Migration and International Business: FIRB update: Business investment made by ‘Foreign Persons’

A Foreign Person wishing to invest in businesses in Australia needs to be aware that certain restrictions may apply. Business investment includes the acquisition of shares and assets of an existing Australian business and the establishment of a new Australian business.

Foreign person

‘Foreign Person’ is defined under Section 5 of the Foreign Acquisition and Takeover Act 1975 (Cth) (Act) to mean ‘a natural person not ordinarily resident in Australia’.  However, the definition also includes:

• a corporation in which one or more ‘Foreign Persons’ or a foreign corporation hold a controlling interest;
• the trustee of a trust estate in which a ‘Foreign Person’ or a foreign corporation holds a substantial interest;
• the trustee of a trust estate in which two or more ‘Foreign Persons’ or a foreign corporation holds an aggregate substantial interest.

A person is considered to hold a ‘substantial interest’ if that person controls 15% or more of voting power or holds a 15% or more interest in a corporation.  Two or more persons are taken to hold an ‘aggregate substantial interest’ if they together control 40% or more of the voting power or hold a 40% or more interest in a corporation.  Either a substantial interest or an aggregate substantial interest is taken to be a ‘controlling interest’.

Business acquisition

Generally, Foreign Persons are not required to notify the Foreign Investment Review Board (FIRB) of their acquisition. Notification is only required when they are acquiring 15% or more interest in an Australian business or corporation where that business or corporation is worth more than $231 million.

For United States investors acquiring interest in an Australian business or corporation, the applicable monetary threshold as at 1 January 2011 is A$1005 million. However, the lower threshold of A$231 million is applicable to United States investors when investments are made in the prescribed sensitive sectors, such as the telecommunications and transportation.

Smaller proposals are usually exempted from meeting the notification requirement, and large proposals are usually approved unless they are determined to be contrary to the national interest.

Direct Investment

Foreign governments and their related entities must notify FIRB and obtain approval before making a direct investment in Australia. Direct investment refers to any investment that is acquiring 10% or more interest in an Australian company, where the investment will provide the investor with influence or control over the target investment. Foreign governments and their related entities include:

• a body politic of a foreign country;
• companies or entities which foreign governments, their agencies or related entities have more than 15% interest; or
• companies or entities that are controlled by foreign governments, their agencies or related entities.

New business

Foreign Persons wishing to establish a new business as a private investor are not required to obtain approval from FIRB irrespective of the size of the proposed businesses.

However, foreign governments and their related entities must apply for approval from FIRB prior to establishing new businesses in Australia.

National Interest Consideration

The Australian Government has the power under the Act to refuse foreign investment proposals if such proposals are determined to be contrary to the national interest. The determination will be made on a case-by-case basis.  The following factors are typically considered by the Government:

• the impact of the investment – investments that contribute to economic growth or promote development of a new technology are less likely to be contrary to the national interest;
• national security concerns – whether the investment will affect Australia’s ability to protect its security interests;
• healthy market competition – the Government prefers to see a diversity of ownership in Australian industries and sectors to promote healthy market competition;
• impact of the investment on Australian tax revenues;
• impact of the investment on Australian economy and the community – the investment should be consistent with the Government’s aim to ensure that Australia remains a reliable supplier to all customers in the future;
• character of the investor – corporate governance practices of foreign investors, and whether the investor operates on a transparent commercial basis.

For assistance in making an application for FIRB approval to invest in businesses in Australia or further information generally please contact Maria Ho, Partner in the Corporate and Commercial team on 8210 1274 or mho@normans.com.au.

Information Technology: Cloud computing – What’s in a name?

Cloud computing is the latest hot topic in IT Outsourcing. It has been making headlines all over the world, including in the UK, where the Ministry of Justice is publishing a Cloud Computing Strategy in October and here in Australia where the Department of Finance and Deregulation issued a Cloud Computing Strategic Direction Paper in April. The thing is, everyone’s idea of what constitutes cloud computing is different, which makes discussions on the topic difficult. It makes structuring deals even more challenging if projects are established based on different norms of cloud computing than what exists in the market.

What is cloud computing?

Cloud computing is an umbrella term which could refer to any number of arrangements in relation to Information and Communication Technology which utilise off-site infrastructure to provide an ICT solution to a client. Examples range from the provision of off-site data storage all the way through to the provision of thin client solutions and desktop virtualisation.

