Australia Foreign Investment Fees Set to Double
The Situation: The Australian Government has doubled Foreign Investment Review Board ("FIRB") application fees payable by investors who are required to seek approval under the Foreign Investments and Takeovers Act 1975 (Cth) ("FATA") before investing in Australia. The changes take effect on 29 July 2022.
The Result: The changes mean that FIRB application fees for all transaction types will double, with the maximum fee being set at $1.045 million (for transactions worth more than $2 billion, agricultural land deals above $80 million, and residential land proposals of more than $40 million).
Looking Ahead: These increases in fees are material; while we expect that, on larger transactions, the material increases will be easily absorbed within overall deal costs, on smaller, mid-market or highly uncertain deals, the increased fees may cause some level of investor concern.
Despite Increased FIRB Fees, the Government Reassures Foreign Investors That it Welcomes Their Investment
Since 2015, a feature of Australia's foreign investment approval regime has been the requirement for investors to pay an application fee to have their proposal considered by the FIRB. On and from 29 July 2022, FIRB application fees are set to double. This means that:
- A transaction involving residential land valued at $2 million or less will now attract an application fee of $26,400 (up from $13,200);
- A share sale with a value of $100 million or less will attract an application fee of $26,400 (up from $13,200);
- A share sale with a value of AUD $500 million or less will attract an application fee of $237,600 (up from $118,800);
- Transactions with a value of $2 billion or more will attract the maximum fee, which is now set at $1,045,000 (up from $522,500); and
- The fee for internal re-organizations is now a flat fee of $26,400.
The maximum fee, which applies to deals valued at $2 billion or more (agricultural land deals of more than $80 million and residential land transactions at more than $40 million), will be set at $1.045 million. By way of simple comparison, the highest filing fee payable to the Committee on Foreign Investment in the United States ("CFIUS"), for foreign investments into the United States, is USD300,000, which applies to deals valued at USD750 million or more. Of course, it's important to note that CFIUS is primarily focused on national security, whereas FIRB is concerned with a broader 'national interest' test.
The newly elected Labor Government has introduced these changes as part of a series of reforms jointly aimed at tightening up corporate compliance and tapping into existing (but not fully realized) revenue streams. In an economically challenging post-COVID environment, the Federal Government is laser focused on reducing Australia's burgeoning debt. In 2020-21, FIRB application fees accounted for AUD $85.6 million in revenue. By comparison, the Government estimates that the doubling of FIRB application fees is expected to raise an additional AUD $455 m in revenue over the next four years.
Notwithstanding this material increase in fees, successive governments have been at pains to publicly reassure investors that Australia welcomes foreign investment.
In 2015, when FIRB application fees were first introduced, then Treasurer Joe Hockey stated that the objective of the fees was "to ensure Australian taxpayers are no longer required to fund the costs of the administering and enforcing the foreign investment regime".
In 2020, when the current FIRB fee regime was introduced, Assistant Treasurer Michael Sukkar reminded investors of the Australian Government's commitment that "the cost of administering the foreign investment review framework should be borne by foreign investors, not Australian taxpayers". In his second reading speech, Mr. Sukkar stated that the 2020 changes were aimed at implementing "fairer and simpler framework for foreign investment fees, while continuing to offset the full cost".
The newly elected Labor Government's decision to double FIRB application fees—just two years after the fee regime was restructured—underscores the fact that foreign investment fees represent a pseudo-tax on foreign investment.
Practical Implications for Foreign Bidders
Increasingly, in order to remove deal execution risk, vendors are strongly encouraging participants in auction processes to submit FIRB applications before they are selected as the preferred bidder. While this has caused some level of discomfort for bidders in the past, more serious foreign bidders on larger deals were often willing to incur the fees without knowing whether the vendor would select them as the preferred bidder.
Despite FIRB application fees typically representing a relatively small percentage of transaction costs on larger deals, the announced material increases may cause some concern amongst foreign bidders in Australian auction processes—particularly given that FIRB will not refund application fees to unsuccessful bidders. It is worth noting though, that there is scope for an unsuccessful bidder to seek to have their fee credited towards a subsequent application, provided that later application is submitted within 24 months of the unsuccessful bid outcome.
Of course, it does remain possible for bidders in a competitive auction process to seek to reach some agreement with sell-side counterparties to compensate them for foregone FIRB fees if they are unsuccessful, and where a break fee has been agreed, this can also be structured to accommodate for a foregone FIRB application fee.
It remains to be seen whether foreign bidders will be as willing to make such an upfront commitment in the future. If not, local buyers' ability to close transactions quickly and without FIRB approval is likely to give them an edge in competitive processes.
Penalties Are Also Set to Increase
The Australian Government has also flagged that it will introduce increases to the penalties payable under FATA in the near future. Those changes will be the subject of separate legislation.
Three Key Takeaways
- The Australian Government has announced that FIRB application fees will double almost immediately, with the changes to take effect from 29 July 2022.
- Despite the material increase in fees, the Australian Government continues to emphasize that it welcomes foreign investment.
- We expect that, on larger transactions, the material increases in FIRB fees will be easily absorbed within overall deal costs but on smaller, mid-market or highly uncertain deals, they may cause some level of investor concern.
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