Understanding FIRB Approvals for Lenders

DATE PUBLISHED: February 22, 2024

key takeaways

Australia’s foreign investment rules include a broad exemption for interests granted to foreign lenders under moneylending arrangements. However, there are circumstances when the moneylending exemption will not apply, meaning that FIRB approval will be required.
The exceptions to the moneylending exemption include circumstances where a foreign lender proposes to take security over residential land, national security land or a national security business.
While the moneylending exemption is far-reaching, foreign lenders should always determine whether any of the exceptions apply and if FIRB approval is required. Failure to comply with the FATA will result in hefty penalties and fines being imposed.
Foreign lenders also need to consider the impact FIRB application fees may have on the feasibility of a proposed moneylending arrangement, and whether these costs can be reasonably passed onto the borrower.

FIRB Framework

Australia’s foreign investment rules, as set out in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) and Foreign Acquisitions and Takeovers Regulation 2015 (Cth) (FATR), regulate the investment by foreign persons in Australia.

One of the primary features of the FATA and Australia’s foreign investment regime is that it requires foreign persons to obtain Foreign Investment Review Board (FIRB) approval (by way of “no objection notification” or “exemption certificate”) before proceeding with a proposed investment. The regime also requires that certain actions and investments by foreign persons be notified to FIRB and/or the Commissioner of Taxation (via the ATO).

In some circumstances, the grant of security by Australian entities and over land to a foreign lender (or its security trustee) in connection with a moneylending transaction could trigger FIRB approval requirements.

Moneylending Exemption

While FIRB approval is required for a broad range of actions and investments by foreign persons, an exemption in section 27 of the FATR has meant that lenders have not needed to concern themselves with foreign investment approvals for the majority of their secured lending transactions.

This exemption, known as the “moneylending exemption”, means that FIRB approval is not required for acquisitions of interests in entities and land for:

1
Securing payment obligations under a moneylending agreement; and
2
Enforcement of that security.

The moneylending exemption applies to “moneylending agreements” that are entered into in good faith, on ordinary commercial terms, and in the course of carrying on a business of lending or providing financial accommodation. A moneylending agreement can be entered into by:

1
A person who carries on a business of lending or providing financial accommodation; or
2
By an entity established by such a person to lend money.

Furthermore, the moneylending exemption covers connected parties to reflect modern lending and debt trading practices, including any subsidiary or holding entity, a security trustee or a receiver and manager appointed by a lender.

Exceptions and Potential Pitfalls

While the moneylending exemption has a broad application, there are still circumstances where a foreign lender will require FIRB approval for a proposed moneylending arrangement.

Set out below are the relevant exceptions to the moneylending exemption.

One-off lending arrangements/not in the business of lending

Where a foreign investor proposes to enter into a moneylending agreement, but is not in the business of lending or providing financial accommodation, then that foreign investor is unlikely to qualify for the moneylending exemption.

Any one-off lending arrangements where security is being granted to a foreign lender should be carefully considered. If the grant of security for that arrangement constitutes a significant and notifiable action pursuant to the FATA, then FIRB approval will be required.

Residential land

Where a foreign lender is proposing to acquire an interest in residential land as part of a moneylending agreement (e.g. a real property mortgage over residential land), the moneylending exemption will only apply if the lender (or a holding entity of the lender) is an Authorised Deposit-taking Institution (ADI).

If the foreign lender is not an ADI , but is otherwise licensed as a financial institution, the moneylending exemption will only apply if the lender (or its holding company):

Has at least 100 holders of securities (the widely-held test for securities);
Has at least 100 members (the widely held test for member-owned businesses); or
Is listed for quotation on an official list of a stock exchange, whether or not in Australia (the listed test).

As such, if a foreign lender is not an ADI or a licensed financial institution thatwhich meets one of the above tests, then that foreign lender will be subject to the FATA when taking or enforcing a security interest in residential land.

In such cases, taking and enforcing the security interest will be both a significant action and a notifiable action, or a notifiable national security action, which will require FIRB approval.

Furthermore, foreign lenders who are not an ADI or a licensed financial institution should carefully consider whether FIRB approval is required in circumstances where:

Security is to be granted over mixed- use land (e.g. Australian land which may be categorised as residential as well as agricultural or commercial land),; and
Security is to be granted over land that is to be developed or rezoned for residential purposes (e.g. security over flat land that is to be developed as part of a residential subdivision).

National security land and businesses

From 1 January 2021, the moneylending exemption does not apply where a lender acquires an interest in:

National security land;
An exploration tenement in respect of national security land;
An asset of a national security business; or
Securities in an entity that carries on a national security business,

(each, a National Security Asset).

In these circumstances, a foreign lender (or the holder of the underlying security, such as a security trustee) will need to notify and seek a no-objection notification from FIRB before acquiring the interest in the National Security Asset under the relevant moneylending agreement.

foreign government investors

In addition to the above exceptions, the moneylending exemption will not fully apply where the foreign lender is a foreign government investor.
Where the foreign lender is a foreign government investor, the moneylending exemption will only apply if:

Where the foreign lender is an ADI (or subsidiary of an ADI):

12 months have not passed since the acquisition of the interest; or
At least 12 months have passed since the acquisition of the interest, and the foreign lender is making a genuine attempt to dispose of that interest; or

In all other circumstances:

6 months have not passed since the acquisition of the interest; or
At least 6 months have passed since the acquisition of the interest, and the foreign lender is making a genuine attempt to dispose of that interest;

A foreign government investor is defined in the FATA quite broadly , and includes state- owned enterprises and sovereign wealth funds. Foreign lenders with an actual or perceived relationship to a government or government- related entity should carefully determine their status, and the extent to which they can access to the moneylending exemption.

FIRB Fees and the impact on moneylending

If FIRB approval is required for a proposed moneylending arrangement, it is important to note that substantial application fees will be payable in connection with an FIRB application.

For land and business transactions, fees are typically charged on a sliding scale based on the consideration paid in the transaction. In a moneylending context, it remains unclear whether the fees payable in connection with the notification of a foreign lender’s interest will be calculated based on the value of the asset, the value of the underlying loan (including the potential interest earnings), or some other measure.

It also remains unclear whether the recently announced increases to FIRB fees for established residential dwellings will extend to FIRB applications for moneylending arrangements concerning residential land. For more information on the recent fee increases, please see our update here.

Where FIRB approval is required for a moneylending arrangement, foreign lenders should consider the appropriate allocation of fees in respect of a moneylending transaction. Where it is commercially reasonable to do so, a lender may consider allocating any required FIRB application fees to the proposed borrower.

where to from here?

While the moneylending exemption is far-reaching, foreign lenders should always consider each moneylender arrangement and determine whether any of the exceptions apply. It is particularly important that FIRB approval must be sought where the moneylending exemption does not apply, given the substantial penalties that can be imposed by the Treasurer under the FATA.

how can mcw help?

If you require advice on whether a particular lending arrangement falls south of the moneylending exemption, or advice on whether a lender is a foreign person for the purposes of the FATA, our experienced team at McInnes Wilson Lawyers is here to assist you.

McInnes Wilson Lawyers assists foreign investors and lenders (both resident and non-resident) with all aspects of lending, including:

Advice on requisite FIRB approvals and notifications (and the corresponding application fees);
Advice on FIRB investigations and enforcement processes;
Assistance with preparing loans and supporting security documentation for moneylending arrangements;
Assistance with securities enforcement (and recovering monies from defaulting borrowers); and
Taxation and duty advice concerning with respect to a proposed moneylending arrangement, including deductibility and interest withholding tax advices.