There are categories of cloud computing which are often referred to. These are Platform as a Service (PaaS), Infrastructure as a Service (IaaS) and Software as a Service (SaaS). As the names suggest, these all relate to making the provision of ICT solutions more akin to service provision than hardware or software related as has been the case in the past. Whereas it used to be the case that you could only obtain software by purchasing a licence, now you can pay to access software online (for example in a webmail service). Another common example is the provision of off-site storage (such as website hosting), which is a form of IaaS.

Considerations when negotiating cloud contracts

Businesses are increasingly considering implementing solutions in the cloud, so what should they (and providers) be thinking about? A few of the big issues are set out below, but they are not the only ones, and the issues that are relevant in any given situation will depend on the project objectives and the proposed solution.

Data storage

Not all businesses are bound by the Privacy Act 1988 (Cth), but many have implemented privacy policies which comply with the National Privacy Principles, or otherwise take the handling of personal information seriously. Most cloud computing solutions will involve the storage of some data at the provider’s site. As a result, parties need to be sure that the requirements around the storage of data is well articulated and meets the requirements of the customer and the capabilities of the provider.

Transition

Although it is always desirable for commercial relationships to be long-term, they are rarely forever. As a result, it is important, and even more so in a cloud contract, to know what will happen at the end of the relationship. What will happen to the data, and in what format will it be returned to the customer? Will the provider help to transition to a new provider? Who will pay? Discussion of these issues at the commencement of a contract may seem distasteful, but it will help the parties to understand the whole of life cost of the contract, and also will hopefully minimise problems at the end of the relationship. It will also help the parties to understand each other’s requirements, and assist in the initial transition into the solution.

What’s the solution?

It may seem obvious, but parties need to understand what the actual solution entails, and what that means the customer is getting and the provider is giving up. As an example, with the purchase of software in a traditional sense, the customer will obtain a licence to install and run the software on their own hardware. In a cloud solution they may obtain a licence to access the provider’s licensed software. To the end user, the differences are hopefully negligible, but customers need to be aware of what rights they have and don’t have.

Support

What support is included? Is it part of the price, or on a consultancy basis? Cloud solutions may reduce the need for in-house support, but support will be required and it is important to know who is responsible. This is especially the case where the provider is using sub-contractors for various parts of their service.

Responsibilities

The contract needs to be clear on who is responsible for what. This is true for all contracts obviously, but because of the different ideas that people have about cloud contracts and what they entail, it is more important than normal to fully flesh out these issues.

Customers also need to consider whether their existing infrastructure and resources are capable of using the cloud solution. Cloud solutions, because of their structure, may require different types or levels of infrastructure (such as an improved internet connection or WAN).

If you have any questions about any of the issues raised in this Briefly, or are considering entering into a cloud computing contract, please contact Mark Henderson on mhenderson@normans.com.au or 8210 1220.

Environment and Planning: Design Reviews by the Integrated Design Commission

At present the Integrated Design Commission (IDC) has no formal relationship with development assessment under the Development Act 1993 and this is not intended to change in the near future.  However, the IDC does intend to submit each report arising from a design review to the relevant planning authority (usually the local council).

The IDC now invites proponents to submit their project for a free-of-charge design review.  It does this both actively, by contacting proponents of projects, and passively via its website.  If a proponent wishes to take advantage of a design review for their project, the Government Architect considers whether it is worthwhile to conduct a design review, and if so the project is considered by a design review panel.  Projects from across SA will be considered (not just metro or central Adelaide).

Design review panels meet monthly and comprise up to six members drawn from a pool of 24 design professionals.  Panels are project-specific and comprise members with relevant expertise.  Panel meetings are not open to the public, and reports will not ordinarily be published (although matters of particular importance may be).

Prior to each panel meeting, a case officer will request all plans and details of the project from the proponent.  In addition the officer will send information to the proponent so as to ensure they come prepared to the panel meeting.

At a panel meeting, each project is given one hour for consideration.  The case officer provides a 1-2 minute introduction and outlines the key issues for discussion.  The proponent and their representatives then enter the room and give a presentation for up to 15 minutes.  30 minutes is then allocated for a critique by the panel with the proponent and their representatives, after which the proponents leave.  The panel then debriefs for 10-15 minutes in the absence of the proponent to clarify recommendations for inclusion in the report.

