The Overseas Investment Amendment Bill (No 3) has now passed its third reading in Parliament.
In 2018 the Government made significant changes to the treatment of residential and forestry land, while mid-2020 saw urgent legislative changes in response to the economic fallout of COVID-19. The No.3 Bill completes the package of reforms aimed at strengthening aspects of the regime for “high risk" investments, while streamlining the process for “low risk" investors.
The No. 3 Bill is expected to pass into law in the coming days, with many of its provisions coming into force six weeks later, although some changes (for example, those concerning farm land advertising and the long-awaited changes to the benefit test) could take up to a year to come into force.
The Government is separately due by 25 May 2021 to decide whether to continue the temporary COVID-19 notification regime.
What it means for investors
The changes are largely positive for investors, with much more streamlined processes for the main types of consent applications. In particular, it brings welcome changes to the “national interest test" as it applies to non-New Zealand government investors, which, since its introduction last year, has captured a much broader group of investors than was ever intended. In addition, while not a direct result of the No.3 Bill, we expect soon to see statutory decision timeframes introduced, something that the investment community has been calling for, for many years.
We set out the key changes below.
Streamlining the national interest test
The national interest test, introduced last year, applies to investments by “non-NZ government investors"; that is, foreign governments, persons acting under the control of foreign governments, and enterprises in which foreign governments have certain ownership or control interests.
The current test is difficult to apply and Parliament has recognised the potential for the law to have unintended consequences. The Select Committee recognised the potentially overreaching application of the regime and confirmed that “the policy intention behind the test is that it should be used only where necessary to protect New Zealand's core national interests." In particular, Parliament did not intend the “non-NZ government investor" test to aggregate interests held by different foreign government interests, and Parliament recognises that passive government investors do not pose strategic risks of the kind that the national interest test was designed to address.
We are pleased to see the No.3 Bill remedy this issue by:
- increasing the national interest ownership threshold for foreign government investors from 10% to 25% and only aggregating for the purposes of the 25% threshold where government investors are from the same country, and
- providing a pathway for certain passive foreign government investors to be exempt, with the criteria for such exemptions to be set by regulations.
We strongly support these changes which will reduce ambiguity in the regime and save affected overseas investors the cost and delay of an unnecessary national interest assessment process.
Simplifying the benefits test
Overseas persons who seek to acquire “sensitive land" in New Zealand must currently satisfy the relevant Ministers that the investment will, or is likely to, benefit New Zealand (the “benefits test"). The No.3 Bill seeks to streamline the process for determining whether an investment in sensitive land will benefit New Zealand.
Currently, in assessing the benefits of an investment, Ministers conduct a “with or without" analysis, comparing the likely future state of New Zealand with the proposed investment, versus without the investment. This can require investors to demonstrate benefits over and above what a hypothetical, well-funded New Zealander would have done with the land. This can set a very high threshold and creates difficulties for applicants and the Overseas Investment Office (OIO) in trying to determine what a hypothetical, well-funded New Zealander is likely to do with the land.
The No.3 Bill will replace the “with or without" analysis with a “before and after" analysis, requiring Ministers to compare instead the likely result of the investment with the existing state of affairs – which will generally be an easier threshold to satisfy. The vendor's situation will become much more important for the purposes of the net benefit assessment.
The No.3 Bill also streamlines the process by scrapping 18 of the current 21 rigid benefit categories and replacing them with three new broader benefit categories, allowing the OIO and Ministers to take a more flexible approach to assessing benefits.
Given the nature of these changes and the impact on the OIO's systems, these particular amendments are not likely to come into force for many months (with a deadline of 12 months for the new benefits assessment to come into effect).
Farm land investment thresholds: benefits test and advertising requirements strengthened
Ministers will be able to apply a more stringent “modified" benefits test to investments in productive farm land, giving high relative importance to the potential economic benefits of the investment. Oversight and participation in the investment by New Zealanders will also be persuasive. This effectively incorporates into statute the current direction from the Minister of Finance to the OIO about how to assess “rural land" applications.
The No.3 Bill also introduces a new requirement that farm land be advertised in New Zealand before any agreement to sell the land to an overseas person is entered into (currently, advertising must only take place before such an acquisition is completed).
This could prove a major impediment to corporate transactions, which happen to include farm land. However, exemptions are possible, including where farm land is more properly used for commercial, industrial, or large residential developments. Regulations will include more detail around this exemption power, and these are yet to be released.
These changes are expected to come into effect over the next six months.
Investor test flexibility for repeat investors
Overseas investors must currently meet the OIO's investor test each time they apply for consent (including through a detailed background check of relevant entities and individuals).
The No. 3 Bill will allow repeat investors to become 'pre-verified', making consecutive applications for consent much more efficient. This will also create material advantages for repeat investors participating in competitive bid processes.
Removing screening requirements for less sensitive transactions
To reduce the burden that the overseas investment regime imposes on both investors and regulators, the No.3 Bill will:
- change the minimum term that a lease must be before it can be classified as (non-residential) sensitive land from three to 10 years. While this is a positive move, it introduces a “total term" concept that means lease extensions over sensitive land that take the total term above 10 years (even if the extension is for a short period – e.g. two years) will still trigger a consent requirement. We consider the total term concept to be unduly burdensome and expect it to result in many unnecessary applications,
- remove the consent requirements for a range of “low-risk" transactions, such as certain categories of existing sensitive land, and transactions involving “fundamentally New Zealand-listed entities" (these transactions currently receive a “standing consent" in accordance with the reforms introduced in 2020, but the No.3 Bill will make these permanent).
Statutory assessment timeframes to be set out in regulations
Since the mid-2020 reforms, the OIO has been able to set out in regulations statutory assessment timeframes for OIO applications. So far, assessment timeframes have only been created for assessments of notifications under the temporary notification regime. However, with the passing of the No.3 Bill, we understand the OIO intends to introduce statutory timeframes for other consent applications. The exact timeframes, and any ramifications for not meeting them, are still to be determined.
Emergency notification regime to be re-assessed
Separate from the No.3 Bill, the next review of the temporary emergency notification regime is due to occur by 25 May 2021, at which point the Ministers must determine whether the effects of the COVID-19 pandemic justify having the regime continue. It was last extended in February 2021. If the emergency notification regime is repealed it will be replaced by a permanent national security and public order 'call-in' power. However, the No.3 Bill empowers the Ministers to reinstate the notification regime in the event of another national emergency. We will release further updates on this once more is known.
Review of special forestry pathways
Finally, while one reform process is nearing its end, the Government is already reviewing some prior reforms to ensure that they are fit for purpose. To that end, Treasury has released terms of reference for a review of the special forestry pathways introduced in 2018. We will release further updates on this review as it proceeds.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.