items: 83-109, 111, and 112.

44 Item 132 inserting section 79M.

45 Exposure Draft, Foreign Investment Reform (Protecting Australia’s National Security) Regulations

2020, reg. 59A.

46 Item 83.

16

Treasurer under some circumstances may extend the decision period by up to 90 days (section 77A).

1.75 Amendments at Item 141 to subsection 82(1) limit a person taking an action after notice has been given before the earliest of:

 ten days after the end of the decision period;  if an interim order is made, the end of the period specified in the order; or  the day a no objection notification is given.

1.76 Amendments at several items apply offences and civil penalty provisions in section 85 and Division 3 of Part 5 of the Act to reviewable national security actions.47

1.77 Through amendments to section 74, the Treasurer can impose conditions to ensure the action will not be contrary to national security, revoke conditions, impose a new condition, and vary an existing condition. However, this power is subject to subsection 74(6) that specifies the Treasurer can only impose a new condition or vary an existing conditions if the person consents, or if it does not disadvantage the person.48

1.78 Several items amend the exemption certificate provisions of the Act to allow a foreign person to seek an exemption certificate to undertake a program of acquisitions that would otherwise be reviewable national security actions. The Treasurer can vary or revoke an exemption certificate if satisfied it would not be contrary to national security.49

1.79 Items 214 and 215 amend subsection 133(3) relating to the Treasurer’s ability to require information. Ordinarily the Treasurer must give a period of at least 14 days for the person to provide documents; for reviewable national security actions it may be less than 14 days.

Application and transitional provisions 1.80 Items 229 and 233 specify the call-in power can only be used by the Treasurer on actions taken or proposed to be taken on or after 1 January 2021.

1.81 If a person does notify of a reviewable national security action that will be taken on or after 1 January 2021 and the notice is given before 1 January 2021, the notice will be taken to have been given on or after 1 January 2021.50

47 See Items: 150-151, 154, 159, 168, and 171.

48 See particularly Items 117 and 120.

49 See Items: 73-75, 77, and 80.

50 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 27-28.

17

Last-resort power 1.82 Under the last-resort power, the Treasurer will have the power, under certain circumstances and conditions, to review a previously approved action, and to impose conditions, vary existing conditions or force divestment, if national

security concerns are identified.51

1.83 Item 132 inserts Division 3—Last resort powers: orders to deal with national security risks arising after an initial assessment. Under these amendments, prior to using the last-resort power to issue an order, the Treasurer must undertake a national security review. No information is provided about the procedure or requirements of how such a review would be conducted.

1.84 Under proposed section 79A, the Treasurer may only undertake a national security review, including of an action that was previously approved (whether subject to conditions or not) or covered by an exemption certificate,52 on the following grounds:

 the person notified the action to the Treasurer and made a statement that was false or misleading in a material particular, or that omitted a matter or thing without which the statement was misleading in a material particular;

 the business, structure or organisation of the person has, or the person’s activities have, materially changed since the investment was approved or exemption certificate provided; or

 the circumstances or market in which the action was, or is proposed to be, taken have materially changed since the time the investment was approved or the exemption certificate provided.53

1.85 Under subsection 79A(2), during the review, the Treasurer must decide whether a national security risk relating to the action exists. In doing so, the Treasurer must obtain, and have regard to, advice from an agency in the national intelligence community about national security risks in relation to the action.

1.86 Prior to giving an order under the last-resort power, under proposed section 79C, the Treasurer must:

 be satisfied a national security review has occurred;  be reasonably satisfied:

− any false or misleading statement or omission directly relates to the national security risk; or

51 The types of prohibition and disposal orders that can be made are detailed in the tables at proposed

section 79D and 79E.

52 The Treasurer may also undertake a review if a notice imposing conditions under an earlier exercise

of the last-resort power has been given, or an interim order was made but no further orders were made after the time period expired. See: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory Memorandum, p. 28.

53 Item 132.

18

− if the risk is posed by a material change to the business, structure or organisation, it could not have been reasonably foreseen at the time the approval was provided or could have been reasonably foreseen but was only a remote possibility; or − if the risk is posed by a material change in the circumstances or market,

the material change alters the nature of the national security risk posed at the time the action was approved;

 be satisfied:

− reasonable steps have been taken to negotiate in good faith with the person to achieve an outcome of eliminating or reducing the national security risk;

− requiring the person to comply with an order is reasonably necessary to eliminate or reduce the national security risk; and − the use of existing regulatory systems would not adequately eliminate or reduce the national security risk.54

1.87 Proposed subsection 79D(2) specifies the prohibition orders the Treasurer may make in relation to different actions. If a prohibition order is made, subsection 79D(3) provides for additional orders to be made by notifiable instrument.

1.88 Proposed subsection 79E allows the Treasurer to make disposal orders in relation to certain actions.

1.89 Proposed subsection 79G allows the Treasurer to vary a no objection notification, specifically to:

 revoke a condition;  impose a new condition;  varying an existing condition; or  vary the information specified in section 76 (content of a notification).

1.90 The Treasurer can vary or revoke conditions if the person was given a no objection notification and if the Treasurer is satisfied the variation is reasonably necessary for the purposes relating to eliminating or reducing the national security risk relating to the action.55 There is no requirement for the person to consent to the order, or for the Treasurer to be satisfied such an order would not disadvantage the person.

1.91 Under section 79H, if the person was not given a no objection notification, the Treasurer can impose conditions and must notify the person in writing. The Treasurer has the ability to later vary the conditions under section 79J if satisfied the variation is reasonably necessary for the purposes relating to eliminating or reducing the national security risk relating to the action. However, section 79P

54 Item 132.

55 Item 132.

19

requires a person’s consent to the later variation or the variation to cause no disadvantage to the person.

Notices and secrecy 1.92 The bill contains notification requirements. In some circumstances a person who is subject to a review may not be notified; and the content of a notice may be completely redacted.

1.93 Under subsection 79A(3), a foreign investor may not receive notice a review is being undertaken if the Treasurer determines it would prejudice Australia’s national security interests to do so.

1.94 In other circumstances, the Treasurer is required to provide notice of the review. Provisions at 79A(3) prevent a person who has not yet taken an action from doing so until the review is completed and the Treasurer gives effect to the outcome of the review. If an action has been taken, the Treasurer may include in the notice a direction about the action or related activity the Treasurer considers necessary to address the national security risk. The Treasurer may also give further notices in writing until the review is complete.

1.95 Under section 79B, having reviewed an action, the Treasurer must give written notice to the person and either:

 if a national security risk does not exist, include a statement to that effect; or  if a national security risk exists, include the reasons for deciding the risk exists in the notice.56

1.96 However, under subsection 79B(2), the Treasurer can redact from the written notice:

 any reasons that would disclose the national security risk or result in prejudice to Australia’s national interest; or  any information relied on in carrying out the review of the action on grounds of national security.

1.97 Subsection 79B(3) states:

To avoid doubt, a written notice to the person who proposes to take, or took, the action may be validly given under subsection (1) even if all the contents of the notice are redacted.57

56 Item 132.

57 Item 132.

20

Review of the Treasurer’s decision 1.98 Under section 130A, a person may apply to the Administrative Appeals Tribunal (AAT) for review of a decision that a national security risk relating to the action exists.

1.99 Item 20 inserts a definition for ‘reviewable decision’ in section 4 of the Act: a decision of the Treasurer under Division 3 of Part 3 [Last-resort powers] that a national security risk exists in relation to an action.

1.100 Item 207 inserts a new Division 4—Review of decisions, into Part 7 of the Act. This deals with the process and procedure of review by the AAT of a decision of the Treasurer under section 79A. Under proposed section 130E, the Security Division of the Tribunal must review applications made under section 130A, and the proceedings are to be in private (subsection 130G(5)).

1.101 Amendments under this item include the following:

 amongst other things, an applicant must include in an application to the Tribunal for a review of a reviewable decision, a copy of the written notice from the Treasurer, a statement indicating any part of the notice with which the applicant does not agree, and a statement setting out the grounds on which the application is made (section 130B);

 the Tribunal must give a copy of the statement lodged with the application to the Treasurer, and if the application is for a review of a reviewable decision and an agency in the national intelligence community provided advice to the Treasurer, the Treasurer must give a copy of the documents to the agency (section 130C);

 the Treasurer must provide the Tribunal within 30 days after receiving notice of the application a copy of the notice given to the person under subsection 79B(1), and a copy of the whole notice without redaction. The Tribunal cannot permit the applicant to have access to any copy of the notice without redaction or any matter to which the notice without redaction relates (section 130D); and

 applicants may apply for a review of the Tribunal’s findings on the grounds the applicant has fresh evidence of material significance that was not available at the time of the previous review (subsection 130A(3)).58

1.102 The bill limits the application of some sections of the AAT Act in regard to a review of a reviewable decision, including limiting the parties to the proceeding (subsection 130G(2)), and through proposed section 130N that states Division 2 of Part IV of the AAT Act (other than sections 32 and 33); and Division 3 of Part IV of the AAT Act, in addition to a number of other sections, do not apply.

58 Item 207.

21

1.103 Under proposed subsections 130G(8-10), the Treasurer is able to issue a national security certificate:

(8) The Treasurer may, by signed writing, certify that evidence proposed to be adduced, or submissions proposed to be made, by or on behalf of the Treasurer, or the agency in the national intelligence community that provided advice to the Treasurer, are of such a nature that the disclosure of the evidence or

submissions would be contrary to national security.

Note: See also subsection (19).

(9) If such a certificate is given:

(a) the applicant must not be present when the evidence is

adduced or the submissions are made; and

(b) a person representing the applicant must not be present when the evidence is adduced or the submissions are made unless the Treasurer consents.

(10) If a person representing the applicant is present when evidence to which a certificate given under subsection (8) relates is

adduced or submissions to which such a certificate relates are made, the representative must not disclose any such evidence or submission to the applicant or to any other person.

Penalty: Imprisonment for 2 years.

1.104 The Treasurer also has the ability to issue a public interest certificate (proposed section 130H). A public interest certificate is not a legislative instrument.

130H Certain documents and information not to be disclosed in review of reviewable decision

(2) If the Treasurer certifies, by signed writing, that the disclosure of information with respect to a matter stated in the certificate, or the disclosure of the contents of a document, would be

contrary to the public interest:

(a) because it would prejudice Australia’s national security; or

(b) because it would involve the disclosure of deliberations or decisions of the Cabinet or a Committee of the Cabinet

or of the Executive Council; or

(c) for any other reason stated in the certificate that could

form the basis for a claim by the Crown in right of the

Commonwealth in a judicial proceeding that the

information or the contents of the document should not

be disclosed;

the following provisions of this section have effect.

1.105 Subsection 130H(8) excludes the operation, apart from this section, of any rules of law relating to the public interest that would otherwise apply in relation to the disclosure of information or of the contents of documents in a proceeding.

22

1.106 Further, subsection 130H(10) establishes that it is the duty for the Tribunal, even though there may be no relevant certificate under this section, to ensure, so far as it is able to do so, that, in or in connection with a proceeding, information is not communicated or made available to a person contrary to the requirements of security.

1.107 Under proposed section 130K, the Tribunal may direct that whole or part of its findings, so far as they relate to a matter that has not been disclosed to the applicant, not be given to the applicant.

Amendment to the Security of Critical Infrastructure Act 2018 1.108 Item 225 amends the Security of Critical Infrastructure Act 2018 (SOCI Act) that directs the Minister of Home Affairs, for the purposes of paragraph 32(3)(d), to ignore Division 3 of Part 3 (Last Resort Powers) of the Act.

1.109 The bill’s Explanatory Memorandum explains the SOCI Act

…allows the Minister of Home Affairs to issue directions if there is a risk of an act or omission that would be prejudicial to security. However the direction can only be issued if the Minister is satisfied no other Commonwealth regulatory system could be used. As Schedule 1 to this bill introduces the Treasurer’s last-resort power, the Security of Critical Infrastructure Act 2018 is amended to provide that Act with priority over the last-resort power, that is the Minister of Home Affairs is able to issue directions under section 32 of the Security of Critical Infrastructure Act 2018.59

Application and transitional provisions 1.110 Item 234 specifies the Treasurer’s last-resort power (Division 3 of Part 3) is only available for actions notified to the Treasurer (or taken, if they were not notified) on or after 1 January 2021.

Measures related to the integrity of the foreign investment framework 1.111 The bill makes further amendments to bring within the purview of the Act, acquisitions that currently fall outside the framework and cannot be examined against the national interest or national security. It also makes some technical

amendments, and allows for greater information sharing.

1.112 Specifically, as detailed below, the bill will:

 amend the definition of ‘significant action’ so a change of control is not required for certain acquisitions;  capture passive increases in holdings of securities;  amend the definition of Australian business to include state and territory

business functions;  expand tracing rules to unincorporated limited partnerships;

59 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 35.

23

 make a range of amendments to the decision period, and orders prohibiting a proposal; and  provide for greater information sharing domestically and internationally.60

Amending definition of significant action 1.113 The bill makes some amendments to the ‘change in control’ provision to capture within the foreign investment framework situations where a private investor who already has control of an entity increases their holdings over time.61

1.114 Items 58 and 59 add subsections 40(7) and 41(6) to modify the meaning of significant action in the Act to specify that a change in control is not always a necessary condition for an action to be a significant action in the case when the person controls the entity immediately before the action is or is to be taken.

1.115 This provision, that a change in control is not always necessary for an action to be a significant action, applies to actions to acquire interests in securities in an entity, to issue securities in an entity or acquire interests in the assets of an Australian business.

1.116 These provisions apply to actions taken, or proposed to be taken, on or after 1 January 2021 (Item 241).

Passive increases in securities holdings 1.117 Item 38, by inserting a new section 18A, makes the passive increase in securities holdings an action under the Act. Under the amendment, a person is taken to take an action of acquiring an interest in securities in an entity if the person holds

an interest of a particular percentage in the entity, and that percentage increases without the person acquiring interests in securities in the entity.

1.118 Item 38, inserting the table at 18A(4) modifies various provisions of the Act in regard to passive increases. A passive increase is only a notifiable action if the person did not hold a direct or substantial interest in the entity immediately before the action is taken. Similarly, an action is a notifiable national security action only if the person did not hold a direct interest in the entity immediately before the action was taken. Under the last-resort power, the Treasurer can only order the percentage of interests the person held prior to the increase be restored.

60 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 37.

61 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 41-42.

24

1.119 The Explanatory Memorandum explains this amendment provides for situations where share buybacks, in which a person does not participate, result in increased ownership of an entity.62

1.120 This (including the table at section 18A(4)) and other amendments (Items 5 and 138) allow the person 30 days to notify the Treasurer after the action is taken, if required; and allow the Treasurer to direct the person to dispose of the interests, or to apply the last-resort power.

1.121 Item 38 also allows modifications to the Act to be prescribed by regulation— proposed section 18A(6). The bill’s Explanatory Memorandum states the purpose of this provision is to address any unintended consequences, in particularly, ‘the amendments should not inappropriately impede the operation of foreign investors or markets’.63

1.122 Item 239 provides that the amendments apply in relation to a percentage interest in an entity that increases on or after 1 January 2021.

Australian business 1.123 Item 8 inserts a definition for ‘business’, specifying it includes any activity (whether for profit or otherwise) carried on by a Commonwealth, state, territory or local governing body; a body corporate established for a public purpose by

or under a law of the Commonwealth, state or territory; or an entity wholly owned by the Commonwealth, state, territory or local governing body.64

1.124 The bill’s Explanatory Memorandum explains the intent of these amendments, in conjunction with proposed amendments to the regulations is that privatisation of certain government functions will not be exempt from being significant and notifiable actions.65

1.125 The proposed amendments to the regulations will, according to the bill’s Explanatory Memorandum:

...provide that, where a foreign person acquires from government an interest in a national security business, national security land, or an Australian business the assets of which include an exploration tenement that is on national security land, the acquisition will not be exempt from the operation of the FATA [the Foreign Acquisitions and Takeovers Act].

