Specifically, the proposed reforms include:
- amending the purpose of the Act to create a more balanced framework that recognises the benefits of overseas investment to New Zealand;
- consolidating the Act’s core tests for certain types of consent applications into one national interest test; and
- adopting a new OIO application assessment process that introduces fast-track consenting with escalation as required.
While generally positive, the amendments do not address several pain points that arise for investors in residential land and farmland, which many had hoped for.
The Act’s purpose
The Government has agreed to amend the Act’s purpose statement, which is currently focused around it being a privilege to own or control sensitive New Zealand assets. The changes provide a more balanced framework, recognising that overseas investment generally provides benefits to New Zealand, while also acknowledging that these investments can sometimes pose risks to New Zealand’s interests which need to be managed under the regime.
Consolidating the Act’s test
The Government proposes to consolidate the regime’s substantive tests by:
- retaining the “Investor Test” and the “Benefits to New Zealand Test” for farmland, fishing quota and residential land applications only; and
- having a modified “National Interest Test” as the primary test for significant business assets and sensitive land (that is not farmland or residential land) applications (Streamlined Applications).
The Cabinet Paper supporting the reforms identified that this consolidation is intended to permit investments to proceed unless a risk is identified, in which case the National Interest Test was the most appropriate test to apply.
The Cabinet Paper also suggests that the current Investor Test might not go far enough as it does not currently screen for investors that may have relationships with foreign governments or individuals that give rise to national security risks. However, the benefit of the current test is that it is a bright-line assessment as to whether the Investor Test criteria is met. Investor characteristics will still be considered as part of the consolidated National Interest Test, so it will be important to ensure that whatever replaces the Investor Test does not increase uncertainty for investors.
The Assessment Process
The Government proposes to introduce a distinct “phase one” and “phase two” approach to the OIO assessment process for Streamlined Applications.
Phase one would entail a rapid triage and risk-assessment process which would allow the OIO to grant consent to low-risk Streamlined Applications within a maximum assessment timeframe of 15 working days. The assessment process would only proceed to phase two if the OIO identifies any national security risks, or the investment falls within a high-risk class of investment. The Cabinet Paper recommends that overseas investment in strategically important businesses and overseas investment where a foreign government (or an associate) acquires more than 25% control or ownership continue to require a national interest assessment, and that a regulation-making power be created that could require additional ‘high-risk’ categories be added and required to undergo mandatory national interest assessment.
Phase two would require additional information and analysis, including an assessment of benefits of the investment to New Zealand, before a consent decision could be made. A phase two decision would need to be made by the Minister, rather than the OIO. Under phase two, the relevant Minister would adopt a balanced approach to assessing whether investments that carry risks but have substantial benefits, are, on balance, in the national interest.
To enable the OIO to undertake this new process, the Government proposes to define the threshold for escalation from phase one to phase two and grant the OIO the power to grant consents and impose automatic conditions without involving the relevant Ministers in phase one.
This is a positive development for Streamlined Applications, particularly significant business assets consent applications which will be assessed within 15 working days. However, the key factor here will be whether this approach results in any changes to the information required from the individuals with control of an overseas investor, which can be a pain point for investors at the moment.
Technical changes to the Act
The Cabinet Paper signals there will be further technical changes to the legislation. For example, the Government proposes to amend the Overseas Investment Regulations 2005 (the Regulations) to include definitions of new types of “strategically important businesses” for the purposes of the national security and public order (NSPO) regime. This would allow the relevant Minister to designate new “strategically important businesses” that do not currently fit within the existing categories, potentially requiring investments in these to be compulsorily notified under the NSPO regime.
What is not addressed in the reforms
The Act and the associated regulations are already complex as the result of numerous amendments since the Act was first enacted in 2005. Almost all the amendments have added or changed requirements rather than seeking to simplify the legislative regime.
While the proposed reforms will streamline some consent pathways and improve the regime for investors, they have the potential to also make the legislation more complex overall, contributing to its reputation as a ‘regulatory maze’.
There are numerous pain points for investors and their advisors that could be addressed during this process, such as the farmland advertising regime, the application of increased thresholds for certain trading partners, the scope of some of the exemptions in the Regulations and the information required from the “individuals with control” of an overseas investor. Given the Government’s aim is to minimise the burden for overseas investors, this is a prime opportunity to address these areas, which have a tangible impact on potential investors in New Zealand. While we support the current efforts to simplify the pathway to consent, we would encourage a close look at some of these other areas as part of this reform package.
Bell Gully will be working with its clients to submit on the draft legislation when it is released. We will release further updates on the legislative reforms as they progress.
If you would like assistance to put together a submission, or would like more information about the proposals, please get in touch with the contacts listed or your usual Bell Gully adviser.