Foreign investment summary

How can we assist you with Australia’s foreign investment rules?

Dealing with foreign investment, including thin capitalisation rules, requires consideration of complex legal issues and strategic positioning at the beginning of a venture. An overseas investor can be prevented from completing a transaction, or be delayed in doing so, if the requirements of the legislation are not followed. An Australian business using overseas funding may lose the benefit of tax deductions. Overseas investors and Australian businesses should seek advice as to whether a proposed transaction falls within Australia’s foreign investment rules or will be affected by the thin capitalisation rules. We can advise on all aspects of foreign investment: whether this is in the form of advice on the most effective ways to manage risks or assistance in the resolution of disputes.

The Foreign Investment Review Board (the FIRB) reviews foreign investment proposals against the national interest case-by-case and makes recommendations to the treasurer (Treasurer) on those subject to the Foreign Acquisitions and Takeovers Act 1975 (FATA) and Australia’s foreign investment policy (the Policy).

Typically, it is Australia’s policy to welcome foreign investment that is not in conflict with the national interest.

National interest test

Each proposal is scrutinised in order to determine whether it conflicts with the national interest. The term “national interest” is not defined, however the national interest criteria typically include:

  1. the effect of the proposal on national security;
  2. the effect of the proposal on competition;
  3. the effect of the proposal on other Australian government policies including the environment and tax;
  4. the effect of the proposal on the community and the economy; and
  5. where the investor is a foreign government investor, the government considers the degree to which the investor operates on a transparent commercial basis. The government also gives consideration to the corporate governance practices of foreign investors.

Australia’s Foreign Investment Policy

The Policy provides the basis for government examination of proposed foreign acquisitions of Australian businesses and real estate.

The FIRB reviews the proposed acquisitions and advises the Treasurer. The Treasurer has the authority under the FATA to reject proposals that would result in a foreign person acquiring control of an Australian corporation or business, or an interest in real estate, which the Treasurer deems to be in conflict with the national interest.

Thin Capitalisation

A thinly capitalised entity is one whose activities are financed by a high level of debt and relatively little equity. The thin capitalisation rules (the Rules) are applicable to foreign controlled Australian entities, foreign entities investing directly into Australia, Australian entities investing overseas and their associated entities (subject to certain exemptions).

The Rules restrict the amount of debt deduction available to Australian operations of both Australian entities investing overseas and foreign entities investing into Australia. A debt deduction is an expense incurred by an entity in connection with a debt interest, such as a loan fee or an interest payment, for which the entity would otherwise be permitted to claim a tax deduction.

Generally, the Rules apply where the debt-to-equity ratio exceeds 75% (this threshold is higher for certain financial entities) and a portion of the debt deduction may be disallowed. The 2013 – 2014 budget announced that the debt-to-equity ratio of 75% of the net value of the Australian assets would be reduced to 60% from 1 July 2014.