The proposed amendments to the FATR [the Foreign Acquisitions and Takeovers Regulation 2015] would ensure that assets relevant to national

62 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 43-44.

63 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 46.

64 See also: Item 26.

65 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 51.

25

security do not avoid scrutiny, including where the acquisition is from the Commonwealth, a State, a Territory or local governing body. These amendments will be made after Schedule 1 to this bill has received Royal Assent.66

Extending tracing rules to unincorporated limited partnerships 1.126 Existing tracing rules—that do not apply to unincorporated limited partnerships—allow for substantial interests to be traced back through the ownership of relevant entities.67

1.127 Tracing rules have the effect that a person is taken to hold interests in securities in companies or trusts which are lower in the corporate structure when certain requirements are met. The rules allow a person’s interests to be traced through many entities and allow the government to impose conditions on higher entities in an organisational structure.68

1.128 Item 31 inserts a definition at section 11A for ‘interest in an unincorporated limited partnership’ that provides a means for establishing whether a person holds an interest through control of any voting power or potential voting power, or through an entitlement to any distribution of capital, assets of profits of the partnership—whether through dissolution or otherwise.69

1.129 Various other definitions are also amended, including ‘constituent document’ (Item 10), ‘general meeting’ (Item 13), ‘interest’ (Item 15), and ‘substantial interest’ (Item 21 and Item 22). These, and other amendments (Item 35 amending section 17; Item 36 inserting subsection 17(2A)), allow for the expansion of tracing.

1.130 Several other items, including Items 35, 37, 39, 40-43, and 45, make further amendments to apply existing provisions to unincorporated limited partnerships and to deal with tracing of substantial interests.

1.131 By extending these tracing rules to unincorporated limited partnerships, the government states it will be able to effectively address national interest and security risks, particularly where limited partnerships are used as a vehicle for investment in critical infrastructure and other sensitive sectors.70

66 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 52.

67 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 46.

68 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 46, 155-156, and 164-165.

69 See also: Items 35-37.

70 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 155-156.

26

Decision periods 1.132 The Treasurer will be able to extend or further extend the statutory decision period by up to 90 days without issuing an interim order or the person’s consent. As it currently stands, the Treasurer has 30 days to make a decision and this can

only be extended if an interim order is made or the foreign person requests an extension.71

1.133 Item 129 inserts a new section 77 that specifies the Treasurer is no longer restricted by time limits if the person takes the action before the end of the decision period. The section also provides for other later decision periods.

Information sharing 1.134 Amendments to the Act will substantially increase the information sharing provisions for protected information.72

Table 1.2 Information sharing arrangements

Current law New law

Information provided by Commonwealth, state/territory minister or body

Protected information about a decision made under the Act cannot be disclosed to a Minister, an officer or employee of the C’wealth, state or territory or an officer or employee of the C’wealth, state or territory body, where they have provided information that assisted with the decision.

Protected information about decisions or orders made under the Act may be shared with a Minister, an officer or employee of the C’wealth, state or territory or an officer or employee of the C’wealth, state or territory body (the recipient), where they have provided information that assisted with the decision or order.

The information can be shared if the discloser reasonably believes the disclosure may assist the recipient in the performance of their functions or duties or exercise of power.73

Information sharing with foreign governments

Protected information cannot be disclosed to a foreign overseas government.

Protected information may be shared with a foreign government and separate government entities where

71 See: Item 129.

72 Limits contained in the Act on sharing protected information do not apply to Parliamentary

oversight.

73 Item 205.

27

Current law New law

national security risks may exist and where it is not contrary to the national interest.

The information can only be shared if there is an agreement in place between the C’wealth and the other government entity.

Once the information is no longer required, it may not need to be destroyed, only de-identified.74

Information sharing within the Commonwealth

Protected information may be disclosed under the Act to a Minister or an accountable authority of the C’wealth for the purposes of the administration of the prescribed list of Acts. The regulations can prescribe additional Acts.

In addition to the existing prescribed Acts, protected information may be disclosed under the Act for the purposes of administering three additional Acts: Competition and Consumer Act 2010; Australia’s Foreign Relations (State and Territory Arrangements) Act 2020; and the Northern Australia Infrastructure Facility Act 2016.

The Treasurer can prescribe additional Acts by legislative instrument.

In addition to disclosing information to a Minister, amendments will allow protected information to be disclosed to an individual employed by a Minister under the Members of Parliament (Staff) Act 1984 (MOPS Act), and an individual who is

74 Item 205; Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020,

Explanatory Memorandum, pp. 57-58. The EM explains such agreements may contain provisions for handling of personal information and privacy protection; limitations on public disclosure of commercial in confidence information; specifications on the uses to which the information can be put; and requirements that foreign government or separate government entity to take reasonable steps to destroy or de-identify personal information where the overseas recipient no longer needs the information. In addition, the Treasurer may be able to impose additional conditions for handling of disclosed protected information—any such conditions would not be a legislative instrument.

28

Current law New law

engaged by a Minister as a consultant under the MOPS Act.75

Protected information may be disclosed to a Minister or an accountable authority of the C’wealth or departmental secretary responsible for agriculture, industry, investment promotion, taxation policy, foreign investment in Australia, defence and for national security purposes.

In addition to the existing permitted purposes, protected information may be disclosed under the Act for the purposes of a Minister discharging that Minister’s responsibility for matters about water, telecommunications and infrastructure.76

Information sharing between Commissioner of Taxation and FIRB

The Commissioner is not permitted to disclose protected information to persons appointed by the C’wealth for the purposes of the Act.

The Commissioner may disclose protected information directly to persons appointed by the C’wealth for the purposes of the Act.77

Disclosure of aggregate information

Protected information may only be disclosed if it is periodic aggregate information disclosed for reporting on the administration of the Act, and not reasonably capable of identifying a person.

Protected information under the Act can be disclosed if it does not or is not reasonably capable of identifying a person.78

Source: The bill and Explanatory Memorandum 79

1.135 The amendments apply to the recording, disclosure or use of information on or after 1 January 2021, regardless of whether the information was obtained before, on, or after that day.80

75 Item 204.

76 Item 204.

77 Item 226 amends the Taxation Administration Act 1953.

78 Item 206.

79 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 40-41.

80 Item 249.

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1.136 An agreement to share information with a foreign government may be in existence prior to 1 January 2021.81

Schedule 2—Compliance and enforcement 1.137 Schedule 2 and some parts of Schedule 1 deal with compliance and enforcement and make a number of amendments to the Act including providing for:

 increasing penalties;82  expanding the infringement notice regime;  the revocation of no objection notifications and exemption certificates where false or misleading statements have been made;83

 uniform notification requirements;  a directions power;  monitoring and investigation powers; and  enforceable undertakings.

1.138 Unless otherwise stated, the item numbers in this section relate to Schedule 2.

Penalties 1.139 The bill amends maximum penalties applicable to certain offences; introduces new offences; and new penalties for breaches of certain civil penalty provisions. The table below summarises key changes.

1.140 The bill’s Explanatory Memorandum states monetary penalties under the Act are low compared to those available to other business regulators, and the changes, including to imprisonment terms, reflect the seriousness of offences, act as a deterrent, and effectively punish those who commit offences.84

1.141 A range of different penalties are applied in different parts of the Act. These are summarised in the table below.

81 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 63.

82 Some amendments to increase penalties for certain offences are also contained in Schedule 1 of the

bill.

83 These amendments are contained in Schedule 1.

84 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 83.

30

Table 1.3 Provisions increasing penalties or creating new offences

Provision Current penalty New penalty85

Division 2—Offences

s.84 Failing to give notice (Item 3) Partly new provision; imprisonment for 3

years, or 750 penalty units, or both for existing provision

Imprisonment for 10 years, or 15,000 penalty units (or 150,000 penalty units if the person is a corporation), or both

s.85 Taking action before end of period (Item 4)

Partly new provision; imprisonment for 3 years, or 750 penalty units, or both for existing provision

s.85A Taking action while prohibited by this Act (Item 155— Schedule 1)

New provision

s.86 Contravening orders under Part 3 (Powers of the Treasurer) (Item 5)

Imprisonment for 3 years, or 750 penalty units, or both

s.87 Contravening conditions (Item 6) Imprisonment for 3 years, or 750 penalty

units, or both

s.88(1) Failing to advertise new dwellings (Item 7)

Imprisonment for 3 years, or 750 penalty units, or both

s.88A Contravening directions and interim directions (Item 158— Schedule 1)

New provision

Division 3—Civil penalties

s.89 Contravening orders under Part 3 (Powers of the Treasurer) (Item 10)

250 penalty units Maximum penalty is the lesser of the following:

85 The value of a penalty unit is currently $222.

31

Provision Current penalty New penalty85

s.91 Failing to give notice (Item 167— Schedule 1)

Partly new provision; 250 penalty units for existing part of provision

(a) 2,500,000 penalty units;

(b) the greater of the following:

(i) 5,000 penalty units (or 50,000 penalty units if the person

is a corporation);

(ii) the amount worked out under section 98F for the

action in relation to which the order

was made

s.92 Taking action before end of period (Items 11-13)

250 penalty units

s.92A Taking action while prohibited by this Act (Item 172— Schedule 1)

New provision

s.93(1-3) Contravening conditions in a no objection notification (Item 14)

250 penalty units

s.93(4-6) Contravening conditions in notice imposing conditions (Item 14)

250 penalty units

s.93(7) Contravening conditions in exemption certificates (Item 14)

250 penalty units 5,000 penalty units (or 50,000 penalty units if the person is a corporation)

s.94 Acquisition of interest in residential land (Item 15)

Partly new provision; for existing part of provision—maximum is greater of following:

(a) 10% of the consideration for the residential land acquisition (b) 10% of the market value of the interest in the relevant residential land

Maximum penalty is the greatest of the following:

(a) the amount of the capital gain that was made or would be made on the disposal of the interest in the relevant residential land;

(b) 25% of the consideration for the residential land acquisition;

s.95A Taking action while prohibited by this New provision

32

Provision Current penalty New penalty85

Act (Item 176— Schedule 1)

(c) 25% of the market value of the interest in the relevant residential land

s.97(1A) Conditions in notice imposing conditions

New provision 250 penalty units

Subdivision D—Other civil penalties

s.98A Contravening directions and interim directions (Item 16)

New provision Maximum penalty:

(a) unless paragraph (b) applies—5,000 penalty units; or

(b) if the person is a corporation—50,000 penalty units

s.98B(1) False or misleading information and documents (Item 16)

New provision for information or documents relevant to no objection notification

Maximum penalty is the lesser of the following:

(a) 2,500,000 penalty units;

(b) the greater of the following:

(i) 5,000 penalty units (or 50,000 penalty units if the person is a corporation);

(ii) the amount worked out under section 98F for the action in relation to which the order was

made

s.98B(2) False or misleading information and documents (Item 16)

New provision for information or documents relevant to exemption certificate

Maximum penalty: (a) unless paragraph (b) applies—5,000 penalty units; or (b) if the person is a

33

Provision Current penalty New penalty85

corporation—50,000 penalty units

s.98C Failure to notify Treasurer of taking of action specified in no objection notification (Item 16)

New provision 250 penalty units

s.98D Failure to notify taking of action related to exemption certificate (Item 16)

New Provision

s.98E Failure to notify Treasurer of situations following core Part 3 action (Item 16)

New provision

Other

s.133 Treasurer may require information (Item 44)

Imprisonment for 6 months or 30 penalty units, or both

Imprisonment for 6 months or 250 penalty units, or both

s.100(6)(c) Infringement notice (tier 3) (Item 34) New provision Individual—300 penalty units;

corporation—1,500 penalty units

s.130ZV Failing to give notice to Registrar (Item 8—Schedule 3)

New Provision 250 penalty units

Source: Bill

1.142 Item 16 also inserts section 98F that provides for the calculation of civil penalty amounts for penalty provisions based on value. The item provides calculation for 15 types of actions, including the acquisition of a direct interest in an entity or a business; an acquisition of an interest of any percentage in an entity or a business; an issue of securities in an entity; entering into an agreement; an alteration of a constituent document of an entity; and starting a business.

1.143 Item 21 repeals and substitutes a new subsection 99(4) that specifies subsection 82(5) of the Regulatory Powers Act that relates to determining a pecuniary penalty does not apply in relation to some provisions of the Act. Subsection 82(5) of Regulatory Powers Act specifies if the person is a body corporate, the pecuniary

34

penalty must not be more than five times the pecuniary penalty specified for the civil penalty provision.

1.144 Amendments to the Act provide that the pecuniary penalty for body corporates is 10 times the penalty specified for some civil penalty provisions. The Explanatory Memorandum explains this is ‘necessary and appropriate to ensure that a corporation does not obtain financial benefits from illegal behaviour’.86

Infringement notices

Expanding the infringement notice regime 1.145 Several items expand the application and scope of the infringement notice regime provided for under Part 5 of the Regulatory Powers Act. Infringement notices are currently available only for ‘less serious’ breaches of the Act and only

in the case of residential real estate investments. There are currently two levels of breach where an infringement notice penalty is available:

 tier 1—where a person discloses the breach to the Commonwealth;  tier 2—when the breach is discovered by means other than self-disclosure.87

1.146 Items 22-25 make a range of changes to the section 100 infringement notices provisions of the Act to allow infringement notices to be issued if an officer believes on reasonable grounds the person has contravened an additional range of civil penalty provisions of the Act, including:

 provisions of Division 3 (civil penalties);  subsection 115DA(1) (vacancy fee liability—false or misleading vacancy fee return); and  subsection 140ZV (civil penalty for failing to give notice to Registrar).88

1.147 Item 26 and Item 27 and existing section 100(3) specify an infringement officer is appointed by the Secretary and must be a person who holds, or performs the duties of, an APS 6 position, or an equivalent or higher position within the Department or the Australian Taxation Office. The Registrar (see below) may also appoint an infringement officer. Item 28 identifies the relevant chief executive for the purposes of Part 5 of the Regulatory Powers Act (Infringement notices).

1.148 Item 32, inserting a new paragraph 100(5)(a), specifies certain requirements for the content of infringement notices under the Regulatory Powers Act are not required for an infringement notice under the Act. The Explanatory

86 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 93.

87 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 73-74.

88 See: Items 22-25.

35

Memorandum states the item excludes content that may be ‘irrelevant, impracticable or difficult to determine in the FATA [the Act] context’ such as the particulars of time, day and place, or the maximum civil penalty that a court could impose where this amount is based on the value of an action.89

Tier 1 infringement notice 1.149 Several items amend the existing definition of a tier 1 infringement notice. Item 36 specifies it is the Treasurer or the Commissioner of Taxation on behalf of the Treasurer who must be notified, and that at the time when the person makes the

notification, the Commonwealth has not yet indicated to the person it is considering investigating the conduct.90

Tier 2 infringement notice 1.150 Tier 2 and tier 3 infringement notices apply when a person does not self-notify voluntarily of a breach of the Act.

1.151 Item 38 repeals and inserts a new subsection 101(2) that identifies a tier 2 infringement notice. In particular, this item (in conjunction with Item 39) specifies a tier 2 infringement notice (and possibly a tier 1 infringement notice, but not a tier 3 infringement notice) applies to the following provisions (amongst others):

 contravening conditions in a no objection notification, in a notice imposing conditions and conditions in an exemption certificate in relation to residential land;

 failing to notify the taking an action in a no objection notification or exemption certificate;  failing to notify the Treasurer of situations following a core Part 3 Action;  failing to give a vacancy fee return, failing to ensure the return does not

contain information that is false or misleading in a material particular, and failing to keep records with regard to liability for a vacancy fee; and  failing to give notice to the Registrar.91

1.152 The rationale in the Explanatory Memorandum is that it is considered more appropriate that certain civil penalty provisions are classed as tier 2 infringement notices to ensure that penalties in an infringement notice are not higher than the related civil penalty amount.92

89 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 83.