Design review panels consider projects against site-specific design vision statements and design principles prepared as part of community engagement sessions (anticipated to be carried out by the proponent or State or local government).  Where such does not exist, the panel will refer to relevant best practice documents and design guidelines.  Somewhat curiously, the IDC’s website suggests that the 30 Year Plan and the SA Strategic Plan are “best practice documents”.  I doubt these are documents which will provide much design inspiration!

The result of a design review by a design review panel is a report that documents the key aspects of the project discussed by the panel and what issues or opportunities the panel has identified.  The report will be provided to the proponent and, as noted above, the relevant planning authority.  The scenario where a project already has planning consent when the design review is conducted does not appear to be specifically addressed.

In theory, a design review should benefit a project by leading to improved designs.  I suspect this will work well for public sector projects where those projects have the luxury of time and are not required to generate profit.  I will be interested to see what the attitude of the private sector will be to an optional process which has potential to add delay, generate criticism and then funnel that criticism to the body responsible for granting planning consent.  It will also be interesting to see what planning authorities make of design review panel reports in the context of a development plan assessment.  It is difficult to see what legal status such reports would have.

For further information on any of the material contained in this article please contact David Billington on 8210 1263 or dbillington@normans.com.au.

Environment and Planning: Retrospective Approvals and Punishment

The media has recently devoted some attention to illegal development and retrospective approvals.  This extract is from the Sunday Mail editorial column on 10 September 2011:

There are clearly growing numbers of people who want to build or extend and follow the philosophy that it is easier to get permission afterwards. They're helped by the fact that most councils are willing to provide retrospective approval for these projects. Is this good enough?

Their planning authority is one of the main reasons our councils exist; to ensure new development is done properly and in accordance with rules known to all.

Existing ratepayers adversely affected by such post-approvals have a right to feel annoyed with their councils - they pay their rates, obey the rules, then if a neighbour puts up an unapproved development it seems all the sympathy is with the unplanned work which gains retrospective approval.

If planning laws were more black and white, and enforced, ratepayers would have much more faith in their councils.

Such comments belie a perception that a “build first, approve later” culture appears to be developing in this State.

What Can Be Done?

As this State’s leading development enforcement lawyers, we see that many councils are turning to prosecution to punish such developers, particularly for the more egregious offences.  Such prosecutions, when properly prepared, are invariably successful and generate “success stories” which set their own local precedents.

Prosecutions can occur regardless of whether other action is taken, and regardless of whether the development is “regularised” by retrospective approval.

Amongst the Councils who have taken criminal proceedings in the last 18 months are Port Adelaide Enfield, Campbelltown, Charles Sturt, Salisbury, Unley and West Torrens.  Highlights include the prosecution of the unrepentant tree lopper, Mr Carlin, who was fined over $20,000 for the removal of one tree, and the prosecution of a trio of builders including the Ahrens Group for commencing construction of a large industrial building prior to obtaining building rules consent were each fined an average of $9,000 each.

The laws in relation to illegal development are, generally, black and white and can be enforced.  We take pride in assisting councils to undertake both civil and criminal enforcement in a realistic and practical manner.

What Can’t Be Done?

Treating retrospective applications differently to prospective applications.  Although the media seem concerned councils are “willing” to grant retrospective approvals (or that such is possible at all), the correct legal position is that retrospective applications should be treated as if the unlawful development had not occurred.

Issues do however arise where applications seek to regularise part only of an existing illegal development.  We regularly find that legal advice is necessary in such circumstances and we welcome enquiries.  

For further information on any of the material contained in this article please contact Claire Ryan on 8210 1294 or cryan@normans.com.au.

Corporate and Commercial: GST Update – Supply of Residential Premises - Sunchen Pty Ltd v Commissioner of Taxation [2010] FCAFC 138

Decision Outcome

On 29 January 2010, the Federal Court handed down its decision in Sunchen, confirming the ATO’s long held view that subsection 40-65(1) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) requires an objective assessment of the nature of the property being purchased rather than considering the subjective intention of the purchaser when determining whether property is residential premises “to be used predominantly for residential accommodation”.

