The Government's New Directive to the OIO

by DLA Piper

DLA Piper

New directive letter

The Associate Finance Minister and the Minister for Land have issued a new directive letter under the Overseas Investment Act 2005 (OIA), directing the Overseas Investment Office (OIO) as to the government's general policy towards overseas investment, and the relative importance to be given to different factors in assessing sensitive land applications involving "rural land" and "forest land".

The directive letter comes into effect from 15 December 2017 and applies to all new and existing applications under consideration by the OIO as at that date.

Current position

In acquisitions involving sensitive land, the overseas person, among other things, is required to demonstrate that the investment will be beneficial to New Zealand. If the acquisition involves "non-urban" land over five hectares the benefit must be "substantial and identifiable". The benefit is assessed against various economic and non-economic factors set out in the OIA and the associated regulations. The benefit is required to be more than what would result under the counterfactual scenario involving the acquisition by an alternative New Zealand purchaser. 

Rural land directive

Under the directive the OIO is to consider the following mainly "economic" factors as highly important in assessing applications involving "rural land":

  • Creation or retention of jobs in New Zealand
  • Introduction of new technology or business skills to New Zealand
  • Increasing export receipts
  • Increasing processing of primary products in New Zealand
  • Oversight and participation by New Zealanders

Prior to this directive, the OIO was not required to consider any factors as being of high importance unless the acquisition involved a "large farm" (being a farm more than ten times the average farm size). 

There are fewer factors of high importance under the new rural land directive compared to the number of high importance factors considered in the context of a large farm under the old directive. However, the new rural land directive is wider and applies to all "rural land". Rural land is defined as non-urban land over five hectares other than forest land (see below the discussion under the forest land directive). Non-urban land is not limited to farmland. This means that the rural land directive applies to all non-urban land acquisitions over five hectares, such as lifestyle blocks. 

Under the directive, overseas persons will need to focus on the above benefit factors and ensure that at least some of these benefit factors arise from the investment, and that the benefits are substantial and identifiable in the context of the transaction. In our experience, in relation to acquisitions by overseas investors of operational farms, there is already a real focus on the above "economic" factors. Many overseas investors looking to acquire farming businesses often identify properties with development potential and expect to invest additional capital for development purposes. While the directive does not consider the introduction of capital as a high importance factor (unlike the previous directive letter in respect of large farms), the investment of additional capital often results in additional jobs, increased export receipts and the processing of primary products. Therefore, in relation to applications of that nature, we do not expect the new directive will have a significant impact. However, in relation to acquisitions where there may be limited scope to realise any economic benefits such as lifestyle blocks, or in relation to large properties with already developed assets where the resulting economic benefits may not be "substantial and identifiable", the directive will make it difficult to get over the threshold for consent.

The directive acknowledges that each application is to be considered on a case by case basis, and in this regard, the directions in the letter are to be applied in general rather than strict terms. For example, the government does not expect the directive to apply to investments involving minor changes in shareholdings. 

Forest land directive

The government is seeking to encourage an increase in the value added processing of raw products and the advancement of forestry-related strategies. In light of this, the following factors are considered to be of high importance in assessing applications involving "forest land":

  • Increasing processing in New Zealand of primary products
  • Effecting or advancing of a significant government policy or strategy

The forest land directive applies to non-urban land over five hectares that is used for forestry purposes. Previously, no particular benefit factor was required to be considered as more important than others in relation to applications involving forest land. The focus on the above factors will make it more difficult for overseas persons to obtain consent for acquisitions involving forest land, particularly given the benefit will need to be substantial and identifiable in respect of the above factors, and more than under the counterfactual.   

The directive states that the government expects the OIO to impose conditions on consent, where appropriate, that require the overseas investor to enter into supply arrangements with local processors. Presumably, this must mean that where such a commitment has been made in the application, the OIO will attribute benefit to this. It is clear that going forward, investments in forest land will require some element or commitment with respect to processing to obtain consent. The New Zealand forestry industry currently exports the majority of logs harvested. Therefore, in some circumstances, in order to obtain consent, applicants may need to move away from their existing business models to include a greater element of domestic processing. This factor may have an effect on the value of the underlying asset.   

