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The Overseas Investment Amendment Bill (the Bill) was passed yesterday after its third and final reading. It is likely to receive Royal assent this month. Once that occurs, the provisions of the Bill that limit the ability of overseas persons to purchase residential property in New Zealand and the changes in the regime governing overseas investments in forestry will officially become part of the Overseas Investment Act (the Act).
Most of the changes will become operative two months from the date the Bill receives Royal assent, unless the Governor-General appoints an earlier date by Order in Council. Most amendments are therefore likely to become legally enforceable by the end of October. The exemption relating to dwellings in large apartment developments where sales of dwellings have begun before assent date comes into force on the expiry of the two-week period after Royal assent.
The amendments are not retrospective and will not affect existing transactions entered before commencement of the Amendment Act. However, purchasers under transactions that pre-date the new law are likely to be caught if they nominate an overseas person to complete a purchase after the Amendment Act comes into force.
Recap of key amendments
The Bill designates residential land and certain "profits-a-prendre" (including forestry rights1) as "sensitive land" requiring prospective overseas purchasers of those assets to obtain consent under the Act before they purchase.
It brings these interests in land within the same category as land more commonly understood to be "sensitive land", like non-urban land of five hectares, foreshore land or certain land adjoining land held for conservation purposes or as a reserve. However, the Bill will allow purchasers to take different pathways to satisfy different "benefits to New Zealand" tests applicable to residential land, and certain forestry rights will be different. In particular:
Purchasers of residential land could satisfy the existing "benefit to New Zealand test" or satisfy a "commitment to reside in New Zealand" test, or an "increased housing on residential land test", or an "incidental residential use" test, or a "non-residential use" test.
Purchasers of forestry interests (either freehold interests or forestry rights will be able to meet a "modified" benefit to New Zealand test (which is similar to the current test but measures those benefits against the status quo), or a "special" benefits test, the details of which will be set out in regulations.
As mentioned in our previous updates, the definition of "residential land" is very broad and is likely to capture a number of commercial transactions unintentionally.
We would hope that the current Ministerial delegation of authority to the Overseas Investment Office (OIO) will be updated to include the authority for the OIO to grant consents relating to residential land, so that these applications will not need to go through the Ministerial process.
Recent changes to the Bill may provide some flexibility
The Bill has been through numerous amendments during its passage through Parliament, mainly aimed at addressing the wide range of unintended consequences that arose from the original drafting (see here and here for a summary of the key changes arising from the select committee and public consultation stage). Since then, the drafters have done more work on the Bill's exemption provisions, perhaps recognising the remaining potential for unintended consequences.
Of particular note, recent changes have introduced a much greater level of detail on the OIO's powers to grant exemptions on a case-by-case basis. The newly-added exemptions purpose statement specifically notes that the purpose of the exemption authority in the Bill is to provide flexibility where compliance with the Act is "impractical, inefficient or unduly burdensome". We would hope that this purpose statement means that the OIO will feel empowered to adopt an accommodating and efficient approach to the granting of exemption applications.
Looking ahead – Key impacts
The key impacts of these changes will be:
A broader range of transactions will be captured by the Act, which will no doubt put further pressure on the OIO's resources (although we note that the OIO has already taken steps to begin expanding its resources to address the expected surge in demand for its services as a result of these changes).
Residential land sales to overseas persons will likely take longer to settle, meaning both buyers and sellers could be in "limbo" for longer periods.
Those involved in corporate transactions where the New Zealand target assets include residential land will need to satisfy the new tests, even if the residential land is ancillary to the primary business of a New Zealand target, for example, a manager's house attached to a factory.
We expect the number of exemption applications to increase substantially given the broad reach of the new provisions and, in particular, their potential application to broader commercial transactions.
While more forestry transactions will be captured by the regime, purchasers will have more pathways to satisfy the benefits to New Zealand test, and therefore should have more opportunity for successful applications.
If you have any questions on the proposed changes or would like to discuss how the changes may affect your current or proposed transactions, please contact our overseas investment team.