The sale of Cubbie Station to a Chinese-led consortium has divided the country on the issue of foreign investment. In part one of her special investigation, ABC's Ticky Fullerton examines genuine concerns around Chinese investment, which go directly to national interest.

In one corner, there's most of 'thinking Australia', left and right: Dr Ken Henry, Bob Carr, Malcolm Turnbull, Saul Eslake, Peter Drysdale, most businessmen and most of the media. And in the other corner? Barnaby Joyce. Oh, and a few Nats and Greenies.

It seems anyone who raises questions about Chinese investment or State Owned Enterprises (SOEs) buying into Australian agriculture is labelled dangerously dumb, part of an ignorant 'public backlash'. Witness the Tasmanian dairies story last week. Didn't they know that Australia was built on foreign investment?

Loaded questions about Cubbie Station come thick and fast at Joyce, hopeful perhaps of extraction of some freelancing xenophobic outburst: just what do you think these Chinese investors could get up to?

There are genuine concerns around Chinese investment, state-owned and private, which go directly to national interest. They include: rubbery figures from the ABS about existing foreign ownership levels; tax avoidance at the expense of the Australian tax payer including charity status, passive investment, and transfer pricing matters; the special financial status of SOEs which tilts any level playing field on investment; a lack of a decent penalty system if there are breaches of rules or conditions attached to the investments, and the under-resourcing of monitoring around this; a general lack of clarity behind the ownership of potential investors; and whether the 'national interest test' is anything other than politically driven and therefore vulnerable to the electoral cycle.

The gift to the Government on Chinese investment is a Coalition in disarray and it isn't just Barnaby Joyce in the anti-red corner. Driving an aggressive investigation is the Senate Rural and Regional Affairs Committee Inquiry into foreign investment, chaired by Liberal Senator Bill Heffernan. Hansard makes interesting reading.

Heffernan, having interviewed the Foreign Investment Review Board (FIRB), DFAT and the ATO, believes the national interest test is a purely political decision, and the FIRB process, including part played by the ATO, is riddled with holes. He argues that the investment pipeline is growing before our eyes and if the ground rules are not right today, the nation may find it much more costly if not politically impossible to change the laws a few decades down the track.

Would it really be so easy to just 'scale back' China, as some suggest, if control of our agriculture was threatened? It's a neat question for our new top Defence department chief, Dennis Richardson, who last week gently warned Kerry Stokes and James Packer against putting national security below the commercial imperative.

While most policy thinking runs to a term of government and institutions focus on quarterly returns, Heffernan is thinking more like the Chinese, of times when food security will be the number one priority for Asia. The Chinese make no secret of this. Pick any number of recent comments. One I like came in July from the head of CITIC Pacific Mining, which owns a $7 billion mining project in the Pilbara. He said he'd rather invest in agriculture than iron ore because that was the future.

Even the oh-so-pro foreign investment Australian Financial Review reported (Paywall), "If there was any doubt that China was desperate for agricultural assets, it has been dispelled by the news that China Investment Corp with its $US190 billion war chest is on the hunt all the way down to chilly Tasmania in search of fresh milk."

Heffernan reminds anyone he can that by 2070, China will have to feed half its population from someone else's resource. Agricultural investments won't be vital for profits but for social order. By then Cubbie may well have replaced its vast cotton crop with a food crop. And SOEs could well be directed to provide food for the state. Senator Heffernan in the Senate committee inquiry into the FIRB national interest test said,

We are trying to define, in the national interest, preventing leakage of our revenue base, the non-distortion of the capital market by people who are not looking for a return on their money, the non-distortion of the supply and demand market by people who want to deal direct. You have an instance of that in Western Australia now where some people are still locked in commercial-in-confidence arrangements to buy ten 25,000 acre blocks of land between Broome and Geraldton to set up a series of fish farms for direct supply of fish to China.

Australia is particularly vulnerable on tax. At the Senate Hearings, Senator Fawcett suggested (PDF) to the ATO's Stuart Hamilton: "...if country X has a sovereign holding in Australia, grows wheat -and let us assume they do not claim anything; they just self-fund the whole operation and they grow however many tonnes of wheat..."

Mr Hamilton responded, "And they export it. Would they be taxable? No... If they are not there to make a profit then they would not be in the income tax system, because they are not earning income."

The ATO confirmed (Paywall) this in a letter to the senate committee in February,

Income tax will generally not be payable if the investment was not in relation to a business venture. For example if the investment was in relation to a farm and there was no ultimate sale of the goods produced in Australia and the goods were distributed to needy persons.

Even if the company is a profit making business, there's a fear that clever use of transfer pricing will lead to a leakage of huge amounts of tax revenue. Where a Chinese company buys produce from its Australian arm and ships it back to its Chinese operation, the price charged will impact the level of profits, and therefore the amount of tax it has to pay in Australia. This leads to questions of what stage of value-add a product is transferred, the potential for deliberate under-pricing and, critically, the resources to monitor this notorious area.

For a sale to even be referred to FIRB for approval, it needs to be valued at over $244 million. Any SOE acquisition must automatically be referred to FIRB, regardless of amount, but the process relies on the SOE declaring itself as such. This is important because the definition of an SOE is frankly a bit fuzzy.

The US government's US-China Economic and Security Review Commission suggests that SOEs (directly or effectively owned by the state, former collectives that are now town and village enterprises and also subsidiaries) make up to 50 per cent of the Chinese economy. A KPMG/Sydney university report (PDF) found that of the 116 foreign direct investment deals China completed in Australia between September 2006 and June 2012, 92 were struck by SOEs.

