The ability for the government to ‘call in’ a foreign investment for review up to 10 years after the investment took place will foster uncertainty and act as a disincentive for foreign investors, according to the Law Council of Australia.
The Coalition has already introduced legislation to Parliament that aims to ensure Australia’s foreign investment screening framework “keeps pace with emerging risks and global developments while remaining a welcoming destination for foreign investment”.
The reforms include expanded rules to require any proposed direct investment in a local company deemed to be a “national security business” to be subject to a national security test.
The Treasurer would also be given the power to block or divest an investment deemed to put the country’s national security at risk.
Treasury consulted on the reforms in two parts, with submissions on the second tranche, focusing on those call in powers and new Foreign Investment Review Board fees, released this week.
Under the rules, the call in power can be used up to 10 years from when the action in question was taken.
“The purpose of the time limit is to provide foreign persons with greater certainty as to the Treasurer’s powers and to assist in the foreign person’s decision as to whether to voluntarily notify,” the explanatory memorandum said.
But the long timeframe for the use of this power “exacerbates these risks as the length of this period creates uncertainty for investors” and should be reduced to two years, the Australian Investment Council said.
“The 10-year timeframe is significantly longer than most limitation periods,” the Australian Investment Council said in a submission to Treasury.
“Otherwise, many foreign investors will be required in practice to seek Foreign Investment Review Board clearance as the risk of the call-in power being exercised after a transaction has occurred will not be palatable to them or their financiers.”
The Law Council of Australia also said this time period should be reduced to two years, as the current length would “give rise to uncertainty and be unreasonably onerous for foreign investors”, and would also cover a period where governments could change and priorities be altered.
The Queensland government is also concerned with the 10-year timeframe, saying it should instead be as short as possible.
“Longer timeframes and retrospective reviews could act as a disincentive for proposals with investment profiles stretching over many years, such as some collaborative commercialisation activities in the universities sector,” the Queensland government said in a submission to the federal government.
“While recognising the importance of appropriate oversight to maintain a high level of national security, the Queensland government considers that the call-in timeframe should be as short as possible, and that the use of call-ins should be kept to a minimum to avoid unnecessary delays and uncertainty.”
The legislation also outlined new and increased fees for applications for a FIRB review, with a maximum fee of $500,000. This is a significant increase from the current limit of $107,100, the Law Council of Australia’s submission said.
“A great deal of anecdotal evidence suggests that offshore investors are concerned about the increasing fee burden. This new fee framework will act as a disincentive to invest in Australian businesses and will have flow on effects across the Australian market,” the submission said.
“Foreign investors are already more likely to retreat inwards to seek their own domestic investments in the face of economic uncertainty, and with Australia’s proposed FIRB fee regime set to impose a higher fee burden than its international equivalents, we respectfully submit that the proposed fee regime will only serve to hasten this process.”
The Australian Investment Council also said this fee increase would disincentivise foreign investors from looking at Australian companies, and should be matched with an increase in efficiency at FIRB.
“This substantial increase in fees will act as a disincentive to invest into Australian businesses at a time when it is vitally important that Australia look to boost its economic growth and access to capital,” the submission said.
The Centre of Excellence for Engineered Quantum Systems, formed by five leading universities in the space, said the changes to foreign investment rules will mean that quantum technology startups “may find it difficult or even impossible to determine whether they are a ‘national security business’”.
“This poses a compliance hurdle and regulatory risk for investors which are barriers to seeing these businesses flourish in Australia,” the Centre said in its submission.