90 See also: Item 37.

91 Item 38.

92 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 76.

36

1.153 Item 39 specifies the threshold for distinction between tier 2 and tier 3 infringement notices. A tier 2 infringement notice applies where the value of the action is less than either: $5 million for an acquisition of an interest in Australian residential land, or otherwise $275 million.93

1.154 Item 39 also includes a valuation table to determine the value of the action to which the contravention of the civil penalty provision relates.

Tier 3 infringement notice 1.155 The Treasury states infringement notices are commonly used for minor breaches that are likely to occur frequently and can be assessed using objective criteria, for instance in cases where reporting requirements are not met, or where an

investor submits a retrospective application to rectify a breach. Item 38 introduces a tier 3 infringement notice for ‘non-compliance of high-value acquisitions’.94

1.156 Item 38 inserts provisions for a tier 3 infringement notice at subsections 101(4) to 101(7). Although section 39 introduces thresholds for the distinction between a tier 2 infringement notice and a tier 3 infringement notice, amendments at Item 38 allow the Treasurer to decide a tier 3 infringement notice is a tier 2 infringement notice having considered the conduct of the person after the alleged contravention including any steps taken to address the alleged contravention and cooperation with authorities, and if such a decision would not be contrary to the national interest.

Limitations on the use of infringement notices 1.157 Although not contained in the bill, the Explanatory Memorandum states infringement notices should be limited to situations where imposing the penalty does not reflect a judgement as to the person’s guilt or liability:

The infringement notice regime is expanded to civil penalty provisions, where it is generally expected that an infringement notice be issued on the basis of straightforward factual questions, without involving discretion from the infringement officer. For example, where the contravention involves a failure to notify arising where an objective circumstance, such as an acquisition occurs. However, the FATA [the Act] regulates actions that can be factually complex. Where the factual circumstances raise doubt as to whether a contravention has occurred, it is not intended that an infringement notice be issued.

A regulator should not be exercising significant discretion in determining the level of penalty to be imposed on a recipient by way of infringement

93 For an explanation of the rationale, see: Foreign Investment Reform (Protecting Australia’s National

Security) Bill 2020, Explanatory Memorandum, p. 76.

94 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 73, 76.

37

notice, other than in strict accordance with factual criteria set out in the legislation.95

Revocation of notifications for the provision of false or misleading information 1.158 Item 126 (Schedule 1) inserting a new section 76A allows for the revocation of no objection notifications if the Treasurer reasonably believes that before a no objection notification was given to a person, the person gave the Treasurer

information that was or documents that were:

 relevant to the no objection notification; and  false or misleading in a material particular.

1.159 Under subsection 76A(3), the Treasurer may revoke a no objection notification (made with or without conditions) if:

(a) the Treasurer is satisfied that before the no objection notification was given the person (or another person specified in the

notification) gave the Treasurer information that was or

documents that were:

(i) relevant to the no objection notification; and

(ii) false or misleading in a material particular; and

(b) the Treasurer has given the person a notice under subsection (2) in respect of the no objection notification; and

(c) the revocation is made no later than 120 days after the day on which the Treasurer gave the person that notice.

1.160 If the Treasurer makes a decision to revoke a no objection notification, this decision must be made within 120 days of the Treasurer advising the person the Treasurer is considering revoking the notification (subsection 76A(3)).

1.161 Under proposed subsection 76A(7), if the Treasurer revokes the no objection notification, the Treasurer may make an order prohibiting the action (if it has not been taken) or a disposal order, or provide a no objection notification with or without imposing conditions, as if the no objection notification had never been given and the relevant decision had never been made.

1.162 In a similar way, Item 79 (Schedule 1) inserts a new section 62A allowing the Treasurer to vary or revoke an exemption certificate if the Treasurer is satisfied documents relevant to the exemption certificate were false or misleading in a material particular.

1.163 Section 62B (Item 79, Schedule 1) specifies actions already taken while a revoked or varied exemption certificate was in force would not retrospectively become a significant action or other ‘core Part 3 action’ as a consequence of the exemption certificate being revoked or varied. However, the relevant action may become a

95 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 82.

38

significant action or other core Part 3 action from the time when the revocation or variation is made or takes effect. This will allow the Treasurer to exercise powers in relation to significant actions or other core Part 3 actions.96

1.164 Item 16 (Schedule 2) makes providing false or misleading information and documents liable for a civil penalty (see above).

Uniform notification requirements 1.165 Currently, the extent of foreign investments in Australia the Treasurer is expected to regulate is unknown. This is because under current legislation, a foreign person only has to notify the Treasurer the foreign person has taken an

action if this is a condition placed on the approval (that is, contained in a no objection notification imposing conditions, and that specific condition is included). If a person receives an unconditional no objection notification there is no requirement to notify if and when the action occurs, a similar issue applies to actions taken under exemption certificates.97

1.166 Item 16 (Schedule 2) creates civil penalties for a range of situations, including:

 failing to notify the Treasurer of taking an action specified in a no objection notification (section 98C);  failing to notify of an action related to an exemption certificate (section 98D); and  failing to notify the Treasurer of situations following core Part 3 actions,

such as a change in control of the entity, the person ceases to have a direct interest, the person reduces an interest, the person ceases to hold in interest in Australian land, and if any situations specified in the regulations cease to exist (section 98E).

Directions power 1.167 Item 132 (Schedule 1) inserts a number of provisions into the Act, including a new Division 5—Treasurer directions, into Part 3—Powers of Treasurer. Proposed section 79R allows the Treasurer to give a direction to a person if the

Treasurer has reason to believe:

 a person has engaged, or is engaging, in conduct that constitutes a contravention of a provision of the Act; or  a person will engage in conduct that would constitute a contravention of a provision of the Act.98

96 See: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 103.

97 See: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 105.

98 Item 132.

39

1.168 The Treasurer may require a person to, amongst other things:

 comply with the Act;  comply with conditions in a no objection notification or exemption certificate; and/or  comply with specifications in the Regulations.99

1.169 Under proposed subsections 79R(6) and 79R(7), the Treasurer can make directions if a consequence or possible consequence arising from the relevant contravention is that the composition of the group of senior officers of a corporation is considered contrary to the national interest. In such a case the Treasurer can direct that a specified person ceases to be a senior officer, ensure a specified person does not become a senior officer, ensure specified kinds of persons (such as non-Australian citizens) cease to be senior officers or do not become senior officers, and ensure a specified proportion of senior officers are not specified kinds of persons.

1.170 Proposed section 79R(8) allows a direction from the Treasurer to refer to external material.

1.171 Written directions provided by the Treasurer are not legislative instruments (subsection 79R(9)) and under proposed subsection 79S need not be published if the Treasurer decides publishing the direction would be contrary to the national interest.

1.172 The Treasurer has the power to vary and revoke a direction (proposed section 79U) if doing so is not contrary to the national interest and can decide not to publish a variation or revocation if satisfied doing so would be contrary to the national interest.

1.173 Under section 88A, contravening a direction or interim direction is a criminal offence and carries a penalty of up to 10 years imprisonment or 15,000 penalty units for an individual and 150,000 for a corporation, or both (see penalties above and Item 158 of Schedule 1).

1.174 Under section 98A (Item 16 of Schedule 2), if the contravention relates to a civil penalty provision, the contravention or direction is a civil penalty provision (see above) and the maximum penalty is 5,000 penalty units for an individual and 50,000 for a corporation.100

Monitoring and investigation powers 1.175 A number of provisions in the bill, and the existing Act, require the power to monitor and investigate. As it currently stands, information gathering powers under the Act rely on the ability of the Treasurer to require information under

99 Item 132.

100 For further explanation, see: Foreign Investment Reform (Protecting Australia’s National Security)

Bill 2020, Explanatory Memorandum, p. 112.

40

section 133, and on desk-top and paper-based auditing and compliance monitoring.101

1.176 The Explanatory Memorandum highlights current deficiencies in the ability of the Treasury to monitor compliance and be certain entities are meeting the requirements of the Act:

At times the existing information gathering power is insufficient to draw compliance conclusions with respect to certain conditions (for example, conditions requiring the installation or removal of surveillance and communications equipment).102

1.177 Item 40 inserts a new section 101A that makes provisions of the Act subject to monitoring under Part 2 of the Regulatory Powers Act. Part 2 of the Regulatory Powers Act creates a framework for:

 monitoring whether the provisions of an Act or legislative instrument have been, or are being, complied with;  monitoring whether information given in compliance, or purported compliance, with a provision of an Act or legislative instrument is correct.103

1.178 Part 2 of the Regulatory Powers Act also provides for an authorised person to enter premises for the purposes of monitoring. Entry must be with the consent of the occupier of the premises or under a monitoring warrant.104

1.179 Proposed subsection 101A(2) specifies information given in compliance or purported compliance with this Act is subject to monitoring under Part 2 of the Regulatory Powers Act.

1.180 Proposed subsection 101A(3) establishes related provisions for the purpose of monitoring powers, specifying offence provisions or civil penalty provisions of the Taxation Administration Act 1953 and the Corporations Act 2001, and provisions of Part 3 or 3B of the Register of Foreign Ownership of Water or Agricultural Land Act 2015. According to the Explanatory Memorandum, if a thing is found in the course of executing a monitoring warrant that may be evidence of the contravention of a related provision, an authorised person is permitted to secure that thing in serious or urgent circumstances to prevent it from being concealed or destroyed.105

101 For further explanation, see: Foreign Investment Reform (Protecting Australia’s National Security)

Bill 2020, Explanatory Memorandum, p. 113.

102 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 113.

103 Item 40.

104 Regulatory Powers (Standard Provisions) Act 2014, s. 6.

105 See: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 114.

41

1.181 Other subsections at 101A specify authorised applicant, authorised person, issuing officer, relevant chief executive, relevant court, person assisting, and extension to external territories.

1.182 Item 40 also inserts a new section 101B (investigation powers) that similarly makes provisions of the Act subject to investigation under Part 3 of the Regulator Powers Act. This part of the Regulatory Powers Act creates a framework for gathering material that relates to the contravention of offence provisions and civil penalty provisions. Under Part 3:

 an authorised person may enter premises if the authorised person suspects on reasonable grounds that there may be material on the premises related to the contravention of an offence provision or a civil penalty provision that is subject to investigation under Part 3;

 entry must be with the consent of the occupier of the premises or under an investigation warrant; and  an authorised person who enters premises may exercise investigation powers. The authorised person may be assisted by other persons if that

assistance is necessary and reasonable and another Act empowers the authorised person to do so.106

1.183 Parts 2 and 3 of the Regulatory Powers Act specify a monitoring or investigation warrant may only be issued by an issuing officer if the issuing officer is satisfied, by information on oath or affirmation:

 that it is reasonably necessary that one or more authorised persons should have access to the premises for the purpose of determining whether a provision subject to monitoring is being complied with or information subject to monitoring is correct (section 32); or

 that there are reasonable grounds for suspecting that there is, or there may be within the next 72 hours, evidential material on the premises (section 70).

1.184 The issuing officer must be provided, either orally or by affidavit, any information required concerning the grounds on which the issue of the warrant is being sought.107

Enforceable undertakings 1.185 Item 40 (Schedule 2) inserts a new Subdivision AD—Application of the Regulatory Powers Act—Enforceable undertakings, and proposed subsection 101C makes the provisions of the Act enforceable under Part 6 of the Regulatory

Powers Act.

106 Regulatory Powers (Standard Provisions) Act 2014, s. 36.

107 Regulatory Powers (Standard Provisions) Act 2014, ss. 32(3), 70(3).

42

1.186 Under Part 6 of the Regulatory Powers Act:

 an authorised person may accept an undertaking relating to compliance with a provision that is enforceable under Part 6;  the undertaking may be enforced in a relevant court; and  the orders that may be made by a relevant court include an order directing

compliance, an order requiring any financial benefit from the failure to comply to be surrendered and an order for damages.108

1.187 Under proposed subsection 101D the Treasurer does not have to publish an undertaking if the Treasurer decides to do so would be contrary to the national interest.

1.188 Items 47 and 48 of Schedule 2 clarify how the Commissioner of Taxation may use the Commissioner’s powers under the Regulatory Powers Act and Taxation Administration Act.

Application and transitional provisions 1.189 The Explanatory Memorandum advises the following application and transitional provisions apply:

 expanding availability of infringement notices—apply in relation to contraventions of the foreign investment rules on or after 1 January 2021 (Item 52, Schedule 2);

 penalties—amendments will apply in relation to contraventions that occur on or after 1 January 2021 (Item 51, Schedule 2);  failing to give notice—amendments apply to contraventions that occur on or after 1 January 2021 (Item 50, Schedule 2);  infringement notices and civil penalty for vacancy fee lodgements—apply in

relation to vacancy fee returns given on or after 1 January 2021 (Item 53, Schedule 2);  incorrect statements—Treasurer can revoke a no objection notification or revoke or vary an exemption certificate where information or documents

that were false or misleading were given in relation to the no objection notification or exemption certificate to the Treasurer before, on or after 1 January 2021. As the amendments apply in relation to information or documents given to the Treasurer before, on or after 1 January 2021, the amendments may apply for no objection notifications and exemption certificates issued before, on or after 1 January 2021. The amendments providing for the effect of revoking or varying an exemption certificate apply to revocations or variations made on or after 1 January 2021 (Item 166 and Item 243, Schedule 1);  civil penalties or infringement notices—may apply for contraventions

involving false or misleading information or documents given on or after

108 Regulatory Powers (Standard Provisions) Act 2014, s. 109.

43

1 January 2021. A civil penalty or infringement notice will not apply for information or documents given before 1 January 2021 (Item 49 and Item 52, Schedule 2)  notification of actions—apply in relation to no objection notices and exemption certificates given on or after 1 January 2021 (Item 50, Schedule 2);  direction powers—where the relevant conditions for making a direction or interim direction were met on or after 1 January 2021 (Item 245, Schedule 1);  monitoring powers—apply in relation to compliance with the provisions of the Act and information given in compliance with a provision of the Act before, on or after 1 January 2021 (Item 55, Schedule 2);  investigation powers—apply in relation to contraventions or suspected contraventions of any offence provision or civil penalty provision of the Act, or an offence against the Crimes Act or the Criminal Code that relates to the Act that occurs before, on or after 1 January 2021 (Item 56, Schedule 2); and  enforceable undertakings—relating to compliance with the Act given on or after 1 January 2021 (Item 57, Schedule 2).109

Fees

Current arrangements 1.190 Under current legislative arrangements, the Foreign Acquisitions and Takeovers Fees Imposition Act 2015 (Fees Act) and the Fee Regulation establish the specific fees and exemptions for fees payable when giving notice under the Act. The fees

are calculated based on the notification type, the value of the transaction or assets and the number of actions being taken. However, the fee may be higher or lower depending on the type of agreements in place, whether it is a variation, and whether any exemptions or lower fee rules apply. All fees imposed are a tax.110

Legislative changes 1.191 The fees imposition bill will amend the Fees Act to establish authority for the Fee Regulation to charge existing and new fees. The fees imposition bill repeals Part 2 of the Fees Act with most of the provisions currently in that section

transferred to Regulation. Fee amounts will be prescribed in Regulation.111

109 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 119-120.

110 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 123.

