New Foreign Investment Legislation:

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1 New Investment Legislation: Is your client a surprise foreign person investor? On 1 December 2015, the complex Acquisitions and Takeovers Legislation Amendment Act 2015 (and associated legislation) introduced a new foreign investment regime. The new foreign investment legislation substantially expands pre-existing requirements including, but not limited to, the following issues: individuals or entities (including some Australian citizens, companies or trusts) may be foreign persons potentially required to apply to and receive approval from the Investment Review Board (FIRB) before undertaking affected transactions (e.g. various acquisitions of Australian Real Property or interests in Australian Businesses or Entities); substantial new fees (usually ranging from $5,000 to $25,000) which must accompany an affected foreign person s FIRB application; expanded Treasurer s powers including imposition of new penalties (e.g. up to 3 years imprisonment and/or monetary penalties up to $135,000 for an individual) or powers to order forced sale of an asset where the new legislation has been breached by a foreign person; and new compulsory requirements to register a foreign person s pre-existing Agricultural land holdings held as at 1 July 2015 (including leases expected to have a minimum 5 year duration) with the Australian Taxation Office (ATO) no later than 29 February IMPTANT Importantly, many Tax Agents will need to seek specialist external advice regarding most foreign investment issues (with exceptions for some legal practitioners or advice strictly limited to ATO Agricultural Land Register requirements see below). This problem arises because most of the complex new legislation will not satisfy the definition of tax agent service in s 90-5 Tax Agent Services Act 2009 and may therefore void Professional Indemnity insurance requirements and/or constitute an offence or other breach of professional standards if advised on for a fee. A broad understanding of which types of client individuals and entities might be foreign persons (potentially requiring specialist referral) will nonetheless be important to allow issues including, but not limited to, the following to be identified: Which existing individuals and entities may need to seek specialist advice on future acquisitions of Australian assets because they are a foreign person? Whether establishment of a new structure (or a restructure) might trigger foreign person status for one or more entities? Whether a property developer might seek to substantially market a development to foreign person buyers and voluntarily undertake those foreign persons fee and similar obligations to improve the appeal of their development to foreign buyers? Whether a foreign person s existing agricultural land holdings (or changes to them) may need to be reported to the ATO s Agricultural Land Register (initially by 29 February 2016 and on an ongoing basis after certain trigger events see below)? It is important to note that this Tax Astute Snapshot provides only a brief overview of the complex new foreign investment provisions. Tax Astute clients should access their Major Tax Events Guide, their next training session and (in most cases) specialist external advice to review numerous further important issues listed below. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2016 Page 1

2 TIP Tax Astute Clients can access further detail and examples in relation to numerous practical issues including: IDENTIFYING more complex FEIGN PERSON scenarios (e.g. an Australian company or trust which might be a foreign person due to a relationship to an Individual Person or a Company despite numerous interposed entities or issues arising via associate relationships to a foreign persons); IDENTIFYING which types of FEIGN PERSON TRANSACTIONS might be significant actions or notifiable actions subject to the new legislation; UNDERSTANDING different types of ASSETS which may be subject to the new foreign investment legislation and whether they carry a higher or lower risk of a foreign investment issue; IDENTIFYING key EXCEPTIONS and THRESHOLDS which may reduce the risk of the new foreign investment rules applying; UNDERSTANDING what is AGRICULTURAL LAND for foreign investment purposes and when Agricultural Land Register requirements may apply. Who or What is a Person? An individual or entity may potentially be subject to the new foreign investment legislation where they satisfy the very broad definition of foreign person. Importantly a foreign person can include: both individuals and entities; and some Australian citizen individuals (based overseas) and some Australian resident companies or trusts (through a foreign individual or company directly or indirectly holding interests in the Australian entity). The following diagram provides a broad overview of when foreign person status may arise for an individual or entity where either: an individual foreign person (IFP) who is not ordinarily resident in Australia (usually based upon a legal limitation on their Australian stay such as temporary visa conditions and/or a < 200 day presence in Australia during the previous 12 months - see D below); or a foreign person entity (which may include a foreign or Australian resident company or trust) in circumstances where either: o an IFP (see D), a foreign corporation, or a foreign Government holds a > 20% direct or indirect substantial interest in the foreign person entity (alone or together with associates) (see B); or o a number of unrelated IFP s (see E), foreign corporations and/or foreign Governments hold a combined > 40% direct or indirect aggregated substantial interest in the foreign person entity (alone or together with associates) (see C) does (or will) own an interest in an asset connected with Australia by taking a significant and/or notifiable action (such as a proposed acquisition) in relation to the asset (see E below). Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2016 Page 2

