They barely cracked a mention in coverage of the Federal Budget in March, but changes to the foreign investment framework should make it easier for some offshore buyers to invest in Australia — the first substantial change since new rules were introduced in January 2021 amid the pandemic.
Given the headwinds M&A has faced in 2022, from war to inflation to the threat of interest rate rises, any change that keeps the market moving will be welcome.
But it remains to be seen whether the moves will do enough to spur along the market, which saw foreign direct investment (FDI) in the first nine months of the reforms fall by nearly $2 billion or 12 per cent compared to the previous period.
Treasury argues that FDI is volatile — and it is — but a sharp change is always concerning.
Research we have undertaken globally with Mergermarket would suggest that Australia’s attractiveness as an investment location slipped during 2021 against other regions, with regulation a key factor.
It’s likely these will not be the last tweaks to the foreign investment system, but it is worth understanding what changes have been made now, and why.
The 2020 reforms, which were updated last year, introduced a new framework centred around national security concerns for some acquisitions.
In brief, they required proposed investments into ‘sensitive’ sectors to be notified, allowed the Treasurer to call in investments assessed as posing a natural security risk, and — in extreme cases — gave the Treasurer powers to review and revise approvals for investments that might already have occurred.
The key challenge for some buyers and sellers was the breadth of sectors covered by the legislation.
The new changes are designed to alleviate some of those issues.
They include a change to the definition of a media business, for example, first flagged in a Treasury exposure draft in February, which will exclude businesses that might have inadvertently been caught up under the broad-brush definition used in the initial legislation.
That original definition included online media businesses, which Treasury concedes “had the potential to capture non-media businesses that presented no or low risk to Australia’s national interest in the context of an Australian media business.”
Treasury cites as an example a bank publishing interest rate charges — a current issue of interest — which would have potentially met the criteria of an Australian media business based on the original legislation.
Among the changes, the Government will:
- Narrow the definition of an Australian media business
- Raise the 5 per cent control acquisition threshold for media businesses to a ‘direct interest’
- Raise the control threshold for foreign persons who acquire an interest in an unlisted Australian land entity from 5 per cent to 10 per cent
- Make a number of other changes to the definition of money lending business and money lending agreements, largely for clarity.
For media businesses, the clarity is especially helpful, given the strength of the technology, media and telecommunications sector as a key driver of mid-market M&A.
The decision to change the 5 per cent interest acquisition threshold to direct interest also brings media businesses more into alignment with other sensitive investments.
While these are modest changes, any initiative that’s designed to remove red tape and streamline processes is welcomed.
That’s particularly true in the immediate environment where sentiment is dented due to the Ukraine issues, rising fuel costs and the ASX being down.
While security matters, it is critical for Australian business that we get the balance right, preserving national sovereignty in key sectors without creating a hostile environment for foreign investment.
These changes signal that the country is open to foreign investment, which combined with our open borders, will reinforce to groups looking to invest in Australia that it should remain on their agenda.
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