111 Foreign Acquisitions and Takeovers Fees Imposition Amendment Bill 2020.

44

1.192 The following fees remain payable when a person:

 applies for an exemption certificate or a variation of an exemption certificate;  gives notice of a notifiable action;  gives notice about a proposal to take a significant action that is not a

notifiable action;  applies for a variation of a no objection notification; and  when a person has been given an order or has been provided a no objection notification without giving the Treasurer a notice relating to the action

specified in the order or notification.112

1.193 Amendments establish new fees for the new actions: notifiable national security action; reviewable national security action that has been notified to the Treasurer; and an action for which the Treasurer has given the person a notice because the action may pose a national security concern. Fees are payable when a person applies to vary a notice imposing conditions that was given to the person.113

1.194 The fees imposition bill establishes a maximum fee cap and allows for the indexation of the maximum cap.114

Table 1.4 Comparison of old and new fee arrangements

Current fee arrangements New fee arrangements

Fees Act

Fees are payable on applications and notices made under the Act. Fee amounts are prescribed in the Fees Act and Fee Regulation.

Fees are payable on applications and notices made under the Act. All fee amounts are to be prescribed in the Fee Regulation, which can prescribe fee amounts including specifying:

 a fee amount or method;  different fee amounts or methods;  a nil amount or a method resulting in a nil amount;

 a method for a fee if two or more fees are payable in relation to a single agreement;

112 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 123-124.

113 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 133.

114 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 133.

45

Current fee arrangements New fee arrangements

 a method for a fee if the action is covered by multiple actions; and  an initial amount, and then later determining a reduced amount or

nil amount.

The Act

No current arrangement Fees are payable for a notifiable national security action.

No current arrangement Fees are payable when the Treasurer issues a notice that a reviewable national security action or significant action that has not been notified may pose a national security concern.

Fees are payable for actions notified to the Treasurer that are not notifiable.

Fees are also payable for reviewable national security actions that are voluntarily notified to the Treasurer.

No current arrangement Fees are payable for retrospective notifications for all notifiable, notifiable national security and significant actions.

A fee is payable if a person applies to vary their no objection notification. Fees when a person applies to vary a no objection notification or notice

imposing conditions.

No current arrangement Fees are payable when a person gives notice of a retrospective action that was a notifiable action but not a significant action if the action was taken between 1 December 2015 and the commencement of the bill.

All joint tenants in a joint tenancy arrangement are required to submit the vacancy fee return.

Only one person in a joint tenancy arrangement submits the vacancy fee return, in order to determine the applicable vacancy fee liability.

Source: Explanatory Memorandum 115

115 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 124-125.

46

Schedule 3—Register of foreign owned assets 1.195 Schedule 3 of the bill creates a Register of Foreign Ownership of Australian Assets. The Register will incorporate and discontinue existing separate registers—Register of Foreign Ownership of Water Entitlements and Register of

Foreign Ownership of Agricultural Land—by repealing the Register of Foreign Ownership of Water or Agricultural Land Act 2015 (Register Act).

1.196 The Register will not contain all foreign owned assets—generally only those that have been notified or been the subject of some of the Treasurer’s new powers under the bill. The information on the Register will not be publicly available.

Definitions and miscellaneous provisions 1.197 Item 1 (Schedule 3) modifies the simplified outline of the Act to include the Register:

The Register of Foreign Ownership of Australian Assets is kept under Part 7A.

The Register records certain actions relating to interests acquired, held or disposed of by foreign persons. A foreign person who takes such an action (which may or may not be a significant action or a notifiable action, or otherwise covered by this Act) must give a register notice to the Registrar. In some circumstances, other people must also give notices to the Register. A civil penalty applies to a failure to give a notice under Part 7A.

1.198 Item 2 (Schedule 3) inserts several definitions into section 4 of the Act, including for some definitions currently in the Register Act.

1.199 Item 3 (Schedule 3) inserts 26A Meaning of registrable water entitlement. This is the same definition in the Register Act, which is repealed at Item 14.

Record keeping and disclosure of information 1.200 Items 4-6 (Schedule 3) extend and slightly modify the existing record-keeping provisions in the Act to the Register.

1.201 Item 7 (Schedule 3) inserts section 126A to allow the Registrar to disclose information. This item means the Register will be captured by changes to the protected information provisions (discussed above) including sections 122, 123A and 123B.

General provisions 1.202 Item 8 (Schedule 3) inserts a new Part 7A—The Register of Foreign Ownership of Australian Assets, into the Act. Provisions in this section create a requirement for a register notice to be provided to the Registrar. When this occurs, a

registered circumstance is established. This creates further reporting requirements.

47

1.203 Section 130P provides a simplified outline, including:

The Register of Foreign Ownership of Australian Assets records certain actions relating to interests in land, water, entities, businesses and other assets in Australia.

The Register is kept by the Registrar, which is a body or person appointed by the Treasurer.

Generally, a foreign person who acquires or disposes of such an interest must give a register notice to the Registrar. The register notice may result in there being a registered circumstance in relation to the person, and the person may be required to give further register notices in relation to the registered circumstance…

No fee is payable for giving a register notice under this Part…

A civil penalty applies to a failure to give a notice as required by this Part.116

1.204 Division 2—The Register of Foreign Ownership of Australian Assets, comprises sections 130Q to 130Z and includes provisions relating to the following:

 Register commencement day on or after the day Part 2 of Schedule 3 commences (130Q);  appointment of the Registrar by notifiable instrument (130R);  requirement of the Registrar to keep the Register (130S);  overview of information to be kept in the Register (130T);  additional information the Registrar may add to the Register, including

information obtained under the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 (130U);  disclosure of information (see below) (130V);  requirements for giving notice to the Registrar before the end of 30 days after the registrable event (except in certain circumstances) and details for events that may have ceased before notice is given or where single events might result in notices given under more than one provision (130W);  establishing the registrable event day (130X);  agents may give notice (130Y); and  regulations may extend time for giving notice (130Z).117

1.205 Proposed section 130V specifies the circumstances in which the Registrar may disclose information in the Register. The Register will not be publicly available, however, under 130V(1), information may be disclosed to the Treasurer, Secretary, Commissioner of Taxation, employees of the Treasury and Tax Office, and other persons appointed for the purposes of the Act. Subsection 130V(3) has the effect that the provisions for the sharing of information under Division 3 of Part 7 apply to the Register. This means information on the Register, whilst not publicly available, can be shared under certain circumstances with other

116 Item 8, Schedule 3.

117 Item 8, Schedule 3.

48

government departments, state/territory governments, and foreign governments.

1.206 Proposed section 130Z allows for extensions to time for giving notice to the Registrar to be made by regulation. Regulations may be made for the purposes of providing extensions on the grounds certain conditions are met and the Treasurer has the power to impose such conditions generally or in particular cases. Regulations may also provide for extensions that apply to specified persons, confer a power to make a decision of an administrative character; and confer a power on the Treasurer to make a legislative instrument providing for anything that may, under section 130Z, be provided for by the regulations.

1.207 Division 3—Requirements to give register notices to the Registrar contains section 130ZA to 130ZU. Key provisions in this division are discussed below. In general, once notice is given, a registered circumstance is created, which ceases if the person ceases to hold the interest. A registered circumstance gives rise to certain ongoing reporting obligations.

1.208 Subdivision A deals with Register requirements relating to interests in land and includes requirements in the following circumstances:

 a foreign person acquires an interest in Australian land, and an equitable interest in a lease or licence expected to exceed 5 years in agricultural land (section 130ZA);

 interests in exploration tenements, allowing for ‘interest’ to be prescribed by the regulations (130ZB);  a person becomes a foreign person while holding an interest in land (130ZC); and  a change in nature of interest in land (130ZD).118

1.209 Subdivision B establishes requirements relating to registrable water interests including when:

 a foreign person acquires a registrable water interest (130ZE);  a person becomes a foreign person while holding a registrable water interest (130ZF); and  there is a change to certain characteristics of a registrable water interest,

such as a change in volume of water (130ZG).119

1.210 Subdivision C (Items 130ZH-130ZP) relates to requirements for interests in businesses or entities and includes requirements for:

 significant actions;  notifiable actions;  notifiable national security actions;

118 Item 8, Schedule 3.

119 Item 8, Schedule 3.

49

 a reviewable national security action that has been notified, or for which a no objection notification (with or without conditions) has been given, or for which the Treasurer has issued a notification the action will be reviewed;  a change in interest in an entity or business; and  a person becomes a foreign person while holding interest in an entity or

business or while carrying on or holding an interest in a national security business.120

1.211 Proposed section 130ZQ requires notice when a registered circumstance ceases and section 130ZR when a foreign person ceases to be a foreign person while registered circumstances exist.

1.212 Further provisions (sections 130ZS and 130ZT) are made specifying the requirements relating to persons who die, or corporations that are wound up before notice is given, and for a corporate liquidator to give notice.

1.213 Section 130ZU allows for the regulations to prescribe additional requirements for giving notice; and section 130ZV establishes a civil penalty for failing to give notice to the Registrar.

1.214 Section 130ZY requires the Registrar to give the Treasurer, for presentation to the Parliament, a report for each financial year that includes ‘statistics derived by the Registrar from information in the Register’. The statistics in this report must not identify, or be reasonably capable of being used to identify, a person.

1.215 Section 130ZZ allows for the Registrar, by legislative instrument, to determine data standards.

Other amendments 1.216 Some changes with regard to low-risk foreign investment will be made through regulation:

 exempting certain investments made by entities who are currently classified as ‘Foreign Government Investors’. This exemption will apply only where no foreign government investor has or could be perceived to have influence or control over the investment or operational decisions of the entity or any of its underlying assets;  exempting revenue streams in relation to mining and production tenements;

and

 exempting acquisitions of interests in land acquired by private investors as a result of obtaining a right in an exploration tenement unless the land is national security land.121

120 Item 8, Schedule 3.

121 See: Draft Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020;

The Treasury, Submission 12, p. 4. See also: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory Memorandum, p. 156; Mr Andrew Deitz, Branch Head,

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Legislative scrutiny

Foreign Acquisitions and Takeovers Fees Imposition Amendment Bill 1.217 The Scrutiny of Bills Committee (scrutiny committee) considered the fees imposition bill and raised concern that guidance in relation to the method of fee calculation under proposed section 6 should be provided in the primary

legislation to allow for greater parliamentary scrutiny.122

1.218 The scrutiny committee is of the view:

…it is for the Parliament, rather than makers of delegated legislation, to set a rate of tax. Therefore, where a fee is imposed as a tax, the committee considers that guidance in relation to the level of a charge should be included on the face of the primary legislation.123

1.219 The scrutiny committee welcomed the inclusion in the primary legislation of the cap on the amount of fees that may be charged under the regulations. However, it requested the Treasurer’s advice as to whether guidance in relation to the method of calculation of the fees in proposed section 6, which are imposed as taxes, can be included on the face of the bill.124

Foreign Investment Reform (Protecting Australia’s National Security) Bill 1.220 The scrutiny committee raised several concerns about the bill, including significant matters left to delegated legislation. The committee highlighted the following delegated legislation concerns:

 ‘national security business’ and ‘national security land’—the Explanatory Memorandum does not provide an adequate justification for definitions that are integral to the operation and purpose of the bill to be defined in delegated legislation, with particular concern the definitions are of relevance to criminal offences (Item 18, Schedule 1);

 exemption certificates—there is insufficient justification for delegated legislation to provide that an action of a specified kind is not a notifiable national security action or reviewable national security action (Item 72, Schedule 1); and  disclosures to Commonwealth ministers and bodies—statements as to

administrative flexibility are not sufficient justification for leaving significant matters to delegated legislation, such as the Treasurer being able

Policy and National Security Branch, Foreign Investment Division, The Treasury, Committee Hansard, 15 May 2020, p. 50.

122 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020, pp. 8-9.

123 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020, pp. 8-9.

124 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020, pp. 8-9.

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determine by legislative instrument further laws to which the disclosure provisions apply (Item 204, Schedule 1).125

1.221 The scrutiny committee also raised concerns about broad delegation of administrative power; broad discretionary power; and privacy. The committee considers that proposed section 79R gives the Treasurer a broad discretionary power to give directions in circumstances where the Treasurer only needs to have ‘reason to believe’ that a contravention has occurred, is occurring or will occur. This is justified on efficiency grounds. The scrutiny committee is of the view a desire to provide a quick and efficient response to remedy a breach (or a potential future breach) of the Act is not a sufficient justification for providing the Treasurer and their delegates such a broad discretionary power. It also raises concerns about potentially sensitive or private information being published online and about the Treasurer’s power to delegate the directions power to a large class of persons.126

1.222 Further concerns were raised about the adequacy of parliamentary oversight and privacy. These concerns are in relation to section 123B that will allow protected information to be provided to foreign governments, potentially trespassing on personal rights and liberties, including privacy. The concerns are heightened by the lack of parliamentary oversight of any relevant international agreement. The scrutiny committee seeks the minister’s advice on whether minimum protections and safeguards related to privacy that must be in international agreements can be set out in primary legislation, and that the primary legislation specifies the agreements must be tabled in the Parliament.127

1.223 In relation to the merits review provisions (Item 207, Schedule 1), the committee is of the view the Explanatory Memorandum provides no justification as to why limits have been placed on AAT proceedings that may impact an applicant’s right to a full and independent merits review, including the right to a fair hearing, and also to subsequent judicial review.128

1.224 The retrospective application of fees for actions not notified (Item 247, Schedule 1) raises concern for the scrutiny committee. The scrutiny committee is of the view there is insufficient detail in the Explanatory Memorandum for the

125 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020,

pp. 10-13.

126 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020,

pp. 14-16.

127 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020,

pp. 17-19.

128 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020,

pp. 19-20.

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committee to determine whether any persons are likely to be adversely affected.129

1.225 The scrutiny committee raises further concerns about the broad delegation powers and matters left to delegated legislation with regard to the Registrar, including being able to delegate to a relatively large class of people, powers and functions under Parts 4 and 5 of the Regulatory Powers (Standard Provisions) Act (Item 19, Schedule 2; Item 29, Schedule 2), and under section 130ZX any or all functions and powers, except the power to make a legislative instrument under section 7A (Item 8, Schedule 3). The committee is of the view delegations should be confined and where broad delegations are provided for, the explanation for the necessity should be included in the Explanatory Memorandum. In this instance, the committee states the Explanatory Memorandum does not provide a justification.130

1.226 Finally, the scrutiny committee highlights significant penalties where maximum terms of imprisonment and monetary penalties have increased from those in relation to the existing offences in the Act. The committee is of the view sufficient information for the imposition of the penalties, particularly those involving imprisonment, is not provided in the Explanatory Memorandum. The committee states, ‘while the Explanatory Memorandum explains that the offences and civil penalty provisions have been framed to ensure consistency in the penalties compared to other regulators, the committee notes that specific examples have not been provided’.131

1.227 The scrutiny committee is awaiting a response from the Treasurer.

Regulatory and financial impact

Rationale for legislation 1.228 The regulatory impact statement (RIS) rationalises the new actions and powers implemented by the bill, including monitoring and compliance powers, largely on national security grounds.

1.229 The RIS acknowledges the importance of foreign investment to the Australian economy, but emphasises risks from foreign investment to Australia’s national interest, particularly national security, have increased and will continue to evolve over time. Drawing upon OECD research, the statement attributes these risks to a confluence of developments, including:

129 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020,

pp. 20-21.

130 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020,

pp. 21-23.

131 Standing Committee for the Scrutiny of Bills, Scrutiny Digest 16 of 2020, 20 November 2020,

pp. 23-24.

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 technological developments and digitalisation that have turned personal data into a sensitive asset;  a shift in global economic weights that has created new dependencies, interests and threats;  heightened sensitivity over the control of assets that constitute critical

infrastructure; and  new and more widely shared concerns, in addition to espionage and sabotage, about diversity of suppliers and access to advanced technology.132

1.230 The statement argues Australia’s foreign investment framework has a screening gap for low-value private foreign investments that, even in the most sensitive sectors, can occur without any assessment or evaluation.133

1.231 The framework also requires a ‘credible monitoring and enforcement capability’ to ensure investors comply with foreign investment rules, including conditions placed on investment. The RIS states, ‘over recent years, as the risks from foreign ownership have increased, so too has the use of conditions’.134

1.232 According to the government, the effective regulation of foreign investment requires also quality, accurate, and current foreign investment data.135

Assessment of regulatory impact 1.233 The RIS assesses three options for reform in each of the ‘policy packages’: status quo, balanced approach, and a significant increase in the protection of Australia’s assets.136 The RIS ultimately settles on the ‘balanced approach’.137

1.234 The regulatory costs estimated for an approach to ‘balance’ each part of the reforms are summarised below.

132 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 151-152.

