Commonwealth Numbered Regulations - Explanatory Statements

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FOREIGN ACQUISITIONS AND TAKEOVERS AMENDMENT REGULATIONS 2004 (NO. 2) 2004 NO. 316

Section 39 of the Foreign Acquisitions and Takeovers Act 1975 (the Act) provides that the Governor-General may make regulations, not inconsistent with the Act, prescribing all matters required or permitted by the Act to be prescribed, or necessary or convenient to be prescribed for carrying out or giving effect to the Act.

The Act gives the Treasurer discretionary powers in relation to acquisitions by foreign interests of substantial interests in Australian businesses or corporations where such acquisitions are deemed not to be in the national interest. Foreign interests must notify the Government of certain classes of investments where the proposed acquisition exceeds the threshold amount set by the Foreign Acquisitions and Takeovers Regulations 1989, currently $50 million.

The US Free Trade Agreement Implementation Act 2004 (the USFTA Act) consists of ten schedules that amend the relevant Australian legislation to fulfil Australia's obligations under the Australia-United States Free Trade Agreement (AUSFTA). Schedule 5 to the USFTA Act amends the Act to fulfil obligations under Annex 1 (Schedule of Australia) and Chapter 11 (Investment) of the AUSFTA. Together these set out Australia's commitment to relax the notification requirements for certain US sourced investments in Australia, including by establishing a higher notification threshold of $800 million. Schedule 5 commences on the later of 1 January 2005 and the entry into force of the AUSFTA.

The purpose of the Regulations, made under new provisions in the amended Act, is to give effect to a number of changes agreed in the AUSFTA. The Regulations include amendments applying to US sourced foreign investment that reduce the number of business proposals that will require notification to the Government under the Act and related policy. Specifically, the Regulations enable:

•       exemption from the Act for those acquisitions of interests in Australian financial sector companies, as defined by the Financial Sector (Shareholdings) Act 1998 (FSSA);

•       introduction of a minimum screening threshold of $800 million, indexed annually, for acquisitions of interests in Australian corporations and businesses in non-sensitive sectors (see below);

•       introduction of a minimum screening threshold of $50 million, indexed annually, for acquisitions of interests in Australian corporations and businesses in defined 'sensitive sectors'. The sensitive sectors are:

-       media;

-       telecommunications;

-       transport, including airports, port facilities, rail infrastructure, international and domestic aviation and shipping services provided either within, or to and from, Australia;

-       the supply of training or human resources or the development, manufacture or supply of military goods, equipment or technology to the Australian or other defence forces;

-       the development, manufacture or supply of goods, equipment or technologies able to be used for a military purpose;

-       the development, manufacture or supply of, or provision of services relating to, encryption and security technologies and communications systems; and

-       the extraction of (or holding of rights to extract) uranium or plutonium or the operation of nuclear facilities; and

•       introduction of a minimum screening threshold of $50 million, indexed annually, for acquisitions by entities in which a United States government has the prescribed interest.

The Regulations commence on the commencement of Schedule 5 of the US Free Trade Agreement Implementation Act 2004. That schedule is expressed to commence on the later of 1 January 2005 and the day on which the AUSFTA comes into force for Australia.

Details of the Regulations are set out in the Attachment.

ATTACHMENT A

DETAILS OF THE FOREIGN ACQUISITIONS AND TAKEOVERS AMENDMENT REGULATIONS 2004 (NO. 2)

Regulation 1 provides that the regulations are the Foreign Acquisitions and Takeovers Amendment Regulations 2004 (No. 2).

Regulation 2 provides that the regulations commence on the commencement of Schedule 5 to the US Free Trade Agreement Implementation Act 2004 (the USFTA Act). Schedule 5 to the USFTA Act amends the Foreign Acquisitions and Takeovers Act 1975 (the Act), with effect on the later of 1 January 2005 or the entry into force of the Australia - United States Free Trade Agreement (AUSFTA).

Regulation 3 provides that the Foreign Acquisitions and Takeovers Regulations 1989 (the Principal Regulations) are amended by Schedule 1 to the Regulations.