In terms of advancing significant government policy, the government is yet to announce a specific forestry policy. However, the government has made various statements in relation to the forestry sector, including that "as part of the coalition agreement, [it] has committed to an ambitious tree planting programme that will require a partnership between the Crown and the sector itself". Therefore it is likely that new government policies will be announced in due course that are relevant to this factor. We expect that in order to satisfy this factor, the overseas person will need to commit to additional planting above and beyond any replanting upon harvesting.

Other matters

Consequential benefit

Under the directive the OIO is to give low importance to the "consequential benefit" factor to the extent it relates to the likes of sponsorship of community projects, in order to highlight that the government does not seek donations or sponsorship from overseas persons.  

Special land

The Ministers have also reiterated the importance the government places on special land (being the foreshore, seabed, riverbed or lakebed), and that special land should be acquired by the Crown (when offered back to the Crown under any application for consent) if it is in the public interest to do so. Given this, it is possible the OIO may place a higher value on the offering back of special land in assessing applications, and the Crown may be more inclined to exercise the right to acquire the special land than previously.

Intention to reside in New Zealand

Under the OIA, overseas persons intending to reside in New Zealand indefinitely are not required to demonstrate their acquisition of sensitive land will result in benefit to New Zealand. The directive provides some clarity in relation to meeting the "intention to reside in New Zealand" criterion. The directive has also changed the approach currently taken by the OIO in respect of time frames, introducing a requirement that the overseas person move to New Zealand within 12 months of obtaining consent and reducing the time frame by which an overseas person must become permanently resident in New Zealand from five to two years.  

Looking ahead

One other aspect the Ministers highlighted in the directive is that while economic goals are important, so too are environmental, social and cultural goals. The intensification of farming in New Zealand and the impact on the environment has become a more prominent issue in recent years. It is not clear how any negative impact from an overseas investment is to be taken in to account in assessing an application, as the current regime focuses on the benefits resulting from the investment. 

The Associate Finance Minister has indicated that the directive is an interim solution and that over the next year the OIA and the regulations will be changed, which will have the effect of "[narrowing] the gate through which applicants can pass, but … the process will be faster". We expect the proposed changes will largely reflect the thrust of the directive. It is also likely that there will be changes to the investor test (being the essential attributes of the investor). Any change to the investor test will affect both sensitive land and significant business asset applications. The government has also indicated that "Forestry Rights" may also be brought within the OIA.

The directive does not prevent overseas investments that generate high levels of economic benefits to New Zealand. It seeks to clarify the way in which "rural land" and "forest land" applications are to be assessed. Any changes that make the process clearer and faster will be welcomed by overseas investors. 

The focus on changing the regime has come about in part due to the view that the current regime is a "rubber stamping" exercise, given the proportionally low number of applications declined by the OIO. However, this does not reflect the true position, particularly in the context of acquisitions involving large scale sensitive assets. The current process is rigorous and not all overseas investments can obtain consent under the regime. Many overseas investors decide not to proceed with investments on advice that the investment is unlikely to get consent under the OIA. A number of applications get rejected by the OIO at the initial processing stage, and the OIO gives applicants the opportunity to withdraw the application if consent is unlikely to be forthcoming. The statistics recently reported on the number of applications declined do not take into account these factors. 

Residential housing to become sensitive

The government intends to introduce legislation prior to Christmas amending the OIA to make all existing homes "sensitive", effectively requiring anyone who is not a New Zealand citizen or resident to apply for consent under the OIA to acquire existing homes. Australians are expected to be exempt from the requirement. Although not a "ban" on foreign ownership of residential housing, the effect of such an amendment would likely discourage any application on this basis as it would be very difficult for an overseas investor to demonstrate any benefit to New Zealand from their ownership.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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