Publications / Food and Agribusiness
The final report from the Senate’s review of the application of the ‘national interest test’ to the purchase of agricultural land by the Foreign Investment Review Board (FIRB) has again been delayed, this time until late February 2013. However, an interim report making recommendations on taxation of agricultural investments and limitations of the legislative regime was released in late November – we take a look at its implications.
As we have previously reported, the Senate Standing Committee on Rural and Regional Affairs and Transport (Committee) has been examining the ‘national interest test’ applied to purchases of Australian agricultural land by foreign entities. The Committee was appointed on 6 July 2011, and was originally due to report on 30 November 2011. However, it has now been given a fourth extension by the Senate to delay the reporting date until 27 February 2013.
The terms of reference of the Committee include how the national interest test is applied to the acquisition of agribusinesses by foreign entities, the obligations of Government and regulators under the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA), Australia’s food security and how other equivalent countries’ national interest tests work.
A number of events have happened since the inquiry began, including the conditional approval by the Treasurer (on the recommendation of FIRB) of the acquisition of Cubbie Station by a consortium comprising a Chinese textile company, Shandong Ruyi Scientific & Technological Group Co Ltd, and an Australian owned wool and grain marketing company, Lempriere Pty Ltd. As would be expected, this and other transactions have been the subject of the Committee’s latest investigations, contributing to the time taken to conduct the review and prepare the report.
Recommendations on taxation
In its interim report, the Committee recommended that the Government:
- undertake an extensive review of the tax arrangements applying to foreign investments and acquisitions in the agricultural sector, in order to prevent tax revenue leakage and market distortions
- review Australia’s tax laws relating to exemptions for not-for-profit activities for foreign entities to examine ways to prevent tax revenue leakage when foreign government entities undertake agricultural production in Australia for humanitarian purposes or for food security
- require that any non-commercial production from agricultural land and business by foreign government entities (including for the purposes of food security) is undertaken within the relevant Australian Government foreign aid programs
- investigate ways of developing more rigorous tax liability arrangements for both government-owned and private foreign entities, particularly in relation to capital gains and passive income, and limit the scope for foreign investors to use business structures and ‘other possible loopholes’ not available to domestic competitors in order to reduce their tax burden, and
- review tax barriers for Australian organisations that limit Australian investment in long-term development projects in Australian agriculture, explicitly comparing tax arrangements for domestic entities with those faced by potential foreign investors in Australian agriculture, and consider possible tax reform to improve incentives for Australian capital investment in agriculture.
Observations on the taxation recommendations
A core concern of the Committee was the anticipated investment by foreign governments in Australian agriculture in order to ensure their own food security, particularly in light of projected future global food demand. It is worth noting that the Australian Taxation Office (ATO), in responding to a question on notice, stated that it ‘has never seen a sovereign entity, with Australian farm assets, seeking to avoid Australia’s tax system by purporting to export its produce for non commercial purposes.’1
The example that the Committee used to illustrate the trend of foreign governments investing in Australia to meet their own food security needs was the investment by Hassad Australia Pty Ltd (Hassad), wholly owned by Qatar, in Australian sheep and grain enterprises. Notably, Hassad’s CEO said that while the Qatari government’s investment was initially driven by food security needs, the Qataris ‘realised that food security is not possible without a commercial outcome,’ and if it ‘is not based on commercial outcomes, somewhere along the line it is doomed to failure.’ 2
Nonetheless the Committee has focused on reducing possible tax leakage through agricultural investments by foreign entities, anticipating that such leakage could occur through exporting produce on a not-for-profit basis. Fundamentally, the Committee’s view was that ‘as a general principle, foreign government entities should invest in Australian agricultural land and businesses on a commercial basis and not for food security purposes.’ 3
It will be interesting to see whether these recommendations are further developed by the Committee in the final report.
Recommendations on the FATA
The Committee has also recommended that the Government undertake a review of the FATA with the aim of developing proposed amendments that address contemporary issues of foreign investment, particularly in agriculture, specifically considering:
- the definitions of ‘rural land’ and ‘urban land’
- drawing a distinction between the treatment of rural land and agricultural business, and
- any limitations that the FATA may place, either explicitly or implicitly, on FIRB’s ability to effectively review the level and nature of foreign investment activities in Australia.
Observations on the FATA recommendations
The FATA’s dichotomy of ‘rural’ land (land used wholly and exclusively for carrying on a business of primary production) versus ‘urban’ land (all other Australian land, and even the seabed in Australia’s Exclusive Economic Zone) is one that the Committee identified as being ‘artificial’ in terms of exempting foreign purchases under the prescribed amount, which for 2012 is $244 million (unless it is purchased by a sovereign entity). By contrast, foreign purchases of vacant land in rural areas of any amount are subject to FIRB review.
The recommendations, although quite broad in scope, do merit examination given that the relevant sections were enacted in 1975, when there was a different legislative focus. The interim report notes that the recommendations regarding FATA amendments would be dealt with in more detail in the final report.
The Committee’s interim report recommends the Government review and make amendments to Australia’s taxation regime in order to capture potential tax revenue leakage from foreign investment in agriculture for food security needs, and to amend the FATA to bring it up to speed with contemporary developments in foreign acquisitions of agricultural land.
The final report will address a number of issues in further detail including:
- the regulatory framework for foreign investment in Australia and the international trends in foreign investment regulation
- the global context of food security and foreign investment (in more detail than the interim report)
- information gaps regarding foreign investment in Australian agriculture
- the scrutiny and transparency of FIRB in applying the national interest test, and
- the foreign investment review threshold.
We expect the recommendations from investigations into these areas to be driven by the Committee’s principle that foreign investment in Australian agriculture be on a commercial basis only and not for food security reasons. However, it will be interesting to see the extent to which the Government implements any of the Committee’s recommendations. In doing so, it must balance the need for foreign investment in Australian agricultural land and businesses for the benefit of the Australian economy with the management of national interest concerns.
Given the increased media attention on FIRB decisions and the impending final report of the Committee, there remains a strong likelihood of changes in this area. We will continue to monitor new developments and foreign investors should ensure they obtain advice regarding any proposed transactions over the next few months.
1ATO, answer to question on notice from the Committee, 16 August 2012 (received 6 September 2012).
2Mr Tom McKeon, Chief Executive Officer, Hassad Australia Pty Ltd, Committee Hansard, 16 November 2011, p 38.
3Committee interim report, November 2012, paragraph 2.22.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.