On 1 January 2021, significant reforms to Australia's foreign investment regime, also known as the FIRB regime, commenced. With a focus on national security issues, the Australian Government has introduced a new national security test, expanded the powers of the Treasurer relating to national security matters, strengthened compliance and enforcement tools and more.
In this insight, we explore some of the key changes to the FIRB regime and proposed amendments to the Security of Critical Infrastructure Act 2018 (SOCI Act) and their relevance to investments in the energy and resources sector.
Notifiable national security actions
One of the more significant changes arising from the recent reforms is the introduction of a 'notifiable national security action', a new category of action designed to enable the screening of investments that may pose national security risks. Investments categorised as notifiable national security actions require mandatory notification and approval. Unlike most other notifiable actions, no monetary screening threshold applies meaning that notification to FIRB will be required regardless of the value of the investment.
2. What are notifiable national security actions?
In general, a notifiable national security action is:
- a proposed investment or acquisition of an interest in 'national security land', being defence premises or land in which an agency in the Australian national intelligence community has an interest that is publicly known or which could be known on the making of reasonable inquiries;1 or
- a proposal to start, or a proposed direct investment in, a 'national security business' - a broad concept encompassing activities that would not usually be considered as businesses.
It is worth noting a notifiable national security action includes an action to acquire an interest in an exploration tenement over national security land or an action to start or acquire a direct interest in certain types of energy assets. Acquisitions of interests in mining or production tenements (e.g. mining or production leases) have always required notification under the general notification provisions.
For a more general discussion on notifiable national security actions, the categories of national security businesses and uncertainties surrounding what actions should be notified, see our recent FIRB update.
3. How does this impact on investment into the energy and resources sector?
Relevantly for participants in the energy and resources sector, a business is a national security business if it is:
- a responsible entity for a 'critical infrastructure
asset' (within the meaning of the SOCI Act), such as the holder
of a licence, approval or authorisation to operate the asset or
provide services delivered by the asset; or
- an entity that is a direct interest holder of a critical infrastructure asset. This comprises, an entity that (together with any associates of the entity) holds 10% or more of the asset or holds an interest of any percentage in the asset that enables it to directly or indirectly influence or control it.
Critical infrastructure assets include certain electricity and gas assets. Investments through which a foreign person would become, or acquire a direct interest in, a responsible entity or a direct interest holder of such assets must be notified to FIRB as a notifiable national security action.
At the time of writing, amendments are proposed to the SOCI Act and thresholds in the Security of Critical Infrastructure Rules 2018 (Cth) that seek to significantly expand the definition of critical infrastructure asset and would significantly increase the number of investments that will require notification to FIRB.2 The proposed changes would bring additional energy related assets within that definition, including certain electricity generation and storage assets, energy market operator assets, and liquid fuel refineries, pipelines and storage facilities that are critical to ensuring the security and reliability of a liquid fuel market. The amending legislation has been referred to a Parliamentary Joint Committee and will be subject to consultation with industry over the coming months before we have a clearer picture of the extent of the changes.
Separately, in Guidance Note 8 FIRB has identified a number of energy and resource assets which do not currently need to be notified, but for which FIRB encourages voluntary notification for the purpose of avoiding the risk of being subject to the Treasurer's new call-in power. This power enables the Treasurer to review non-notifiable investments that may give rise to national security concerns and can be exercised for 10 years after the date of the investment. Some of those energy and resource assets fall within the proposed amended definition of critical infrastructure asset and will require mandatory notification if the amendments are passed in their current form.
While no mining assets are currently proposed to be regulated as critical infrastructure assets, FIRB has encouraged voluntary notification of proposed investments into certain nuclear and critical minerals assets.
Exemption for revenue streams from mining or production tenements
The FIRB regime will no longer apply to a proposed acquisition of an interest in most mining or production tenements where the interest:
- is a non-proprietary right to the revenue stream from the tenements (eg, a contractual royalty); and
- does not give its holder a right to occupy land, or control or influence who may enter or occupy the relevant land.
While this exemption helpfully addresses the confusion some investors have faced as to whether contractual royalties constitute an interest in Australian land, it does not exempt the very common accompanying security granted in respect of the tenement from the need for FIRB approval.
Confirmation of exemption for exploration tenements acquired by non-foreign government investors
The recent changes have further clarified the previous position that interests in exploration tenements are generally exempt from the operation of the FIRB regime. Interests in exploration tenements acquired by foreign government investors (FGIs) and exploration tenements over national security land are not exempt, and will still require FIRB approval.
Register of Foreign Ownership of Australian Assets
The new FIRB regime provides for a Register of Foreign Ownership of Australian Assets (the Register) to record and monitor foreign interests in most Australian assets. It is expected that the IT infrastructure required for the new Register will take at least 18 months to procure and build so it is not expected to be implemented until mid-2022 at the earliest.
Under the rules governing the Register, foreign persons will be subject to a number of new reporting obligations. In addition to notice of interests in agricultural land and water entitlements for which registers currently exist, foreign persons will have to notify interests acquired through any of the following:
- an acquisition of Australian land (including mining or production tenements);
- an acquisition of exploration tenements; or
- the taking of certain significant actions, notifiable actions, notifiable national security actions or reviewable notifiable national security actions in relation to entities or businesses.
A person who was not a foreign person when an interest was acquired through any of the above events must provide notice if that person later becomes a foreign person while still holding the interest.
Moreover, as the reporting obligations will generally continue until an interest is disposed of, foreign persons are subject to ongoing obligations to report:
- changes to the nature of the interest;
- when the person ceases to be a foreign person; and
- when the interest is disposed of.
These additional reporting obligations may be onerous depending on the circumstances, and foreign persons must ensure proper records of relevant investments are kept, and should consider implementing systems to flag such notifiable events. Failure to provide notice in time (typically within 30 days) may result in significant monetary penalties. As noted above, these obligations are not expected to arise until mid-2022 at the earliest, once the new Register is built.
Reinstatement of monetary thresholds
On 29 March 2020, the Australian Government introduced temporary measures in response to COVID-19 which removed monetary thresholds for notifiable actions. As of 1 January 2021, these monetary thresholds have been re-instated.
However, foreign investors should note that:
- as identified above, a notifiable national security action is not subject to a monetary threshold; and
- mining and production tenements are still classified as land with a nil threshold value so the acquisition of any interest requires prior FIRB approval (unless acquired by a relevant agreement country investor). This can include acquisitions of interests in entities which themselves own mining and production tenements.
1 An agency in the national intelligence
community includes, for example, the Office of National
Intelligence, the Australian Secret Intelligence Service and the
Australian Signals Directorate. For a more comprehensive overview
of all the agencies, available here.
2 The proposed amendments to the SOCI Act are before Federal Parliament in the form of the Security Legislation Amendment (Critical Infrastructure Bill) 2020 (Cth).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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