133 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 153.

134 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 154.

135 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 154.

136 Or ‘decrease’ in the case of streamlining less sensitive investments; or a ‘lower investment approach’

in terms of modernising the investment ICT platform for case management, compliance enforcement and data usage. Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory Memorandum, pp. 169, 174.

137 See: Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 159-190.

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Table 1.5 Summary of regulatory cost—balanced approach

Business Community

organisations Individuals Total change in cost

National security provisions including national security test

$5.4m $0 $0 $5.4138

Integrity provisions

($0.1m) $0 ($0.6m) $(0.8m)139

Compliance and enforcement powers

none identified none identified none identified none identified

Streamlining

($1.9) $0 $0 ($1.9)140

Register of foreign ownership of Australian assets

$0.1m $0 $0 $0.1m141

Fees

($0.1m) $0 ($0.6m) ($0.7m)142

Modernising ICT platform

($0.1m) $0 ($0.6m) ($0.7m)143

$3.3m $0 ($1.8) $1.5

Source: Explanatory Memorandum

National security test 1.235 The introduction of the national security test is expected to result in an average of 161 additional applications each year with a regulatory burden of $5.4 million

138 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 178-179.

139 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 180.

140 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 183.

141 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 185-186.

142 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 186-187.

143 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 188-190.

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on investors. The government’s additional resourcing will be approximately $3.4 million and will be recovered from reform to the application fee framework.144

Integrity provisions 1.236 Although the number of applications is expected to stay largely the same, the government suggests greater clarity and readability in the legislation will reduce regulatory burden for investors. It is estimated the reforms will reduce

the aggregate regulatory burden faced by investors under the foreign investment framework by approximately $775,000 each year.145

Compliance and enforcement powers 1.237 The government estimates no increased regulatory burden on investors from the expansion of compliance and enforcement powers. The additional powers to monitor compliance and address non-compliance will increase the functions

of the Treasurer, Treasury and ATO. The increased resourcing will be approximately $9.3 million per annum over the next ten years and will be recovered from investors through the reform to the fee framework.146

Streamlining 1.238 The government estimates streamlining will result in 60 fewer foreign investment applications each year, which will reduce the aggregate regulatory burden on investors by approximately $1.9 million.147

Register 1.239 The government does not expect there to be significant costs to investors for the purposes of the Register and estimates an additional 1,800 events registered by foreign investors each year, in addition to the approximately 13,500 events

already registered under existing obligations. The aggregate burden is in addition to the existing $500,000 regulatory cost. The government’s expenditure of approximately $86.3 million over four years for a new ICT platform will be recovered from investors through the application fee framework.148

144 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 178.

145 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 180.

146 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 181-182.

147 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 183.

148 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 185-186.

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Fees 1.240 By reducing the complexity of the fee framework, the government estimates the aggregate regulatory cost on investors will be reduced by approximately $650,000 each year. Although there will be higher fees, foreign investors will

bear the cost of administering the regime.149

Modernising the ICT platform 1.241 The new IT system will streamline the submission process and requirements to provide information. The estimated reduction in regulatory burden is approximately $650,000 each year.150

1.242 The benefits and costs for each of the ‘policy packages’ is summarised below.

Table 1.6 Summary of benefits and costs of regulatory changes

Benefits Costs

National security provisions

Enables government oversight of actions that could be contrary to national security

New notification requirements for actions that could be contrary to national security; increased workload to process new actions

Integrity

Expands the range of actions the government will have powers over, without increasing regulatory burden; more efficient and more informed case assessments

Information flows will remain limited to certain purposes

Compliance and enforcement

Additional monitoring, investigative and enforcement powers consistent with other regulators; increased penalty amounts for proportionate penalties

Increased staffing to implement the monitoring, investigative and enforcement powers; associated increased training requirements

149 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 186-187.

150 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, pp. 188-190.

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Benefits Costs

Streamlining less sensitive investments

Fewer reporting obligations for lower risk investments Decrease in regulatory oversight of actions that may be contrary to

national interest

Register of foreign ownership of Australian assets

Faster and more robust case processing, with improved compliance monitoring; better data set to aid future policy considerations

Additional regulatory burden; financial cost to government for IT build

Fees

No financial cost to Australian taxpayers; fairer and simpler fee framework

Some foreign investors will pay more

ICT platform

Cases handled more quickly and more efficiently, with compliance activities more effectively managed; greatest reduction in regulatory burden

IT build and delivery will require additional government funding

Source: Explanatory Memorandum

Conduct of the inquiry 1.243 The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting submissions by 10 November 2020. The committee received 17 submissions, which are listed at Appendix 1.

1.244 The committee held a public hearing on Wednesday, 18 November 2020. The names of witnesses who appeared at the hearing are at Appendix 2.

1.245 The committee thanks all individuals and organisations that contributed to the inquiry.

1.246 Hansard references throughout this document relate to the proof Hansard. Please note that the page numbering may differ between the proof and final Hansard.

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Chapter 2 Views on the bill

Introduction 2.1 Submissions to the inquiry broadly supported the intent of the legislation, but focussed on the scope of key definitions and the reach of the Treasurer’s new powers, and in particular, sought more detailed guidance on the operation of

some provisions.

2.2 Submitters made general points about the overall intent and effect of the legislation, including the similarity of the legislation to that being introduced in other jurisdictions, and of maintaining the balance between foreign investment and national security.

2.3 Specific concerns were raised about changes to the moneylending exemption; the definition of national security business and its possible reach into large areas of the economy; the power of the Treasurer to review investments over time; changes to fees; and appeal rights.

2.4 A range of other issues were covered including requirements of the Register; suggestions for a range of exemptions; the decision period extension; calculation of market value; and the increase in compliance and monitoring.

The broad intent and effect of the legislation 2.5 As discussed in the previous chapter, the pretext of the legislation is ensuring Australia’s national security. A number of jurisdictions around the world have recently moved to address national security concerns arising from foreign

investment, including Canada, China, the European Union, India, Japan, New Zealand, the United Kingdom, and the United States.1

2.6 The Department of Foreign Affairs and Trade argued the changes in Australia are consistent with those occurring in similar jurisdictions globally. The Department cited Organisation for Economic Cooperation and Development (OECD) research involving 62 countries that showed 21 countries have made policy changes since September 2019 to foreign investment screening regimes.2

2.7 While the pandemic has been an accelerator for some of the changes, the broader underlying concerns with regard to threats to essential security interests associated with foreign investment were existing. The research also suggests the proportion of foreign direct investment potentially subject to cross-sector

1 Ms Roxanne Kelley, Deputy Secretary, Corporate and Foreign Investment, The Treasury, Committee

Hansard, 18 November 2020, p. 48.

2 Department of Foreign Affairs and Trade, Submission 4, p. 4.

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investment screening has doubled over the past thirty years. In respect of the legislation, the Department suggests Australia is not an outlier.3

2.8 In terms of the level of foreign direct investment, the Treasury highlighted research suggesting slowing foreign direct investment was a world-wide trend: global foreign direct investment (FDI) inflows during 2018 and 2019 were lower than at any time since 2010. The United Nations Conference on Trade and Development has attributed this in part to the effects of 2017 tax reforms in the United States and declining outward FDI from China driven by domestic policy settings.4

2.9 The Australian Financial Markets Association acknowledged it was unsurprising, given actions elsewhere in the world, that Australia would need to improve its national security legislation. The Association, though, expressed concern at the speed at which the legislation was being considered and questioned some aspects of the bill (see below).5 The Business Council of Australia similarly commented on recent legislative changes in the United Kingdom.6

2.10 Notably, the Property Council of Australia argued Australia’s screening regime captures significantly more investments than similar regimes in the United States or Germany.7

Maintaining a balance between the economy and security 2.11 The Australian Strategic Policy Institute (ASPI) welcomed the legislation, highlighting the growing threats to critical infrastructure as industrial control systems are increasingly run through the internet of things. These threats may

emerge from past, present and future investment decisions in conjunction with changed political intent on the part of a foreign power.8

2.12 While ASPI is of the view the zero-dollar threshold should remain in place permanently, others sought a different balance between security and the economy. Some submissions made claims the increased regulation would drive away foreign investors in areas such as mining and agribusiness who will look

3 Department of Foreign Affairs and Trade, Submission 4, p. 4. See also, Austrade, Submission 11, p. 4.

4 Treasury, answers to questions on notice, 18 November 2020 (received 20 November 2020).

5 Mr David Love, General Counsel, Australian Financial Markets Association, Committee Hansard,

18 November 2020, p. 8.

6 The BCA suggested the legislative changes in the UK were more targeted and clearer. Mr Adam

McKissack, Chief Economist, Business Council of Australia, Committee Hansard, 18 November 2020, p. 23.

7 The basis for the calculations presented by the Property Council of Australia were not disclosed in

the council’s submission or at the public hearing. Property Council of Australia, Submission 16, p. 2.

8 Mr Peter Jennings, Executive Director, Australian Strategic Policy Institute, Committee Hansard,

18 November 2020, pp. 1-2.

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elsewhere in a competitive global foreign investment environment. This foreign investment, submitters argued, cannot be replaced with equivalent funding from alternative sources such as government loans or domestic investment.9

2.13 The Treasury is certainly aware of the need to balance competing needs.10 However, it makes a case for a changed security environment to support the legislative changes:

…risks to Australia’s national interest, particularly national security, have increased as a result of a confluence of developments—including rapid technological change and changes in the international security environment. Security agencies are increasingly consulted as part of the foreign investment review process. For example, the Australian Security Intelligence Organisation (ASIO) undertook 275 foreign investment assessments in 2018-19 (up 12 per cent over the previous year).11

2.14 The Treasury argues the existing foreign investment framework has gaps in its capacity to scrutinise and address national security risks. As it currently stands:

 many private investments under $275 million are not screened, and in some cases under $1.192 billion; and  the majority of Australia’s manufacturers and suppliers of military-related goods and services fall below screening thresholds.12

2.15 The Department of Home Affairs agrees, stating the existing thresholds do not reflect potential security risks that may come as a consequence of an increasingly complex economic environment, where governments and the private sector rely to a growing extent on smaller businesses to provide critical equipment or outsourced services. While smaller businesses are not themselves critical infrastructure providers, and may not be subject to screening under existing monetary thresholds, they may nevertheless be subject to exploitation as a consequence of the trusted access they have to physical sites, IT networks, and large sensitive data sets.13

9 See: Australian Financial Markets Association, Submission 1, p. 1; Association of Mining and

Exploration Companies, Submission 2, pp. [2-4]; Minerals Council of Australia, Submission 5, pp. [2, 14]; Business Council of Australia, Submission 7, p. 1; Australian Sugar Milling Council, Submission 8, p. 2; Real Estate Institute of Australia, Submission 14, p. 2; Property Council of Australia, Submission 16, p. 4.

10 A different balance was suggested by Austrade—that between encouraging foreign investment and

maintaining community support for foreign investment and ensuring it is in the national interest. Austrade, Submission 11, p. 6.

11 The Treasury, Submission 12, p. 2.

12 The Treasury, Submission 12, p. 2.

13 Department of Home Affairs, Submission 9, pp. 3-4.

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2.16 The Treasury is of the view the legislation achieves a balance by:

…addressing national security risks, strengthening compliance and enforcement powers, streamlining certain approvals, addressing technical legislative loopholes and implementing a fairer and simpler fee regime.14

Sovereign risk 2.17 Beyond commenting on balance, some submitters suggested the legislation raised questions of actual or perceived sovereign risk. The Business Council of Australia, for instance, argued that the rules can be changed after investment

decisions are made has the potential to create a chilling effect on foreign investment into Australia.15 The Council did not quantify this.

2.18 The Consolidated Pastoral Company similarly suggested the Treasurer’s last resort power meant there was no way for a foreign person to manage sovereign risk when investing in Australia.16

2.19 These claims, however, define sovereign risk not in the traditional way as the confiscation of private property, but in a manner that encompasses any policy, regulatory or taxation change that might affect an entity’s operations. The proposed legislation does not allow for the rules to be changed over time, but for an assessment of potential evolving national security risks that may arise in response to the changing economic and political environment.

2.20 Mr Jennings from ASPI argued:

I think the flaw in the sovereign risk case is that it argues that, once a decision has been taken—and certainly everything that applied before 1 January 2021 cannot be changed. My concern about that is from a national security point of view. Unfortunately, facts can change. It might have been perfectly reasonable for a particular decision to have been taken 10 years or five years ago, but, if the technology has changed in ways which now make those investments vulnerable to cyberattack, then it seems to me government has to be able to make decisions that might force a reconsideration of past foreign investment decisions.

The claim is: if you do that, that is going to undermine confidence that foreign investors might have in Australia. My view would be: I don’t think that’s right. I think many foreign investors from like-minded democracies would look at that and say, ‘This is an example of Australia taking necessary

14 Ms Roxanne Kelley, Deputy Secretary, Corporate and Foreign Investment, The Treasury, Committee

Hansard, 18 November 2020, p. 48.

15 Business Council of Australia, Submission 7, p. 8. See also: Property Council of Australia, Submission

16, p. 2; Mr David Love, General Counsel, Australian Financial Markets Association, Committee Hansard, 18 November 2020, p. 9; Mr Sid Marris, General Manager of Strategy, State & Territory Relationships, Minerals Council of Australia, Committee Hansard, 18 November 2020, p. 12; Mr Warren Pearce, Chief Executive Officer, Association of Mining and Exploration Companies, Committee Hansard, 18 November 2020, p. 14.

16 Consolidated Pastoral Company, Submission 17, p. [8].

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steps to look after its national security.’ For that reason, I think there has to be some capacity for a retrospective look to past decisions…

I don’t think there can be a sort of statute of limitations on Australia’s national security interests.17

Australia’s open foreign investment regime 2.21 Several submitters suggested the legislative program would make Australia’s already restrictive foreign investment regime more so, with suggestions this was supported by OECD figures.18

2.22 The Productivity Commission recently studied the restrictiveness of Australia’s foreign investment framework. It cited research from the OECD comparing Australia’s policies to regimes elsewhere. The OECD’s index of FDI restrictiveness places Australia well above the OECD average, though still lower than Canada and New Zealand. However, the index also shows that Australia’s regime is not overly restrictive in absolute terms (a score of 0.149, compared with a maximum of 1.0). The OECD also notes a decline in Australia’s restrictiveness since 1997.19

2.23 The Productivity Commission also quantified the effects of Australia’s foreign investment restrictions. Overall, its modelling estimated that the cost of added foreign investment restrictions to Australians is material, though not large in the context of Australia’s nearly $2 trillion economy. Increasing Australia’s restrictions on foreign investment (to a similar level of restrictiveness as New Zealand) would reduce gross national income by between $0.8 and $7.1 billion (or $82-$731 per household per year), due to a loss of $19-$182 billion of net foreign capital.20

2.24 The Productivity Commission, however, warned reliably measuring ‘restrictiveness’ is difficult:

It’s a very, very difficult thing to really get a handle on, because this OECD measure of restrictiveness is quite subjective and it actually doesn’t take into account at all the national security element, which is the main subject matter of this bill. It’s largely about the screening requirements, more so than what actually gets through and what actually doesn’t. So, on one measure, Australia has a very strong and open approach to foreign investment, because foreign investment as a share of GDP in Australia is higher than it is for many OECD peers, but it can appear that our screening regime is more restrictive, because more deals are coming under the purview of the FIRB

17 Mr Peter Jennings, Executive Director, Australian Strategic Policy Institute, Committee Hansard,

18 November 2020, p. 4.

18 See: Association of Mining and Exploration Companies, Submission 2, p. [3]; Minerals Council of

Australia, Submission 5, p. [2]; Property Council of Australia, Submission 16, pp. 8-9.