Summary of Facts

• Sunchen Pty Ltd purchased property (117 Bridge Street Port Macquarie New South Wales) on 20 September 2006.
• A single storey house with carport was located on the property.
• The property was being occupied by a tenant pursuant to a residential tenancy agreement and the contract of sale provided that the sale to Sunchen Pty Ltd was subject to the existing tenancy.
• The existing tenancy continued until at least November 2006.
• The property was also the subject of a development approval allowing the construction of a five-storey residential building. The benefit of the vendor's interest in the development approval was assigned to Sunchen Pty Ltd under the contract of sale.
• Sunchen Pty Ltd argued that it was entitled to an input tax credit on the acquisition of the property, on the basis that it intended to develop the site.
• The key issue for the Federal Court was whether the land in question could be described as being “predominantly for residential accommodation” in accordance with the requirements for input taxed sales of residential premises.

The Competing Views

Prior to Sunchen there were two competing views regarding the approach to be adopted when determining whether property is residential premises “to be used predominantly for residential accommodation”.

The first view, which was upheld in Toyama Pty Ltd v Landmark Building Developments Pty Ltd (2006) 197 FLR 74, was that the question of whether property is residential premises “to be used predominantly for residential accommodation” required a prediction as to the future use of the property determine by ascertaining the purchaser’s intention for the property.  This was the view put forward by Sunchen Pty Ltd.

The second view, which was upheld in Marana Holdings Pty Ltd v Commissioner of Taxation (2004) 141 FCR 299, was that the question of whether property is residential premises “to be used predominantly for residential accommodation” should be determined objectively with reference to the physical characteristics of the property as at the date of acquisition.  This was the view put forward by the ATO, which was ultimately the view adopted by the Full Federal Court.

Practical Outcomes

As the decision confirmed the ATO view, there were no changes to ATO administrative practice as a result of the decision.

Now when determining whether property you buy is subject to GST, the property’s physical characteristics, and not your intentions for the land, is the applicable test to determine if the property is residential premises “to be used predominantly for residential accommodation” for the purposes of the GST Act.

Thus, it appears to be settled that if you buy property:

• it will not matter that the property was purchased for re-development;
• if the property purchased is, in terms of its physical characteristics, residential premises within the meaning of the GST Act, the sale will be input taxed within the meaning of s 40-65(1);
• if the property is residential accommodation “to be used predominantly for residential accommodation as at the time of purchase”, then the supply of the property will not be subject to GST but will be input taxed. This means that no GST is payable on the purchase of the property but you won’t be able to claim the GST back for things you acquired in connection with purchasing the property.

For more information about the Sunchen decision or when sales of real estate might have GST implication please feel free to contact Tom Walrut on (08) 8210 1218 and Tom Pledge on (08) 8210 1262.

Corporate Insolvency and Restructuring: Uncommercial Transactions

In the liquidation of an insolvent company, liquidators look at various ways in which they can raise money for creditors. As part of this process, they examine the company’s transactions prior to its liquidation to see if they can unwind certain transactions for the benefit of creditors. One such transaction which can be unwound is an uncommercial transaction.

In the recent case of The Old Kiama Wharf Company Pty Ltd (In Liquidation) v Betohuwisa Investments Pty Ltd and Anor [2011] NSWSC 823, the NSW Supreme Court considered whether a transaction for value was an uncommercial transaction within the meaning of section 588FB of the Corporations Act 2001 (Cth) (Act).

Section 588FB provides that a transaction of a company is an uncommercial transaction if a reasonable person in the company’s circumstances would not have entered into the transaction having regard to (a) the benefits to the company of entering into the transaction, (b) the detriment to the company of entering into the transaction, (c) the respective benefits to other parties to the transaction of entering into it, and (d) any other relevant matter.

Old Kiama Wharf Company (OKW) owned two restaurants. By February 2009, OKW was under significant pressure from its major creditor, trade creditors and the Australian Taxation Office.  On 30 June 2009, OKW’s major creditor issued a statutory demand seeking payment of the debt.

OKW filed an application seeking to set aside the statutory demand. OKW also shortly thereafter commenced a transaction to sell the restaurants to Betohuwisa Investments (Betohuwisa). The Court found that both OKW and Betohuwisa were controlled by the same person as de facto and shadow director.

