‘Unintended consequences and complexity’
A tweaked foreign buyers' ban passed into law this week, creating a fresh set of complexities. Bell Gully's Andrew Petersen and Glenn Shewan look at how it may affect commercial deals.
The Overseas Investment Amendment Bill drew widespread concern from business as it sped from its introduction on December 14 to pass in Parliament this week. Businesses fear they will be affected by the bill – not because they are the intended target of the so-called ‘foreign buyers ban’ on residential housing – but because some see the potential for unintended consequences that will affect their transactions.
Since the initial draft some of those concerns have been addressed. But the manner in which they were addressed – including the introduction of numerous exemptions – has resulted in a far more complex piece of legislation than the existing set of rules.
What will change?
The amendments designate residential land, certain forestry rights and “profits-a-prendre” (the rights to take something like crops from land owned by someone else) as ‘sensitive land’. That means potential overseas buyers of these types of assets will now need to gain Overseas Investment Office consent before any purchase can go ahead.
Many established companies operating in New Zealand will be categorised as overseas buyers, including locally-listed companies where more than 25 per cent of investors are from overseas. They face a new layer of regulation when it comes to transactions involving these types of assets.
In practice, the amendments will capture a broader range of transactions than the existing rules do, including those where the newly-defined ‘sensitive land’ may not be a fundamental part of the intended acquisition. A manager’s house attached to a factory may impose a need for OIO consent on a transaction that may not previously have attracted that condition, for example.
A key difference to the existing regime is that there will be five available pathways for an overseas buyer of residential land. A buyer of residential land could satisfy: the original ‘benefit to New Zealand’ test; the ‘commitment to reside in New Zealand’ test; the “increased housing” test; the “non-residential use” test; or the “incidental residential use” test.
Purchasers of forestry interests (either freehold interests or forestry rights covering an area of 1,000 hectares a year) will be able to meet either a “modified” benefits test or a “special” benefits test. The modified benefits test is similar to the current test but measure the benefits from the transaction against the status quo instead of using an unpopular “counterfactual” test. The counterfactual test, which still applies to other sensitive land applications, can require a foreign buyer to prove that benefits exceed those expected if the assets were sold to an alternative well-funded New Zealand purchaser – often one that doesn’t really exist. The exact details of the “special” benefits test for forestry acquisitions will be set out in future regulations.
Further complexity has been added by the late inclusion of significant detail around the exemptions that can be granted from consent requirements, and when the OIO may use those powers. The exemption regime covers both one-off exemptions and exemptions for classes of assets. A newly-added exemption purpose statement makes it clear exemptions are intended to provide flexibility where compliance with the Act is “impractical, inefficient or unduly burdensome”. We watch with interest whether the OIO will actually utilise this purported greater exemption power.
Is it workable?
The changes to be introduced will vastly increase the level of complexity of New Zealand’s overseas investment regime. However, provided the appropriate resources are put into the overseas investment analysis up front, we believe it should have limited implications for commercial investors doing deals in New Zealand over what they already face under the current legislation. Under the existing rules, the requirement for consent can be triggered in many situations where obtaining consent could be “impractical, inefficient, or unduly burdensome”. A greater range of exemptions, and scope for their broader application, could trigger a substantial increase in exemption applications in the commercial arena.
Some discussion has focused on the potential for these changes to discourage foreign investment in New Zealand. It is worth putting the changes in a global context. While New Zealand’s overseas investment regime is still relatively broad compared to some, and has just been made broader, the change is not necessarily out of step with global sentiment. There are increasing efforts to add teeth to foreign direct investment regimes in a range of jurisdictions. Indeed all of the “G7” countries are underway with rule changes that increase scrutiny on foreign investment.
Those considering transactions will need to pay close attention to analysis of their position under the new rules. But overseas investors should not fear the changes if they are properly advised, and are involved in transactions offering real benefits to New Zealand.
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