19 Productivity Commission, Foreign Investment in Australia, Research Paper, June 2020, p. 12.

20 Productivity Commission, Foreign Investment in Australia, Research Paper, June 2020, pp. 13-14.

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[Foreign Investment Review Board] and the Treasurer…it’s not even clear we would be regarded as more restrictive under the OECD measure as a result of these changes.21

Assessments of national security risk 2.25 A concern was raised during the hearing which goes to the integrity of the reforms that are to address risks to Australia’s national security—specifically, the capacity of agencies to coordinate and provide comprehensive advice on

national security risks for the Treasurer’s consideration.

2.26 The Australian Strategic Policy Institute suggested there needs to be a robust framework, beyond agencies talking to each other. The advice to the Treasurer, who exercises the call-in and last-resort powers, has to be supported by the wider national security system and agencies have to resist the urge to focus parochially on their own departmental interests.22

2.27 Mr Jennings stated the Treasury was not designed to shape national security advice to the government and in the past the consolidation of advice to the Treasurer and the Foreign Investment Review Board had been a ‘poorly resourced, ad hoc process that has not developed timely, well-considered whole-of-government advice for the Treasurer’.23

2.28 The Treasury responded that over time it has evolved to be a much more effective, consultative agency:

We do consult very regularly with security partners, including ASIO…We work very closely with the Department of Defence on a range of issues that might affect their equities. We work very closely with colleagues in departments across government, both security and non-security…to form our judgements on individual cases—and, importantly, not just on individual cases; we work very closely with them on some of the broader policy issues as well around foreign investment and how we work to implement the government’s foreign investment policy framework.24

Moneylending exemption 2.29 One reform under the current legislative program is to the Foreign Acquisitions and Takeovers Regulation 2015 to amend section 27 that relates to exemptions from the Act for moneylending agreements. Under current regulations, an

interest in securities, assets, a trust, Australian land or a tenement is exempt

21 Mr Michael Brennan, Chair, Productivity Commission, Committee Hansard, 18 November 2020,

pp. 44-45.

22 See: Mr Peter Jennings, Executive Director, Australian Strategic Policy Institute, Committee Hansard,

18 November 2020, pp. 1-3, and 5.

23 Mr Peter Jennings, Executive Director, Australian Strategic Policy Institute, Committee Hansard,

18 November 2020, p. 2.

24 Mr Tom Hamilton, Division Head, Foreign Investment Division, The Treasury, Committee Hansard,

18 November 2020, pp. 55-56.

65

from the Act (that is, it does not have to be notified or assessed) if the interest is held by way of security for the purposes of a moneylending agreement.

2.30 Amendments to the regulations remove the exemption to screening requirements for national security land; an exploration tenement that is national security land; and an interest in an asset of a national security business. This means prospective lenders for these purposes, who would hold the debt on a secured basis, may need to obtain approval from the Treasurer. Under current drafting, this may apply for both crystallising and contingent interests.

2.31 The Australian Financial Markets Association is of the view the intent of the changes or their scope is not clear and they potentially capture contingent interests prior to there being any crystallising interest. Mr Love stated the concern:

We are concerned about syndicated lending…This is the common way that lending occurs. When we’re talking about national infrastructure matters, like gas pipelines and these types of things, we’re talking hundreds of millions of dollars. Normally, the primary vehicle for the initial getting the project going is to finance it through lending. This is done through syndicated lending, where a group of banks come together.

If you look at the legislation, it’s unclear at the moment whether or not you would have to approach FIRB to get prior approval. Normally you appoint a security holder for the syndicate, the syndicate security holder, to hold those secured assets in the event that you need to enforce your interest, if they default on their payments to the syndicate banks. You would then have to go through an approval process there. A discussion about whether or not it would only result where you actually needed to crystallise your interest, in the sense that the borrower had defaulted—we’re talking about the direct investor here—whether or not the investor itself defaults, and how you would go about enforcing that enforcement process—whether or not you might need to approach FIRB at that point, which would be a better outcome, certainly a much less impactful outcome—might be, hopefully, a way forward on these matters.

I also note that it is very common, once you have a project well underway and you have the initial financing all in place, to, after a period, refinance the transaction through debt issuance by the investor themselves. That would be intermediated, once again, through banks. The processes around the secured asset and dealing with that sort of situation need to be clarified and clearly understood.25

2.32 The Association argued this was complicated by the fact many major Australian banks, because of their foreign shareholdings, may be considered foreign persons for the purposes of this legislation when they act as intermediaries. And further, that many financial institutions have broad-based shareholdings and

25 Mr David Love, General Counsel, Australian Financial Markets Association, Committee Hansard,

18 November 2020, p. 7.

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focussing on where, nominally, an institution has its home jurisdiction may not be appropriate.26

2.33 The Association argued for a limited change that would ensure only the actual acquisition of a national security related interest by way of enforcement of a security (that is, a crystallising interest) held solely for the purposes of a moneylending agreement be subject to approval by the Treasurer. It argued against contingent interests triggering the need for review.27

2.34 It also suggested in relation to listed entities that were moneylenders:

It’s better to think of the possibility of looking at financial institutions, looking at their business, what they are doing, who they’re owned by, on a regular basis maybe, on a periodic basis, to look at their fitness to participate in syndication or other intermediation in relation to those fundraisings. So you’re saying that that financial institution has gone through a process once maybe for a period of several years of being looked at, of being considered whether or not it presents national security threats. If they get a clean bill of health, then they can participate, basically, and have a certification that says they can participate. These are simple processes.28

2.35 The Treasury explained the broader policy considerations that were driving its approach to the exemption:

The changes that the government is making at this time very much look at the possibility that because of the moneylending exemption it is possible for a lender to take possession, ultimately, of an asset in a way which effectively extinguishes any conditions that might have been put on that without the government having an opportunity to review that transaction and to consider whether to prohibit or to impose conditions.29

Definition of national security business 2.36 A significant concern to several submitters was the definition of national security business and how this might affect a range of foreign investors. This was a particular concern of mining and minerals groups who sought special

recognition for critical minerals.

26 Mr David Love, General Counsel, Australian Financial Markets Association, Committee Hansard,

18 November 2020, pp. 7 and 9.

27 The Property Council of Australia also objected to the removal of the moneylending exemption.

Australian Financial Markets Association, Submission 1, p. 2; Property Council of Australia, Submission 16, p. 2.

28 Mr David Love, General Counsel, Australian Financial Markets Association, Committee Hansard,

18 November 2020, p. 9.

29 Mr Andrew Deitz, Branch Head, Policy and National Security Branch, Foreign Investment Division,

The Treasury, Committee Hansard, 18 November 2020, p. 60.

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2.37 As discussed in chapter 1, the definition of a national security business is made in the Foreign Investment Reform (Protecting Australia’s National Security) National Security Business) Regulations 2020, currently in draft form.

Concern from mining industry 2.38 The Association of Mining and Exploration Companies suggested:

Under the current broad definitions, businesses that ‘develop’, ‘manufacture’ or ‘supply’ goods or services to a sensitive national security business could refer to the entire minerals sector at all stages of the supply chain…[there is] no certainty that any good or service that isn’t technically considered military in nature, will not be subject to review because it may be utilised at some point by defence or intelligence personnel.30

2.39 The Minerals Council of Australia made a similar argument—miners should not be captured by the definition of national security business because the raw minerals may be processed and manufactured into components that directly or indirectly feed into defence supply chains. The Council further questioned the potential scope creep for ‘criticality’ permitted by the Treasurer’s regulation-making powers.31

2.40 The Association of Mining and Exploration Companies expanded on the importance of foreign investment to the critical minerals industry, suggesting this may be endangered by the current broadly drafted regulation:

Over 100 Australian mining and exploration companies are currently working to find and develop critical mineral projects in Australia. Many of these companies are also pursuing potential value-adding and downstream processing opportunities here in Australia. The reality is that most of these projects will require foreign investment and offtake agreements with overseas customers to be viable. For these projects to incorporate and develop downstream processing will also likely require international partners, bringing technical expertise and intellectual property as well as further investment...Under the proposed provisions and broad definitions, all transaction could be subject to review, regardless of their actual or implied threat to national security. 32

2.41 The Association went further to state:

The reality is: although we’ve worked hard to build a wider range of investment opportunities with strategic partners across the world, that investment has not come forward in the early stages. Our companies, explorers and project developers have been very reliant on investment from China in particular, in getting that early seed capital that we are able to build a project around and in finding those customers that actually want to take

30 Association of Mining and Exploration Companies, Submission 2, p. [9].

31 Minerals Council of Australia, Submission 5, pp. [4 and 15]. See also: Chamber of Minerals & Energy

of Western Australia, Submission 13, p. 1.

32 Mr Warren Pearce, Chief Executive Officer, Association of Mining and Exploration Companies,

Committee Hansard, 18 November 2020, p. 12.

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the product. In that environment we have seen a couple of examples recently where it has not been quite as simple as some might think to find other investment opportunities once an investment application has been rejected.33

2.42 The argument that mining should be exempt is based on a suggestion the minerals do not become critical until such time as they are processed, and further that any processing requires foreign investment. This was explained by the Minerals Council of Australia:

…on the critical minerals side, it’s not mining where the pinch point is. The pinch point that is often referred to as the ‘seat of the national security point’ is much further down in the supply chain before you get to the manufacturing. At the mining level, it can’t be used in any products; it needs to be separated. What you mine needs to be separated and those separated components need to be smeltered; then you’re in a position where you have early manufacture material. But you need the technology and the know-how to do the smelting and the early manufacture material. That technology and know-how, unless you buy something that’s old technology and off-the-shelf, requires foreign direct investment to access and partnerships to deliver that access through foreign direct environment.34

2.43 The Minerals Council of Australia, however, acknowledged they were not privy to the ‘second half of the equation in the tension between national security and the national interest’:

We’re not privy to the national security considerations that they are referring. We can only talk about the economic impacts and, yes, the economic impacts would appear to us to be potentially significant, but we’re not in a position to say whether the government—how the government has weighed up those two.35

Concern from property industry 2.44 The Property Council of Australia does not accept owners of property would use their ownership to access premises (or would only do so rarely when the owner was not present) and is of the view the definition of ‘national security

business’ is in danger of being interpreted too broadly to capture interests and assets that would not normally warrant national security concerns—this

33 Mr Warren Pearce, Chief Executive Officer, Association of Mining and Exploration Companies,

Committee Hansard, 18 November 2020, p. 14.

34 Mr Demus King, General Manager of Trade, Investment and Investor Relations, Minerals Council

of Australia, Committee Hansard, 18 November 2020, p. 17.

35 A similar comment was made by the Business Council of Australia. Mr Sid Marris, General Manager

of Strategy, State & Territory Relationships, Minerals Council of Australia, Committee Hansard, 18 November 2020, p. 15; Mr Adam McKissack, Chief Economist, Business Council of Australia, Committee Hansard, 18 November 2020, p. 24.

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includes foreign ownership of premises holding data centres and government agencies.36

2.45 The Property Council of Australia argued there were often steps between the asset and the owner:

Typically, when we’re talking about data centres—or any commercial asset, but data centres as well—in the property asset that houses the data centre there might be a number of investors in that property asset. The management of the property asset would be undertaken, normally, by a real estate investment trust…So you’ve already got one step removed. If you’ve got an offshore investor in that asset, they don’t have any operational control. They’re not on the ground doing the normal property management activities of a property manager; they’re removed already.

Then you’ve got the fact of the difference between the owner of the property asset in total, including whatever mix of investors actually own the asset, and what’s happening within the data centre… I understand if the government is concerned about security issues and about information being held on data centres or, indeed, on servers within office tenancies. Yes, there may well be information, data, which has some sensitivity or security dimensions to it, but it’s not managed by, it can’t be accessed by and it’s not owned by the property owner.37

2.46 Further, the Council is of the view the meaning of ‘interest’ in Australian land under the Act is too extensive—it includes legal and equitable interests, options, and leases of greater than five years. And, given there will be no public register for critical infrastructure or carriage service providers, or land used for defence purposes, it will be difficult for property investors to determine whether an acquisition falls within the relevant definitions.38

Interaction with SOCI Act 2.47 The current amendments are occurring alongside amendments to expand the scope of the Security of Critical Infrastructure Act 2018 (SOCI Act) to cover additional sectors and introduce new regulatory requirements, including a

positive security obligation, enhanced cyber security obligations, and a government assistance regime. Under the arrangements, foreign-owned and Australian-owned businesses will be held to the same security standards.39

2.48 Broad concerns were expressed at the evolving nature of the definition of national security business through its connection to the SOCI Act. Certain critical infrastructure defined in the SOCI Act will be included in the definition

36 Property Council of Australia, Submission 16, pp. 2-3, 10-11, and 13.

37 Mr Ken Morrison, Chief Executive, Property Council of Australia, Committee Hansard, 18 November

2020, p. 22.

38 Property Council of Australia, Submission 16, pp. 11-13.

39 Department of Home Affairs, Submission 9, pp. 4-5.

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of a national security business through the regulations. The Minister of Home Affairs is empowered to add assets to this class of businesses under the Act.40

2.49 The Department of Home Affairs stated the government is particularly concerned about a number of sectors containing critical infrastructure, including telecommunications, energy, banking, finance, health, food and grocery.41 Submitters also included water and sewerage in the list.42

2.50 For the Department of Home Affairs, the security situation with regard to critical infrastructure evolves:

…the zero-dollar threshold that’s been in place through COVID has brought to light cases that we haven’t previously seen in the sectors that we’re concerned about, and that has increasingly convinced us…that there are sensitive assets, regardless of the dollar value, that we might need to take a careful look at.43

2.51 The Business Council of Australia argued against any ‘automatic update’ by reference to the SOCI Act, and suggested the definition should be limited to identifiable assets—electricity, gas, water, ports, telecommunications, and defence assets; with the ability to add or remove assets to take account of changing risks or emerging technologies.44

2.52 The Chair of the Foreign Investment Review Board argued generally against being overly prescriptive for issues of security concern:

We’ve been very careful, and I suspect the government’s been very careful not to box itself in by being too prescriptive in nominating a particular sector or a particular element of a sector, simply because, from our experience looking at hundreds and hundreds and hundreds of cases every year, no case is similar. And the national interest is subtly different in each case and requires different consideration. On the face of it, what you’re suggesting makes a lot of sense, and it makes a lot of sense to me. It’s actually more difficult to do in practice without becoming overly prescriptive and boxing

40 Department of Home Affairs, Submission 9, pp. 4-5.

41 Mr Samuel Grunhard, First Assistant Secretary, Critical Infrastructure Security, Department of

Home Affairs, Committee Hansard, 18 November 2020, p. 39.

42 For the range of concerns, see: Association of Mining and Exploration Companies, Submission 2,

p. [8]; Minerals Council of Australia, Submission 5, p. [4]; Business Council of Australia, Submission 7, pp. 3, 5; Consolidated Pastoral Company, Submission 17.

43 Mr Samuel Grunhard, First Assistant Secretary, Critical Infrastructure Security, Department of

Home Affairs, Committee Hansard, 18 November 2020, p. 42.

44 The Australian Sugar Milling Council called for certainty on whether sugar mills owning ports as

part of their portfolios would be captured by the national security business definition. Evidence from the Department of Home Affairs suggested this was not the case. Business Council of Australia, Submission 7, pp. 3-5; Mr David Rynne, Director of Policy, Economics and Trade, Australian Sugar Milling Council, Committee Hansard, 18 November 2020, p. 31; Mr Samuel Grunhard, First Assistant Secretary, Critical Infrastructure Security, Department of Home Affairs, Committee Hansard, 18 November 2020, p. 37.

