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Op-Ed: The Need to Define an Australian Company

Monday, May 10, 2021 11:14 AM | Anonymous

Op-Ed: The Need to Define an Australian Company

By: Brent Clark

July last year, the Prime Minister released the 2020 Defence Strategic Update, which set out the deterioration in Australia’s strategic circumstances. This triggered wide-ranging discussions on the state of Australia’s preparedness for armed conflict, the state of Australia’s program of major Defence procurements, and the extent to which sovereign industrial capabilities are being suitably developed via these programs.

AIDN has been direct in setting out the necessity for critical defence industrial capabilities to reside in sovereign Australian organisations, and the risks to the ADF of relying on foreign controlled suppliers.

The question of what comprises an Australian industrial participant has arisen.

AIDN considers that the answer to this question lies in the nature of the strategic risk that sovereign control addresses. In the circumstance of national emergency and armed conflict, where the ADF needs to lean hard on Australian industry to keep it in the fight, which industrial resources can be absolutely relied upon to answer the call?

Conversely, which industrial resources are in some form subject to external influence that might detract from providing that support? Maybe parties are owned offshore in countries whose national interests may not necessarily align with the Australian interest. Maybe those countries might see fit to withhold support (possibly because our adversary has threatened them against any involvement). Or maybe those countries prefer that resources be directed towards addressing their own force’s immediate needs ahead of the ADF’s.

The question really boils down to who can we be absolutely certain that we can rely upon in the ADF’s hour of need?

AIDN asserts that this can only be answered in the affirmative for those businesses whose ultimate ownership is Australian, and most certainly whose ultimate control is Australian.

The bulk of Australian defence industry is owned or controlled by foreign owned prime contractors. It is only natural that these parties would oppose this view.

Currently Defence uses the following definitions for an Australian company:

  1. Australian business entities that perform work in Australia with Australian-based employees and have an Australian Business Number (ABN); and

  2. New Zealand business entities that perform work in New Zealand with New Zealand-based employees (consistent with the Closer Economic Relations Trade Agreement between Australia and New Zealand) and have a New Zealand Business Number (NZBN).

  3. Australian industry also includes subsidiaries of overseas companies (e.g. equipment manufacturers) based in Australia or New Zealand, that meet the above criteria.

Clearly this simplistic definition is not acceptable to Australian industry.

Under direction from the government, Defence is reviewing the definition of what an Australian entity is and is considering the following two possible options;

Option 1 – registration-based means:

  1. a company registered under the Corporations Act 2001 (Cth) or a company registered under the Companies Act 1993 (New Zealand);

  2. a body corporate, partnership, or association formed or incorporated in Australia or New Zealand; or

  3. a foreign-owned company with an ongoing business presence in Australia or New Zealand, and which has a registered body number (i.e. ARBN or NZRBN).

Option 2 – tax-based means 

  1. an Australian or New Zealand tax resident:

  2. a person who:

  • is a tax resident of a country other than Australia or New Zealand with which Australia or New Zealand has a tax treaty; and
  • is carrying on business through a permanent establishment in Australia or New Zealand; or

  3. a person other than a person under paragraph a or b who:

  • if a tax treaty were in place between Australia or New Zealand and that person’s country of tax residence, would be considered to be carrying on business through a permanent establishment in Australia or New Zealand; and

  4. is subject to income tax in Australia or New Zealand.

Neither of these proposals addresses the fundamental issue of where sovereign control resides.

While part of Defence has struggled to understand sovereign risks relating to control of Australian industry in a deteriorated strategic environment, other parts of Defence have been taking the matter very seriously.

The Defence Security Agency is one such agency. AIDN members will have been going through the process of updating their security systems and frameworks to meet the new industrial security guidelines and framework. While updates to this system every few years is not unusual, the recent change has sought material improvements from participants, including their IT systems, to better control access to Defence information to protect against cyber-attack and other threats.

To control the security risks relating to industry, DSA has required industrial entities, once they have their security systems to the designated level, to reapply to join the industrial security program.

Clearly it is in DSA’s business to understand the nature of risks associated with each entity applying to join the DISP. After all, entry into DISP provides industrial entities access to sensitive security information, and it is important to understand any factors that might influence the industrial entity to utilise that information other than for the Australian national interest.

The types of questions that DSA asks in assessing applicant businesses includes:

  • Does any foreign government, any single foreign person(s), either alone or together with associates, have a 20 per cent or more holding in your Entity?
  • Do any two or more foreign persons (and any associates), or foreign corporations (and any associates), have a total holding of 40 per cent or more in your entity?
  • Notwithstanding the above, does any foreign person(s), or foreign corporations(s) otherwise hold an interest that amounts to control or influence over the operations of your entity?
  • Does any foreign person(s) serve as members of your entity’s board of directors (or similar governing body), officers, executive personnel, general partners, trustees or senior management officials?
  • Does any foreign person(s) or foreign corporations(s) have the power, direct or indirect, to control the election, appointment, or tenure of members of your entity’s board of directors (or similar governing body) or other management positions of your entity, or have the power to control or cause the direction of decisions or activities of your entity?
  • Do any members of your entity’s board of directors (or similar governing body), executive personnel, general partners, trustees, or senior management officials hold any positions with, or serve as consultants for, any foreign corporation(s)?
  • These questions (and there are others that have been omitted for brevity) are entirely sensible in seeking to understand the extent of non-Australian influence on an industrial entity, so as to assess the level of risk that the entity’s “non-Australian-ness” poses to Australian security information.

If the Department is able to recognise the potential risks to information security posed by this substantial range of foreign influences on entities; why is the Department uninterested in the equivalent risk to the availability of industrial capability posed by the same range of foreign influences?

Both involve questions of sovereign risk; one regards to sovereign security information, the other to sovereign industrial capability. There is a clear inconsistency here.

AIDN’s membership of Australian SME’s represent genuinely Australian controlled industry. Locally developed, Australian-owned businesses are the only businesses clear of external influences that might fetter the ADF’s access to supply during times of need.

Defence should be making untrammelled efforts to support and encourage this group. Instead, the Department is abiding by definitions for Australian industrial entities crafted to allow “business as usual” to continue with the big foreign controlled primes.

The Department’s approach in this regard would be problematic under ordinary circumstances. But in our current strategic environment, it is no longer acceptable.

The time has come for the Department to reflect the reality in its definition of what a sovereign Australian industrial entity is.

Brent Clark is the chief executive of the Australian Industry and Defence Network (AIDN).

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