3 Persons Potentially subject to new I nvestm ent Rules > 20% SUBSTANTI AL I NTEREST held ( associate inclusive) by AN: Corporation; or Governm ent Direct Ow nership A Governm ent B Who or What is a Person? Corporation FEI GN PERSON ENTI TY ( e.g. Australian Com pany or Trust) > 40% AGGREGATE SUBSTANTI AL I NTEREST held ( associate inclusive) by > 2 NON- ASSOCI ATE s; &/ or Corporations &/ or z Governm ents SI GNI FI CANT &/ or NOTI FI ABLE ACTI ON re Australian Connected Assets ( e.g. Land/ Securities/ Agribusiness etc.) C E D I ndividual Person ( ) = NOT Ordinarily Resident in Australia e.g. includes Som e Australian CI TI ZENS living overseas Non- Residents Tem porary Residents where Legal Lim itation on Australian stay Actually in Australian for < 2 00 days in previous 1 2 m onths Due to a strict indirect tracing rule in s 19 of the Acquisitions and Takeovers Legislation Amendment Act 2015 foreign person entity status (see B and C above) may arise where an IFP, foreign corporation and/or foreign Government hold an indirect substantial or aggregate substantial interest (i.e. through interests held via numerous interposed resident or non-resident entities between the foreign person entity and the IFP, foreign corporation). The percentage an IFP or foreign corporation hold in a potential foreign person entity (see B and C above) will often be determined by shares/units held in a company or unit trust (including rights to such shares or units). Importantly, s 18 of the Acquisitions and Takeovers Legislation Amendment Act 2015 will determine a beneficiary s deemed percentage interest in a discretionary trust based upon the maximum percentage of income or property of the trust that the trustee may distribute to that beneficiary. Technically this provision might cause any Australian discretionary trust with even one IFP beneficiary to be a foreign person (even where the IFP beneficiary does not receive distributions from the trust). A number of exception provisions and thresholds (which are beyond the scope of this Guide) may protect various foreign person individuals or entities from requirements to apply and pay fees to the FIRB (depending on the particular circumstances involved). Importantly, however, once foreign person status and agricultural land status are present, there are no such exceptions to the ATO Agricultural Land Register requirement explained below. This has particular implications for agricultural land held by discretionary trusts (for the reasons noted above). Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2016 Page 3

4 ATO Agricultural Land Register requirements The ATO Agricultural Land Register requirements apply only where: any foreign person (see above) holds a freehold interest (or leasehold or similar right with > 5 years expected duration); in agricultural land which is very broadly defined as land which is used, or could reasonably be used, for a Primary Production business (subject to very limited exceptions). It is important to understand the new Agricultural Land Register requirements due to: the broad definition of foreign person (which is likely to include many Australian discretionary trusts); and the very limited access to exceptions once foreign person and agricultural land status is present; and the forthcoming 29 February 2016 registration deadline which applies even to pre-existing agricultural land held from 1 July 2015 (i.e. prior to the 1 December 2015 commencement date of the new foreign investment legislation generally). As shown below a foreign person holding the freehold (or a leasehold or other right with > 5 years reasonably expected duration) in agricultural land will be required to report to the ATO in approved form: by no later than 29 February 2016 for interests held as at 1 July 2015 (or acquired between 1 July 2015 and 31 January 2016) (see A below); and within 30 days after any post 1 July 2015 Registration Trigger Time (e.g. changes in foreign person status or agricultural land status or ownership such as purchase, sale, rezoning or residence changes) (see B below). FEI GN PERSON Corporation or Trust Holds Freehold ( or Leasehold/ Right with > 5 years expected duration) ANY VALUE AGRI CULTURAL LAND Used ( or could reasonably be used) for Prim ary Production business MAY be subject to future regulation exem ptions A 1/ 7/ 1 5 or up to 31/ 1/ 16 Report to ATO by 29/ 2/ 16 z B WHEN is a Person required to register Agricultural Land I nterest with ATO? REGI STRATI ON TRI GGER TI ME Any post 1/ 7/ 1 5 change in Person Status Agricultural Land Status or Ow nership ( e.g. purchase/ sale/ rezoning) Report to ATO within 3 0 days of trigger tim e While no fee is payable when registering Agricultural Land, the Tax Office Agricultural Land Register instructions (see ATO Link) require a substantial amount of information including title and market valuation details, with additional Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2016 Page 4

5 registration forms required if agricultural land is held on > 1 title. Failure to comply with the above requirements within the time limits shown may result in administrative penalties of up to $3,600. Review the online recording of this summary in under 10 minutes: > CLICK EHERE < WANT ME DETAILS? In addition to details available at Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of their: Tax Astute training session; Tax Astute reference guide; and detailed Tax Astute multimedia recording. COPYRIGHT & DISCLAIMER STATEMENT Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2016 This training material snapshot summary is subject to copyright and may not be reproduced, reused or adapted in any manner, except in accordance with the Copyright Act 1968 (Cth) for bona fide study purposes, other than with the express written consent of Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust). This material has been prepared with the objective of maximising accuracy and currency, but is provided for personal educational purposes only and must not be relied on as legal, financial or any other type of advice. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) hereby excludes any and all liability arising, whether directly or indirectly, from the use of this training material snapshot summary and any information contained herein. Tax Astute Pty Ltd (as Trustee for the Tax Astute Trust) 2016 Page 5