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yourself in, and thereby hindering your ability to apply the most appropriate solution on a case-by-case basis.45

2.53 One submitter, Associate Professor Shumi Akhtar, argued for an expansive national security definition to include real-estate, agriculture, airspace, water rights, trees, soil, animals, marine lives, mining resources, financial assets, and human capital.46

Powers to review over time 2.54 The change in the Treasurer’s role from gatekeeper to regulator over time (and by delegation that of the Treasury) was noted.47 Under current arrangements the capacity of the Treasurer to review an approved transaction has been limited.

Some provisions have allowed the Treasurer to modify conditions after an approval. However, this power has been subject to the limitation that the investor has to voluntarily agree, or the Treasurer has to be satisfied it will not disadvantage the investor.48

2.55 The Department of Home Affairs stated the ‘single touch nature’ of the foreign investment framework is not well suited to regulating changes to national security risk over time. The call-in and last-resort powers allow for assessments against risks to Australia’s national security to be made over time.49

2.56 The Business Council of Australia argued the power to re-examine is a major shift and creates uncertainty as it deals with matters not entirely in an entity’s control and potentially reduces the incentive for comprehensive assessments during the screening process.50

2.57 It is not clear the legislation would operate in the manner that concerns some submitters. As discussed in chapter 1, the safeguards in the last-resort power require that changes that lead to a national security review and potential use of the last-resort power could not have been foreseen at the time of the initial assessment. There are further a range of safeguards on the use of the disposal power, including that the national security risk cannot be addressed in any other way (for instance through conditions or negotiations with the investor). The call-

45 Mr David Irvine, Chair, Foreign Investment Review Board, Committee Hansard, 18 November 2020,

p. 51.

46 Associate Professor Shumi Akhtar, Submission 15, p. 5.

47 See: Mr Adam McKissack, Chief Economist, Business Council of Australia, Committee Hansard,

18 November 2020, p. 23.

48 See discussion in chapter 1.

49 Department of Home Affairs, Submission 9, p. 5.

50 See also: Association of Mining and Exploration Companies, Submission 2, pp. [8-9].

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in power does not relate to investments that have been approved, and investors can extinguish the power by voluntarily notifying.51

Last resort power 2.58 The Business Council of Australia called for clearer guidance and additional safeguards to be added to the use of the last-resort power, including:

 a standard of reasonableness and knowledge for directors as to what level of ongoing monitoring is required by an investor to identify future national security risk;

 opportunity to consult with the FIRB in the event the power has been triggered;  clarity on remedies; and  the Treasurer to consult with senior cabinet ministers, states, territories and

the foreign person impacted.52

Call-in power 2.59 Several submitters argued the ten-year time period for the call in power was too long and should be reduced to three years.53

2.60 The Treasury, however, explained a broader benefit to investors from the call-in power: it allows the ‘national security business’ definition to be more targeted, particularly as that type of action requires mandatory notification and assessment:

The call-in provides that national security risks can be addressed, which in turn allows the national security business definition to be focused on investments that are most likely to present national security risks.54

2.61 The Treasury also noted call-in powers existed in other jurisdictions:

 the United Kingdom is considering a five-year call in power; and  the United States, New Zealand and Canada have unlimited time frames for call in.55

51 This was explained by the Treasury. Ms Roxanne Kelley, Deputy Secretary, Corporate and Foreign

Investment, The Treasury, Committee Hansard, 18 November 2020, p. 49.

52 Business Council of Australia, Submission 7, pp. 8-9.

53 Minerals Council of Australia, Submission 5, pp. [2, 4]; Property Council of Australia, Submission 16,

p. 19; Consolidated Pastoral Company, Submission 17, p. [8].

54 The Treasury, Submission 12, p. 3.

55 Mr Andrew Deitz, Branch Head, Policy and National Security Branch, Foreign Investment Division,

The Treasury, Committee Hansard, 18 November 2020, p. 59.

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2.62 A further consideration for the timeframe was the fact technical provisions in the Act can deem an acquisition to have taken place many years before the title transfers. For instance:

The way section 15 operates means that it can be, again on the advice of different agencies, perhaps anywhere up to four years before the acquisition in fact occurs. It can start to appear in ways which will allow us to identify that information and take a decision. So there are a range of factors that we’ve balanced in reaching that decision.56

2.63 The Business Council of Australia suggested it was not clear what the national security concern trigger is and argued some threshold triggers were too low— for instance, entering or terminating a significant agreement with an Australian business.57

Fees 2.64 Many submissions commented on the fee structure suggesting it was disproportionate to the cost of administering the regulatory system, did not reflect the nature of assessments, was not equitable, and operated more like a

tax.58

2.65 In the Explanatory Memorandum, the government states ‘all fees imposed are a tax’.59 As such, fees are not levied on a cost recovery basis and neither are they intended to be so levied. This does not appear to be well understood.

2.66 The Treasury acknowledges some investors will pay more, but states these are investors proposing to undertake the highest value investments. Under the reforms, the Treasury states more of the costs of administering the framework will be borne by larger investors and investors that currently pay a disproportionately smaller fee for their investment. The maximum fee for a commercial transaction over $50 million will not be higher than 0.03 per cent of the consideration. For agricultural land over $2 million, it will not be higher than 0.66 per cent.60

56 Mr Andrew Deitz, Branch Head, Policy and National Security Branch, Foreign Investment Division,

The Treasury, Committee Hansard, 18 November 2020, p. 60.

57 Business Council of Australia, Submission 7, p. 7; Optus, Submission 6, p. [4].

58 Minerals Council of Australia, Submission 5; Optus, Submission 6; Business Council of Australia,

Submission 7, p. 10; Australian Sugar Milling Council, Submission 8, p. 3; Real Estate Institute of Australia, Submission 14, p. 3; Property Council of Australia, Submission 16, pp. 3, 14. See also: Professor Shumi Akhtar, Submission 15, p. 4.

59 Foreign Investment Reform (Protecting Australia’s National Security) Bill 2020, Explanatory

Memorandum, p. 123.

60 The Treasury, Submission 12, p. 2.

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2.67 However, the committee notes that in comparison to the existing fee framework, the new fee framework is intended to be fairer and simpler, and will reduce the administrative burden of determining the fee that is payable.

2.68 The Real Estate Institute of Australia does not oppose fees but questions the equity of the fee structure. It states an asset with a value of $210 million has a proposed fee of $52,800. This is the same fee level as a residential property valued at $5 million. The Institute argues it is difficult to see how the complexity involved with the assessment of an asset with a national security risk is the same as a residential property at a fraction of the value. The Institute also notes that the proposed fee increases for residential property up to the value of $6 million are 30 per cent or more whilst for properties of greater value the increase is half of that. The rationale for the disparity in proposed fee increases, according to the Institute, is not apparent.61

2.69 The Treasury noted the different fee treatments between commercial, agricultural and residential investments are not new, and are consistent with the fee structure adopted under the 2015 foreign investment reforms.62

2.70 The Consolidated Pastoral Company stated that while fees cap out at $500,000, it was concerned fees would increase to $1 million for agricultural land acquisitions with a value of more than $152 million—approximately 0.65 per cent of the acquisition price. It argued this is effectively a federal stamp duty or a tax on investment that will discourage foreign investors with impacts for farmers. The Company also expressed concerns that the fee for an exemption certificate is based on the maximum value covered by the exemption certificate, regardless of whether the full cap it used.63

2.71 Several submissions mentioned an analysis of foreign investment fees undertaken by the Productivity Commission. The Productivity Commission argues for aligning fees for the assessment of foreign investment proposals with the actual cost of administration—as it says was intended when the fees were announced. It states the fees are set at levels that are out of proportion with the cost of delivering the regulatory regime and are thus taxes, not a fee for service.64 This is not disputed by the Treasury (see above).

61 Real Estate Institute of Australia, Submission 14, p. 3. Opposition to real estate fees can also be found

in the Property Council of Australia submission. See: Property Council of Australia, Submission 16, pp. 1 and 14-15.

62 Ms Roxanne Kelley, Deputy Secretary, Corporate and Foreign Investment, The Treasury, Committee

Hansard, 18 November 2020, p. 49.

63 Consolidated Pastoral Company, Submission 17, p. [7]. See also: Mr David Rynne, Director of Policy,

Economics and Trade, Australian Sugar Milling Council, Committee Hansard, 18 November 2020, pp. 30-31.

64 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 21-22 and 92.

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2.72 In 2017-18, the government collected $114 million in fee revenue; the operation costs of the FIRB and its secretariats in the Treasury and the Australian Tax Office (ATO) totalled $14.7 million.65

2.73 The Commission states that while fees on large commercial transactions are likely to be immaterial, the relatively much higher fees on small agricultural investment applications have the potential to affect growth in regional communities.66

Other comments on the bill

Appeal rights 2.74 Under proposed subsection 79A(2), a person may apply to the Administrative Appeals Tribunal for review of a decision that a national security risk relating to the action exists—but not the orders made under the power. The Association

Mining and Exploration Companies argues for the right to review to be extended to the appropriateness or merits of any orders made, or new or varied conditions imposed. The Business Council of Australia argues similarly.67

Regulatory burden 2.75 Although the Treasury has estimated a minimal regulatory burden on businesses and individuals (see discussion in chapter 1), some submitters commented on the increase in regulation, particularly related to the expansion

of infringement notices for civil penalty provisions.

2.76 The Minerals Council of Australia said the cost of ensuring compliance would increase.68

2.77 The Association of Mining and Exploration Companies suggests increasing civil penalty amounts, and with some penalties now calculated as a proportion of the benefit gained by wrongdoing raise a concern commercially sensitive information would be investigated for reasons under the expanded definition of national security, that would previously have been unaffected.69

65 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 21-22.

66 Productivity Commission, Foreign Investment in Australia, June 2020, pp. 21-22.

67 Association of Mining and Exploration Companies, Submission 2, p. [5]; Business Council of

Australia, Submission 7, p. 9.

68 Association of Mining and Exploration Companies, Submission 2, p. [6]; Minerals Council of

Australia, Submission 5, p. [3].

69 Association of Mining and Exploration Companies, Submission 2, p. [6].

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Decision period increase to 90 days 2.78 Several submitters criticised provisions that would allow the Treasurer up to 90 days to make a decision in some instances—this was regarded as too long by stakeholders.70

2.79 The Business Council of Australia stated the time increase would involve significant cost because major investments typically involve merger and acquisition project teams and project implementation teams. These are established and funded in advance of application and continue to operate during the decision period to ensure implementation can occur upon approval. It recommended a maximum of thirty days, supported by a better resourced secretariat on a cost-recovery fee-for-service model.71

2.80 The Consolidated Pastoral Company, writing of recent experience with foreign investment approvals, stated delays in approvals allowed the buyer to renegotiate the sale to terms that better supported the buyer when the competition for the assets was removed. A slow approval process takes competition out of the market and can leave sellers in a long sale process where the buyer can position to renegotiate terms.72

Register 2.81 A number of submitters raised concerns about the Register of Foreign Ownership of Australian Assets. The Minerals Council of Australia stated it would impose substantial additional costs and a compliance burden on foreign

investors73—though it is not clear how the cost would be substantial.

2.82 Optus sought more detail on the requirement for the register, unsure if it would need to disclose each of its mobile network’s over 8,000 locations across Australia.74

2.83 The Property Council of Australia fears the register could be made public and could be used outside the stated mandate. The Council also argued it should not include interests that are not direct ownership stakes but which may still be considered interests (e.g. leases over five years).75

70 See, for instance, Association of Mining and Exploration Companies, Submission 2, pp. [11-12];

Minerals Council of Australia, Submission 5, p. [2]; Business Council of Australia, Submission 7, p. 10.

71 Business Council of Australia, Submission 7, p. 10.

72 Consolidated Pastoral Company, Submission 17, p. [6].

73 Minerals Council of Australia, Submission 5, p. [3].

74 Optus, Submission 6, p. [3].

75 Property Council of Australia, Submission 16, p. 18.

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A broader role for the Register 2.84 The Business Council of Australia sought a different role for the Register—one to streamline the foreign investment process by introducing a new action. The Council suggested:

…use these registers more to give yourself more visibility of what foreign investment is coming in. There are probably a lot of transactions you could do just with the registration process and not have to go through the whole screening process. We actually think there’s the potential to use the registration idea to maintain the visibility of foreign investment coming in, but to make registration the only requirement.

You can say: ‘Register your investment. Tell us what you’re going to do. Tell us how much you invested. If we think there’s a problem, we’ll let you know.’ They don’t have to necessarily go through the whole process of the FIRB, the screening process and waiting months for approval. We think that registers have some potential to improve the system. I don’t think that’s being utilised currently.76

Calculation of market value under civil penalty provisions 2.85 The Inspector General of Taxation and Taxation Ombudsman (IGTO) raised concerns about the manner in which market value is calculated for some civil penalty provisions where the penalty is calculated proportionally to the degree

of the benefit obtained from misconduct and harm to the national interest. In particular, the IGTO highlights proposed section 95A in relation to market value for residential land, the method of calculation (greatest of three different calculations) is also used elsewhere.

2.86 Drawing upon a 2015 review investigation of the ATO’s administration of valuation matters, the IGTO found:

There are inherent difficulties associated with valuations, such as their subjective nature, the use of ranges and the potentially prohibitive costs of obtaining them. Minor changes in valuations may also have a disproportionate tax effect where, for example, the eligibility for a concession is dependent on not exceeding certain thresholds. These difficulties, combined with the taxpayers’ burden of proof where the ATO challenges their valuation, increase the potential for increased uncertainty, disputation and costs for both taxpayers and the ATO alike.77

2.87 The IGTO warns the risk where market valuation is used is that it can lead to collateral disputes as to the correct ‘market value’. The IGTO acknowledges the difficulty of ascertaining market value may have been acknowledged through the option for a nil value—however, it is not clear under what circumstances a

76 Mr Adam McKissack, Chief Economist, Business Council of Australia, Committee Hansard,

18 November 2020, p. 25.

77 Inspector General of Taxation and Taxation Ombudsman, Submission 10, p. 3.

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market value would be considered unascertainable, who would make the decision, and whether this, in and of itself, may generate further disputes.78

2.88 The IGTO recommends exploring options to more clearly define how ‘market value’ is to be determined, identify alternative options that are less subjective or consider how approaches in disputes about valuation can be mitigated, or recommend market value is only used where other options have been exhausted.79

No role for the IGTO 2.89 The IGTO also expressed concern there is a possibility it could have jurisdiction to review decisions relating to matters of national security risk under amendments to the Act. Specifically the existing investigation powers of the

IGTO—power to investigate administrative actions and decisions of Tax Officials)—may be inadvertently invoked in some circumstances. The IGTO seeks an express exclusion through the bill or amendment to the Inspector-General of Taxation Act.80

Exemptions 2.90 Various submitters called for exemptions from certain provisions of the Act they were concerned might affect the interests they represent, though there was little evidence presented on the likely scope of the impact. Some of these exemptions

have the potential to undermine the integrity of the Act, and in particular its concern to protect Australia’s national security, or do not acknowledge some of the provisions of the Act which might ameliorate some concerns.

2.91 The Minerals Council of Australia called for the following exemptions:

 either all mining should be exempt from the call-in power or the majority should be excluded (including mineral sands);  the coverage of the exemption certificate in section 43BB (of the Regulations) should be widened; and  there should be exemptions from water reporting as water access for the

industry is largely non-tradeable.81

2.92 Optus (which is a wholly owned subsidiary of Singtel, which in turn is owned by Temasek Holdings, a Singaporean government investment company), called for an exemption for investment in assets that are deemed to be supporting an

78 Inspector General of Taxation and Taxation Ombudsman, Submission 10, pp. 3-4.

79 Inspector General of Taxation and Taxation Ombudsman, Submission 10, pp. 3-4.

80 The submission by the IGTO contains a detailed explanation of the concern. Inspector General of

Taxation and Taxation Ombudsman, Submission 10, pp. 5-6.