The restaurants were transferred on 30 November 2009. The purchase price was $475,000, being $50,000 more than the valuation of the assets, although this sum was not paid.

The application to set aside the statutory demand was ultimately dismissed.

The liquidator of OKW sought an order that the transaction between OKW and Betohuwisa was an uncommercial transaction within the meaning of section 588FB of the Act.

Generally, a common indication of an uncommercial transaction is a sale at undervalue. In this case, the Court did not consider whether the sale transaction was at an undervalue, but referred to the factors listed in section 588FB to determine whether the transaction was uncommercial.

The Court found that the benefit to OKW in entering into the transaction was negligible and that the detriment to it was significant, depriving it of its sole assets and leaving it without any reasonable likelihood of payment from Betohuwisa.

The Court was critical of the sale process, stating that it was no more than a “transparent stratagem” designed to avoid OKW’s creditors and preserve its assets. The Court found that the objective from July 2009 was to ensure that the restaurants were transferred to an entity that was not vulnerable to the many claims by creditors to whom OKW was indebted.

This case demonstrates that a sale at an undervalue need not be present to lead to a finding that a transaction is uncommercial within section 588FB.  As held by the Court, a situation in which a reasonable person in the company’s circumstances would not have entered into the transaction, even if for value, may justify the conclusion that it is an uncommercial transaction.

For further information on any of the material contained in this article please contact Steven Hagivassilis on 8210 1232 or shagivassilis@normans.com.au or Thomas Burke on 8210 1276 or tburke@normans.com.au.

Employment and Industrial Relations: Adverse Action Claim Headed to the High Court

The landmark decision of the Full Court of the Federal Court, which extended the concept of adverse action beyond anything seen in the provision’s short history, will now be subject to the scrutiny of the High Court.

Earlier this month, the High Court offered a potential lifeline to employers by opening up the decision in Barclay v The Board of Bendigo Regional Institute of Technical and Further Education to further review.  With adverse action claims under the Fair Work Act 2009 (Cth) arguably applicable to employers in the State, as well as the Federal industrial relations systems, the High Court’s deliberations will be of relevance to local government and private sector employers alike.

In Barclay, the employee, unbeknownst to his employer, used his work email account to send an accusatory email regarding misconduct in the workplace.  The proceedings arose because, in that email, the employee identified his position as the Union President as the basis for sending the email.

After being notified by fellow employees, the employer required the employee to show cause as to why he should not be disciplined.  The employee was suspended on full pay, and blocked from the employer’s internet connection.  These actions were the subject of the employee’s adverse action claim.

At first instance, the trial judge found that, although the conduct of the employer equated to adverse action, the employer’s intention for taking that adverse action was not for a prohibited reason.  As such, because it found that the employer took the action for legitimate business reasons, the employee’s action failed.

On appeal, the Full Court (in a 2-1 majority) overturned this decision.  In reaching their conclusion, the majority looked beyond the employer’s intention and, rather, examined the ‘real reason or reasons’ for the employer’s action.  Therefore, the Full Court broadened the test for adverse action to one that is based on the Court’s objective analysis of the action.

In the opinion of the majority, the appropriate test is whether, from an objective viewpoint, the employer’s adverse action was taken as a consequence of the employee’s union membership (i.e. a prohibited reason).  This, an employer’s good, subjective, intention may not be sufficient to disprove an adverse action claim.

The majority further highlighted that the adverse action provisions are protective in nature, and must be construed broadly.

This case highlights the need for employers to be vigilant when dealing with employees, particularly union members, when considering any form of action taken against an employee.  On the Full Court’s approach, good intentions do not necessarily protect employers.

Decisions are now flowing thick and fast in this jurisdiction, and adverse action claims have being taken and upheld against employers in a variety of circumstances including:

• employer conduct during the negotiation of enterprise agreements;
• hurt and humiliation caused by the dismissal of an employee; and
• an employee’s suspension from employment, with pay, during the course of an investigation for misconduct.

The High Court’s decision will, therefore, provide much needed clarity on the true breadth of adverse action claims.

For further information on any of the material contained in this article please contact Dale Mazzachi on 8210 1221 or dmazzachi@normans.com.au.

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