At a hearing last year the late Liberal Senator Judith Adams raised concerns about sales made under the radar:

I am from Western Australia. In the Great Southern area we are having a number of Chinese investors moving through. There is an area where farmers have had a series of droughts. They are having problems with debt and they are being offered enormous amounts of money for their land...They are all joining together, of course, but they are not the same person. They are coming in under that threshold... This grain is not going to be sold here; it is not going to be marketed in Australia. It is going back for consumption to the country that owns the property... I want to know who the watchdog is and what is happening?

Greens leader Christine Milne raised another risk with the Tasmanian dairies - market distortion: "We want to make sure that vertical integration from the farm, to the processor to the Chinese consumer does not constitute 'out sourcing' and distort markets for land and dairy products". While farming leader Mick Keogh pooh-poohs the impact of global prices, a CEO of a top food company I've talked with sees it as real.

Investment doesn't need to distort world markets, only local ones. For example, if a company bought up a big lump of the sugar industry in Australia for its own consumption, then it might take out a previously major buyer, at commercial rates, in our sugar market affecting prices. An ability to pay non commercial rates for land naturally affects the property market too.

What clearly riled the Senate Committee were the rubbery ABS figures on foreign ownership bandied about by Labor politicians and used liberally in the Government's Green Paper for the proposed National Food Plan. Last year's survey showed that of the 99 per cent of all businesses undertaking agricultural activity were Australian owned, as is 89 per cent of all agricultural land and 91 per cent of water entitlements. On further scrutiny, it turns out that 52 per cent of the businesses surveyed were 'micro businesses' with agricultural values as low as $5,000 included! These are unlikely to be farm operations.

At the other end of the scale, some very big deals were completely ignored.

Heffernan quizzed the ATO's Bruce Hockman on the Chinese miner Shenhua, now in New South Wales. "Shenhua is 68 per cent owned by a provincial government. It is a mining company that bought 42 farms. That company would not have been included in your survey, because it is a miner - it does not have an ABN that relates to agriculture?"

Hockman: "No."

So what of Cubbie? A political football? Witness last week's story that at least a dozen Australian bidders expressed interest in buying Queensland's Cubbie Station (after FIRB approval was given for the sale to the Chinese led consortium). Guys, Cubbie has been in administration for three years!

I first went to Cubbie in 1980 as a teenager riding ponies round a property when it was flat dry cattle country; then in 1999 for a book I was writing on water, it was covered in ring tanks – it was the biggest water holding in Australia. Assuming the sale goes ahead, the 93,000-hectares will be initially 80 per cent owned by Chinese textile manufacturer Shandong RuYi, and 20 per cent by Australian owned Lempriere.

Chinese state media accused (Paywall) Nationals and Greens politicians of playing "the outdated tune of protecting national interests". They were at it again on Tuesday at a foreign investment conference in Sydney.

In Australia, we still believe in protecting national interests. That's why we have FIRB. And on SOE's we're a light on detail, as Joyce explained in his Cubbie rant.

We've applied to the Parliamentary Library and we cannot get any transparency as to actually who is the owner of Shandong Ruyi. What we do know is the CEO is appointed by the Chinese Politburo. What we do know is that the state-owned enterprises are both the subsidiaries and part-owners of this organisation.

As part of the sale conditions, Shandong RuYi must sell down its stake to 51 per cent within three years. Bill Heffernan tells me his inquiries reveal that there are few if any penalties for non-compliance if Shandong RuYi does not sell down. Furthermore, of the 30 officers in the Foreign Investment and Trade Policy Division, about six people are allocated to the task of monitoring such ongoing conditions for investment and to ensure that all SOEs, large and small, make themselves known to FIRB. How do we know if they don't? FIRB's Frank Di Giorgio assured Senator Nash, "The bottom-line answer to that is that it is a requirement of the government policy and we see compliance with that."

At a hearing just before the FIRB decision on Cubbie, Senator Heffernan had other suspicions:

I understand further that the equity partner in Australia will be 100 per cent financed by the minority shareholder, which is the foreign vehicle. As the letter from the tax office says, there are situations where dividends through investment are also exempt for a sovereign entity, so I guess it is an income tax nightmare.

It's unclear whether the Senator is justified in his suspicions.

The Coalition wants the $244 million screening threshold for foreign investment to be referred to FIRB to be dropped to $15 million. In an opinion piece in The Australian in August, Trade Minister Craig Emerson asks (PDF), "How does lowering the threshold for private foreign investment deal with the Coalition's concerns about state-owned enterprises?" There would be serious consequences for our farmers in bilateral trade agreements if this were to happen, he warns.

However, Craig Emerson's examples mix apples and oranges in terms of trade and long term investment. He says New Zealand and the US have just been granted an increase in the screening threshold from $244 million to $1,062 million.

New Zealand has a free trade agreement with China giving its farmers a big advantage and China wants an increase in our screening threshold not a decrease. Yet he fails to mention that New Zealand refers all foreign investments of over five hectares in agricultural land to their regulator.

And a small point, investment by Australian companies in Chinese freehold farmland is illegal.

In part two of her investigation, which was published October 2, Ticky Fullerton looks at the politics around Chinese investment and the massive sleeper land deal in Northern Australia that has brought out heated emotions in Parliament just when the Asian Century White Paper is about to be delivered.

Ticky Fullerton presents The Business on ABC 1 and News 24, and is the author of Watershed, on the fight for Australia's water. View her full profile here.