81 Minerals Council of Australia, Submission 5, pp. [16 and 18].

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essential service when the investor is considered low risk and has long-track record of supporting the government on national security matters. It stated:

The ideal application of this amendment would be that where an ownership structure is well known and understood by the government, investment by a foreign owner into an Australian-based company would not be subject the current levels of compliance or administrative hurdles. This should be of particular priority where the investment is in the national interest…

Optus recommends that fees are waived or moderated for investments into critical infrastructure—telecommunications.82

2.93 The Business Council of Australia called for exemptions for non-sensitive transactions from review by introducing a registration process for buy-backs, Australian entities with no Australian assets, small land acquisitions incidental to land already approved, commercial property leases, bolt-on transactions, and existing shareholders making creep investments in certain parameters. It argued for the removal of some non-sensitive transactions completely, including internal corporate restructures where ultimate beneficial ownership remains unchanged; and initial or further capitalisation of wholly-owned subsidiaries where there is no new acquisition or business created and the foreign person is contributing working capital to an existing business owned through a wholly-owned subsidiary.83

2.94 The Australian Sugar Milling Council called for ‘benign acquisitions in non-sensitive sectors such as sugar are exempted from all proposed national security provisions’.84

2.95 The Property Council of Australia argued for exemption or a streamlined regime to facilitate investment by ‘trusted offshore investors, who are appropriately regulated and have a track record of investment in Australia’, and a higher threshold for foreign investment into locally managed funds.85

Compliance powers 2.96 The Treasury made a case for its compliance powers to be strengthened, tying it to the increase in the impositions of conditions. In 2018-19, conditions were applied to 80 percent (by value) of foreign investment approvals. In 2017-18,

Treasury applied conditions to 43 per cent of approved applications— representing 75 per cent of the value of approved applications. The majority of conditions for non-real estate approvals apply to taxation.86

82 Optus, Submission 6, p. [4].

83 Business Council of Australia, Submission 7, p. 7.

84 Australian Sugar Milling Council, Submission 8, p. 3.

85 Property Council of Australia, Submission 16, pp. 3 and 17-18.

86 Treasury, Submission 12, p. 3; Productivity Commission, Foreign Investment in Australia, June 2020, p.

39.

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2.97 The Treasury has separately stated:

The credibility of the ongoing and expanding use of conditions is dependent on having adequate resources and effective powers to ensure compliance and hold entities and individuals to account. Existing compliance powers are limited in comparison to other financial services, tax and competition regulators, and blunt in that action is largely reliant on the courts.87

Guidance material 2.98 The Department of Foreign Affairs and Trade confirmed a common message from investors was the need for clear guidance on how the reforms will be implemented—particularly the definition of national security business and the

proposed link to the SOCI Act.88 This was repeated in many submissions and by many witnesses to the inquiry.

2.99 The Treasury acknowledges there is a range of regulations yet to be finalised, including the definition of national security business, national security land, fee regulations, streamlining of passive foreign government investors, and moneylending.89

Committee view 2.100 The committee is in agreement that foreign investment is important for Australia’s long-term economic success, stability and prosperity.

2.101 It is appropriate to highlight evidence to this effect received during the inquiry:

It [foreign investment] creates jobs, improves productivity and connects Australian businesses to global markets. At the same time, Australia is an attractive destination for foreign investors thanks to our stable democracy, strong rule of law, highly skilled and highly educated workforce, proximity to dynamic and fast-growing markets, abundant natural resources and world-class industry capabilities, and strong and well-managed economy. This is evidenced by the foreign direct investment inflows relative to the size of our economy. In the three years to 2019, foreign direct investment inflows into Australia averaged 3.3 per cent of GDP, compared with 1.7 per cent for the OECD and 1.5 per cent for the G20.90

2.102 The committee acknowledges the changes proposed by the legislation are complex and some areas of confusion could be resolved by a more thoroughgoing understanding of the bill.

87 Ms Roxanne Kelley, Deputy Secretary, Corporate and Foreign Investment, The Treasury, Committee

Hansard, 15 May 2020, p. 67.

88 Department of Foreign Affairs and Trade, Submission 4, pp. 4-5.

89 Mr Andrew Deitz, Branch Head, Policy and National Security Branch, Foreign Investment Division,

The Treasury, Committee Hansard, 18 November 2020, p. 56.

90 Ms Roxanne Kelley, Deputy Secretary, Corporate and Foreign Investment, The Treasury, Committee

Hansard, 18 November 2020, p. 48.

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2.103 The committee supports calls for guidance material to be provided by the Treasury as a matter of priority in advance of the legislation coming into effect.

Recommendation 1

2.104 The committee recommends the Treasury publishes comprehensive guidance as soon as practicable to offer foreign investors in Australia greater clarity as to their responsibilities and rights.

Recommendation 2

2.105 The committee recommends the bills be passed.

Senator Slade Brockman Chair

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Additional Comments by Labor Senators

1.1 Labor Senators support the recommendations of the Chair’s report.

1.2 Australia has long relied on foreign investment as an important source of capital to grow our economy, grow jobs and support our economic development.

1.3 As we emerge from the changes that COVID-19 has wrought on the global economy, it is fundamental that international investors know that Australia is a free and fair, stable, and rules-based investment partner.

1.4 Well-defined and articulated foreign investment policies are integral to our nation’s well-being. They help provide certainty and maintain investor confidence, especially when assisted by clear and consistent monitoring and compliance arrangements, and by fair, appropriate and proportionate fees and penalties.

1.5 The Chair’s report comprehensively details the evidence provided via submissions to the inquiry and by witnesses at the committee’s hearing, highlighting considerable unease with both the bills’ consultation phase and the absence to date of meaningful regulatory detail.

1.6 For example, as noted in the Chair’s report:

The Department of Foreign Affairs and Trade confirmed a common message from investors was the need for clear guidance on how the reforms will be implemented—particularly the definition of national security business and the proposed link to SOCI Act. This was repeated in many submissions and by many witnesses to the inquiry.1

1.7 In this regard, Labor Senators note that draft regulations associated with these reforms which define a ‘national security business’ draw key definitions from the Security of Critical Infrastructure Act 2018—an Act which itself is currently the subject of proposals for significant amendment, with an exposure draft recently released by the Department of Home Affairs for consultation. It is understandable that significant uncertainty exists within the regulated community about the combined effect of these inter-related reforms.

1.8 As noted in the Chair’s Report,2 the Scrutiny of Bills Committee has considered the bills and awaits the Treasurer’s response to questions posed regarding the bills’ legislative impacts. These queries go to the imposition of fees and other salient matters, and ultimately draw attention to the uncertainty and limited accountability occasioned by the government’s decision to use delegated

1 See: Chapter 2, paragraph 2.98

2 See: Chapter 1, paragraphs 1.217-1.227.

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regulatory powers, rather than allow the Parliament to directly determine policy by way of the primary legislation.

1.9 Regrettably, however, the bills are being rapidly progressed through the 46th Parliament, with the government providing little opportunity for further considered debate by Members and Senators of legislation deemed pressing to ‘the national interest’.

1.10 Labor Senators are of the view that the timely, open and transparent explanation of the bills that are before the Senate Inquiry and any foreshadowed related Regulations and consequential amendments, must be made available and seriously debated before the bills’ passage.

1.11 Labor Senators make the following additional recommendations:

Recommendation 1

1.12 The definitions under the new national security test of ‘national security business’ and ‘national security land’, and the delegated regulatory powers be clearly explained and communicated for the benefit of the Australian community and businesses, and existing and future foreign investors, before the bills’ passage and proposed enactment.

Recommendation 2

1.13 There be greater transparency in the publication of decisions and enforceable undertakings made under the bills and related regulations.

Recommendation 3

1.14 Given the current economic imperatives, there be a review within six to twelve months of the bills’ commencement to update the Parliament on the impact of the legislation, whether it is achieving its stated objectives and whether it strikes the right balance between Australia’s openness to foreign investment and protecting Australia’s national interests.

Senator Alex Gallacher Deputy Chair

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Additional Comments from the Australian Greens: Still in the dark

1.1 The Australian Greens support these bills and the improvements they make to the framework for reviewing foreign investment. In particular, we support:

 the creation of a specific test for proposed foreign investment that has national security implications;  the Treasurer being given clear powers to enforce conditions placed on foreign investment; and  the creation of a consolidated register of foreign owned assets.

1.2 However, one of the major issues with the existing framework is the lack of transparency around foreign investment approvals. This issue remains unaddressed in these Bills.

1.3 Foreign investment approval in Australia largely occurs in the dark. Publication of any decision to approve a foreign investment, the reasons for approving a foreign investment, and any conditions placed on the approval of a foreign investment are at the discretion of the Treasurer. If the government of the day wants to keep quiet who, from where, is buying what, and on what condition, then that’s entirely up to them.

1.4 The lack of transparency around foreign investment approvals affects potential foreign investors' expectation of what is or isn’t acceptable. It creates a system that is intrinsically politically biased. In turn, this creates opportunities for the government to extract from foreign investors an arrangement, free from public scrutiny, that suits its political ends rather than the national interest. In a country where there is no independent national integrity commission, this creates an environment where corruption can flourish.

Recommendation 1

1.5 The decision to grant proposed foreign investments a ‘no objection notification’ (approval) or an ‘exemption certificate’ should be made public, along with a statement of reasons, with an exemption from this publication requirement being available on national security grounds.

1.6 Another example of this lack of transparency is inadequate reporting of the levels and origin of foreign ownership in Australia, particularly in relation to land.

1.7 The new Register of Foreign Ownership of Australian Assets consolidates existing registers. This includes the existing Register of Foreign Ownership of Agricultural Land which was established by the Government with the support of the Australian Greens in 2015. Both the existing register, and the new

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consolidated register as established by these bills, are required to generate an annual publicly available report containing aggregate statistical information on foreign ownership.

1.8 To date, these statistical reports, prepared by the Australian Taxation Office, have only included information on the area of agricultural land in which there is a foreign interest, and not the value of agricultural land in which there is a foreign interest. This presents a distorted picture of the level of foreign ownership, particularly given the variation in quality of agricultural land in Australia. The current approach fails to adequately represent the importance of the amount of land in which there is a foreign interest.

Recommendation 2

1.9 The annual statistical report contains information on the area, value, tenure and use of land, including agricultural land, in which there is a foreign interest.

Critical infrastructure and renewable energy 1.10 The definition of a notifiable national security action in these bills includes infrastructure defined as a critical infrastructure asset under the Security of Critical Infrastructure Act 2018. The Department of Home Affairs is undertaking

consultation on the Exposure Draft of the Security Legislation Amendment (Critical Infrastructure) Bill 2020. In respect of critical electricity assets, the Explanatory Document states that:

It is likely that an expanded set of generator assets will be captured, building on the existing approach in the rules.1

1.11 Currently, the Security of Critical Infrastructure Rules 2018 establish thresholds for electricity generation stations in each state and territory proportional to population, starting with 1,400MW for NSW, down to 300MW for the Northern Territory.

1.12 Renewable energy advocates have raised concerns that a large reduction in the thresholds for electricity generators is being considered (i.e. as low as 30MW). Such a change would disproportionately affect renewable energy as individual generation facilities are usually smaller.

1.13 The National Electricity Market connects about 50GW of generation capacity. A 30MW generation facility would account for about 0.06% of the NEM. The Exposure Draft does not make the case for why a reduction in threshold of this magnitude is necessary to ensure the integrity of Australia’s electricity supply.

1 Department of Home Affairs, Exposure Draft—Security Legislation Amendment (Critical Infrastructure)

Bill 2020: Explanatory Document, p. 35.

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1.14 Although the Senate will have the opportunity to consider the Security Legislation Amendment (Critical Infrastructure) Bill 2020 directly, it is prudent to express a view on the potential impact that these proposed changes in the definition of critical infrastructure would have on the working of the foreign investment laws under consideration here.

Recommendation 3

1.15 The threshold for critical electricity assets be set at a level that does not have a disproportionate impact on renewable energy.

Senator Nick McKim Australian Greens

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Appendix 1

Submissions and additional information

1 Australian Financial Markets Association 2 Association of Mining and Exploration Companies (AMEC) 3 Australian National Audit Office (ANAO) 4 Department of Foreign Affairs and Trade 5 Minerals Council of Australia (MCA) 6 Optus

7 Business Council of Australia 8 Australian Sugar Milling Council 9 Department of Home Affairs 10 Inspector-General of Taxation and Taxation Ombudsman 11 Australian Trade and Investment Commission (Austrade) 12 Treasury 13 The Chamber of Minerals & Energy of Western Australia 14 Real Estate Institute of Australia (REIA) 15 Associate Professor Shumi Akhtar 16 Property Council of Australia 17 Consolidated Pastoral Company (CPC)

Tabled Documents 1 Australian Strategic Policy Institute (ASPI): Opening statement from the public hearing in Canberra on Wednesday 18 November 2020 2 Association of Mining and Exploration Companies (AMEC): Opening

statement from the public hearing in Canberra on Wednesday 18 November 2020 3 Property Council of Australia: Opening statement from the public hearing in Canberra on Wednesday 18 November 2020 4 Real Estate Council of Australia (REIA): Opening statement from the public

hearing in Canberra on Wednesday 18 November 2020 5 Treasury: Opening statement from the public hearing in Canberra on Wednesday 18 November 2020

Answers to Questions on Notice 1 Treasury: Answers to questions on notice from a public hearing in Canberra on 18 November 2020 (Received 20 November 2020) 2 Productivity Commission: Answer to a question on notice from a public

hearing in Canberra on 18 November 2020 (Received 20 November 2020)

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Appendix 2 Public hearing

Wednesday, 18 November 2020 Main Committee Room Parliament House Canberra

Australian Strategic Policy Institute (ASPI)  Mr Peter Jennings, Executive Director

Australian Financial Markets Association (AFMA)  Mr David Love, General Counsel

Minerals Council of Australia (MCA)  Mr Sid Marris, General Manager—Strategy, State and Territory Relationships  Mr Demus King, General Manager—Trade, Investment and Investor

Relations

Association of Mining and Exploration Companies (AMEC)  Mr Warren Pearce, Chief Executive Officer

Real Estate Institute of Australia (REIA)  Mrs Anna Neelagama, Chief Executive Officer

Property Council of Australia  Mr Ken Morrison, Chief Executive Officer  Mr Richard Lindsay, Government Relations Manager  Mr Kosta Sinelnikov, Policy Manager

Business Council of Australia  Mr Adam McKissack, Chief Economist  Mr Ted Burgell, Senior Advisor

Australian Sugar Milling Council  Mr David Rynne, Director—Policy, Economics & Trade  Mr Jim Crane, Director—Industry & Government Affairs

Consolidated Pastoral Company (CPC)  Mr Troy Setter, Chief Executive Officer

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Department of Home Affairs  Mr Samuel Grunhard, First Assistant Secretary—Critical Infrastructure Security

Productivity Commission  Mr Michael Brennan, Chair  Ms Nina Davidson, Head of Office

Treasury  Ms Roxanne Kelley, Deputy Secretary—Corporate and Foreign Investment  Mr David Irvine, Chair—Foreign Investment Review Board  Mr Andrew Deitz, Branch Head—Foreign Investment Division  Ms Bridie McAsey, Manager—Foreign Investment Division  Mr John Breusch, Manager—Foreign Investment Division  Ms Sharon Nyakuengama, Branch Head—Foreign Investment Division  Mr Tom Hamilton, Division Head—Foreign Investment Division  Mr Chris Leggett, Branch Head—Law Design Office