Schedule 1 - Amendments

Items [1] - [5]

Items 1, 2 and 5 make a number of minor changes to the descriptions and position of the defined terms. Items 3 and 4 insert three new defined terms: 'entity'; 'US enterprise'; and 'US national'.

Item [6] - Regulations 2AA and 2AB

This item inserts two regulations, 2AA and 2AB. Regulation 2AA defines the geographic territory that, for the purposes of the regulations, comprises the United States of America. Regulation 2AB sets out types of entities that may satisfy the requirement necessary to be considered a US enterprise or a branch of an entity that would be treated as a US enterprise.

Item [7] - Paragraph 3(p)

This item substitutes a new paragraph 3(p) to establish the monetary level of the exemption threshold to apply for a non-residential commercial land acquisition by a prescribed foreign investor. The prescribed monetary amount of $800,000,000 will be subject to annual indexation from 2006 in accordance with regulation 13. The existing monetary amount of $50,000,000 will continue to apply for non-prescribed foreign investors.

Item [8] - Regulations 6-13

Regulation 6, made under section 17B of the Act, sets asset thresholds for prescribed foreign investors (see new regulation 9). Foreign investments valued below these thresholds and made by 'prescribed foreign investors' are exempt from the notification requirements of the Act. The thresholds established under items 1 to 4 of the table under regulation 6 apply to investments in 'corporations', and the thresholds established under items 5 and 6 apply to investments in 'businesses' as defined under the Act.

Items 1 and 2 of the table under regulation 6 establish an indexed monetary threshold of $50,000,000 for investments in corporations in the prescribed sensitive sectors established under regulation 12.

Items 3 and 4 establish an indexed monetary threshold of $800,000,000 to apply for investments in corporations that are not in the prescribed sensitive sectors.

Item 5 establishes an indexed monetary threshold of $50,000,000 to apply for investments in businesses in the prescribed sensitive sectors. Item 6 establishes an indexed monetary threshold of $800,000,000 to apply for investments in businesses that are not in the prescribed sensitive sectors.

Regulation 7, made under section 17C of the Act, sets asset thresholds for exempt foreign investments undertaken by 'prescribed foreign government investors', as determined under regulation 11. Foreign investments valued below these thresholds and made by prescribed foreign government investors are exempt from the notification requirements of the Act. The threshold established under items 1 and 2 of the table under regulation 7 applies to investments in corporations, and the threshold established under item 3 applies to investments in businesses. The thresholds are to be indexed annually from an initial amount of $50,000,000 in accordance with regulation 13.

Regulation 8, made under subsection 17D (3) of the Act, establishes the condition to be met to satisfy the exemption it provides from the Act for acquisitions of financial sector companies. The prescribed condition is that the entity undertaking the acquisition is a prescribed foreign investor (see regulation 9).

Regulation 9, made under paragraph 17E (1) (a) of the Act, establishes the conditions required to be a 'prescribed foreign investor' and hence subject to the US-specific asset thresholds established by regulation 7. The prescribed condition is that the entity must be a 'US national' or a 'US enterprise'.

Regulation 10, made under paragraph 17F (c) of the Act, establishes the condition to be met for an entity (the first entity) to be a 'foreign government investor', other than as determined under paragraph 17F (a) or (b) of the Act. The prescribed condition is that an entity mentioned in paragraph 17F (a) holds an interest in the first entity greater than 15 per cent.

Regulation 11, made under paragraph 17G (b) of the Act, establishes the condition to be met for an entity which is a 'foreign government investor' to be a 'prescribed foreign government investor' and hence subject to the US-specific asset thresholds established by regulation 7. The prescribed condition is that the entity is one mentioned in paragraph 17F (b) or (c) of the Act and regulation 10 and the interest in it is held by a government of the United States of America.

Regulation 12, made under paragraph 17H (b) of the Act, sets out the business activities that are classed as sensitive sectors for the purposes of regulation 6.

Regulation 13 sets out the method for calculation of the indexed amounts under regulations 3, 6 and 7. The amounts will be indexed each year commencing in 2006. If the result of the calculation in 2006 exceeds the initial prescribed amount, then that new amount will apply, and in subsequent years, the previous year's amount is the basis of the calculation. The indexed amount will ordinarily be rounded to the nearest multiple of $1,000,000.