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Editorial

Overseas Investment - review announced just as new regime comes into force

December 2018 - EU & Competition. Legal Developments by Bell Gully.

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Just days before amendments to New Zealand’s overseas investment regime take effect, the government has announced its intention to undertake a further review of the legislation.

Billed as a ‚Äėsecond phase‚Äô of the reforms, the review will have two parts: a focus on reducing complexity, and the likely introduction of a broad ‚Äúbut rarely used‚ÄĚ discretion to decline approval for significant foreign investment, such as infrastructure assets with monopoly characteristics.

While the potential for a new discretionary power in the national interest will draw public attention, the move to cut red tape to ‚Äúensure New Zealand remains an attractive destination for beneficial, long-term foreign direct investment‚ÄĚ is a welcome development.

The first phase of the reforms will usher in the most significant changes to the legislation in over a decade. The changes are wide-ranging and the drafting is complex. The highest profile change has been to make residential land ‚Äėsensitive‚Äô, effectively banning foreigners from buying houses here, except in limited circumstances. Foreigners will also now require consent to acquire forestry rights (over 1000 hectares in a calendar year) and certain profits-√†-prendre (the right to take resources or crops from land).

However, alongside these more restrictive measures, there have also been some regulatory changes making some of the standing exemptions to the consent regime more user-friendly. The announcement of a further review to cut complexity is of even greater significance.

Below we take an in-depth look at the key areas covered by the changes set to take effect next week, and what they mean for overseas investors into New Zealand. We also consider the government‚Äôs further review and what changes might be sought. 

Residential land

As of 22 October, overseas persons seeking to buy residential land must seek OIO consent. To obtain consent, they must satisfy either the pre-existing ‚Äėbenefit to New Zealand‚Äô test or one of the following new tests:

a) Commitment to reside in NZ test

This test allows overseas purchasers that hold residence class visas to acquire residential land for them to live on, provided they are committed to residing in New Zealand. To demonstrate their commitment to reside in New Zealand the overseas purchaser must sign a statutory declaration confirming that they will become a tax resident in New Zealand and spend at least half their time here (being 183 days in every 12-month period).

b) Increased housing test

The increased housing test will be met if the overseas person‚Äôs investment in residential land will have at least one ‚Äėincreased housing outcome‚Äô, and the overseas person:

  • on-sells the land within a specified time period; and‚Äč
  • does not occupy the land themselves.

‚ÄėIncreased housing outcomes‚Äô include an increase in the number of residential dwellings constructed on the land, or construction/expansion of a long-term accommodation facility (i.e. rest homes and student housing). Long-term accommodation facilities are exempt from the requirement to on-sell.

c) Incidental residential use test

The incidental residential use test is satisfied if the residential land will be used for residential purposes, but these purposes are in support of the relevant business of the overseas person. 

This test only applies if the relevant business is not one that revolves around using land for residential purposes. For example, an overseas-owned retail business seeking to expand a New Zealand store may be permitted to purchase residential land and let it to unrelated persons (a residential purpose) for a limited amount of time before the land is utilised for the store expansion.

d) Non-residential use test

The non-residential use test is met if the residential land is acquired by an overseas business and will be used for non-residential purposes in the ordinary course of the business. To meet this test, the land must not be used, or held for future use, for any residential purpose. 

If the residential land is also otherwise ‚Äúsensitive‚ÄĚ, then the (existing) benefits to New Zealand test must be met in addition to demonstrating specific outcomes in relation to residential land (such as those set out above). 

There are some limited exceptions to the consent requirements for acquisitions of interests in residential land. Importantly, citizens and permanent residents of Australia and Singapore purchasing residential land in New Zealand do not require OIO consent in accordance with New Zealand’s existing economic relationships with each country. There are also exemptions available in certain other areas, although each exemption has a specific set of criteria that must be met in order to qualify. These include:

a) short term leases;

b) investments in ‚Äúoff the plan‚ÄĚ apartment developments; and

c) investments in hotel units for lease back.‚Äč‚Äč‚Äč

‚ÄčFinally, a new ‚Äústanding consent‚ÄĚ regime has also been introduced, allowing overseas persons to obtain consent once to cover a series of transactions or potential transactions (again subject to a host of conditions). 

Forestry activities

Forestry rights and other profits-√†-prendre were previously excluded from the definition of ‚Äúsensitive land‚ÄĚ. However, acquisitions of forestry rights relating to over 1000 hectares in a calendar year will now constitute an acquisition of ‚Äúsensitive land‚ÄĚ under the Act and require consent. Acquisitions of other profits-√†-prendre (other than those relating to minerals) will also now require consent where these relate to land that is considered ‚Äúsensitive‚ÄĚ under existing rules. 

While tightening some aspects of the regime as it relates to forestry, the government has also recognised the substantial role that overseas investment plays in the forestry sector. Accordingly, it has introduced two alternative consent pathways for forestry acquisitions meeting certain criteria. These are expected to be easier to apply than the existing requirement to show ‚Äúsubstantial and identifiable‚ÄĚ benefits to New Zealand. 

Consistent with the government’s aim to increase tree numbers in New Zealand, one key prerequisite to qualifying for these alternative pathways is that a new crop of trees is planted to replace any that are harvested. Provided this (and limited additional) criteria are satisfied, overseas investors may apply for consent under the following tests:

a)The ‚Äėmodified‚Äô‚Äč test allows the Ministers to measure benefits by comparing the expected result of the overseas investment against what     would happen if the investment was not given effect to and there were no changes to ownership or control. This allows Ministers to  consider the counterfactual scenario as the status quo, instead of what an alternate investor might do (as required under the current benefits test) resulting in a lower threshold to obtain consent. 

b)The ‚Äėspecial‚Äô test ‚Äď the ‚Äėbenefit to New Zealand‚Äô test may be met if an applicant can met the requirements as set out in the new  regulations. At a high level, this simply requires the applicant to continue pre-existing beneficial activities (such as environmental  protections and log supply arrangements). ‚Äč

Depending on the circumstances, the ‚Äėspecial‚Äô test could represent a vastly simplified consent path compared to that previously facing forestry investors. Moreover, as with residential land consents, the legislation allows for investors to seek ‚Äėstanding consents‚Äô. If granted, a standing consent would allow an investor to undertake forestry transactions without obtaining consent each time provided it met certain conditions (including satisfying itself each time that the ‚Äėspecial‚Äô test is met in relation to each investment).

Amendments to class exemptions

Alongside changes to the primary legislation, changes to the regulations also take effect on 22 October 2018. The main change for investors is the clarification and extension to several of the existing class exemptions from consent requirements for certain transactions. Two of particular note are updates to the:

a) corporate restructuring exemption which provides more flexibility in relation to corporate restructurings, particularly where the  investment is held jointly by different overseas persons or by overseas and New Zealand persons; 

b) shareholding creep exemption where the changes bring a welcome extension to allow overseas persons to acquire up to an additional  10% of the total number of shares initially consented to, provided such further acquisitions do not exceed the ‚Äúcontrol limits‚ÄĚ in the regulations (being 25%, 50%, 75% and 90%).

Further government review of legislation

While the tweaks to the standing consents above are welcome, there is certainly scope for additional change in order to avoid unnecessary consent applications, and to streamline the process where consents are required. The government has heeded this message and the review of the legislation announced this week is aimed at doing this. 

We have identified numerous circumstances where consent requirements are unduly burdensome and could be reformed. These include potential exemptions or a fast-track process for:

  • land deemed ‚Äúsensitive‚ÄĚ only because it adjoins a park or reserve;‚Äč
  • NZX listed companies that are ‚Äėoverseas persons‚Äô for the purposes of the Act, but where shareholdings by overseas persons in that listed entity are widely held; and‚Äč
  • acquisitions of minority shareholdings in sensitive land (e.g. where the overseas person has no practical control over the land).

There are many more areas ripe for reform and Bell Gully will be participating fully in the ‚Äėphase two‚Äô review process. The government intends to consult widely on options for reform and the public consultation will take place in the first half of 2019. The terms of reference can be found here

If you or your business has any questions regarding the review, and the steps that could be taken going forward, please contact one of our overseas investment team‚Äč or your usual Bell Gully adviser.

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