New Supplementary Order Paper amending the Overseas Investment Amendment Bill

10 Apr 18

On 20 March 2018 the Government published a supplementary order paper (SOP) amending the Overseas Investment Amendment Bill (Bill). The Bill will amend the Overseas Investment Act 2005 (Act) and the initial draft of the Bill was focussed primarily on placing new restrictions on the purchase of residential land by overseas persons. Queenstown Partner Robert Huse has previously reported on the Bill and summarised the impact of the changes proposed here.

The key changes to the overseas investment regime contained in the SOP are as follows:

a) Forestry rights (also known as cutting rights) and other profits à prendre are now under the overseas investment regime; and

b) A separate consent pathway for investments in forestry which will likely be less challenging that the current benefit to New Zealand test is created;

c) A new ability for overseas investors to apply for “Forestry Standing Consents” which are intended to function as pre-approvals for forestry investments for applicants meeting the criteria is introduced.

Further details of these changes (and other amendments) are set out below

Definition of “exempted interest” now excludes forestry rights

The Act currently excludes certain interests in land (easements and profits à prendre) from the overseas investment regime. The SOP proposes to change the definition of “exempted interest” in the Act to exclude a “regulated profit à prendre”. A new defined term of “regulated profit à prendre” has been inserted which means either a forestry right or any other profit à prendre where the land subject to the profit à prendre is used exclusively or principally for the purposes of the profit à prendre, but does not include any profit à prendre that consists only of rights to take a mineral, or a profit à prendre that is excluded by the regulations. This means that all profits à prendre, except those relating to minerals or those classes excluded by the regulations (yet to be issued), will be covered by the overseas investment regime.

Note that forestry rights have been defined as being either registered forestry rights or unregistered profits à prendre which relates to trees in a forest. Accordingly, short term harvesting agreements or licences will not be included in the new definition of “regulated profit à prendre” unless they legally constitute a profit à prendre.

Exclusion of small forestry rights and other regulated profits à prendre

The SOP will insert a new Schedule 1A into the Act which provides that:

  • The Act will not apply to forestry rights which have an area of less than 1,000 hectares (including any right to extend such area). However, the SOP also provides that if over 1,000 hectares (in aggregate) of forestry rights are acquired by the person making the investment (or associates of that person) during a calendar year and those forestry rights are for a term of 3 years or more (including renewal rights), then they will not be excluded from the Act. This aggregation approach appears to be targeted at preventing overseas persons from acquiring forestry rights in staggered transactions of less than 1,000 hectares each in order to avoid the Act applying.
  • The Act will not apply to other “regulated profit à prendre” which are not forestry rights and have an area of less than 5 hectares. The same aggregated area test outlined above will also apply to these profits à prendre as for forestry rights of less than 1,000 hectares.

Status quo counterfactual scenario permitted for forestry investments

New provisions are added to section 16 of the Act providing that if the relevant interest in land being acquired is a freehold or leasehold estate which does not include any residential land and will be used exclusively or principally for forestry activities or establishing a crop of trees (other than to replace a previously harvested crop), then the Ministers may assess the benefit to New Zealand for the purposes of sections 16E(1)(a) and (b) of the Bill by comparing the expected result of the investment against what is expected to occur if the investment does not occur and there would be no changes to the ownership or control of the relevant interest in the land. This wording essentially clarifies that the Ministers are permitted to come to the conclusion that the counterfactual scenario may be the status quo, but does not impose this approach as a requirement. While the explanatory note accompanying the SOP states that this provision differs from the current counterfactual test, it is difficult to discern how this will result in a different approach given that the status quo is already a permitted counterfactual scenario under the present rules. The requirement for the Ministers to formulate and consider the counterfactual scenario comes from the case of Tiroa E and Te Hape B Trusts v Chief Executive of Land Information [2012] NZHC 147. This change merely seems to codify in the Act one part of the counterfactual test developed in this case, while not expressly addressing the more problematic area of the counterfactual test, being the requirement for the Ministers to consider what would occur if the relevant interest in land was sold to a hypothetical non-overseas person (i.e. a New Zealander).

In our view, it is likely that the Overseas Investment Office (OIO) will continue to apply the existing counterfactual test notwithstanding this change and that the hypothetical NZ buyer will continue to form part of the counterfactual scenario for forestry transactions, especially where there is evidence that the vendor wishes to sell its interest and NZ buyers have expressed a level of interest in the relevant asset.

Special tests relating to forestry

New provisions are inserted into section 16 of the Act providing that regulations may provide that the benefit to New Zealand test (as set out in section 16E of the Bill) may be satisfied for forestry investments if the requirements set out in any regulations are, or likely to be, met. These regulations have not yet been issued but their likely content is hinted at in the new section 16E(6) which provides that these regulations may be about:

  • activities that must or must not be carried out on the land, including the requirement to establish crops of trees or undertake replanting; and
  • maintenance or protection of things that exist at the time the investment is made, including maintaining existing heritage, biodiversity, environmental or public access commitments or existing log supply commitments.

It should be noted that the Ministers are empowered to decide not to apply or to modify the requirements set out in the regulations if they are satisfied that the relevant overseas person will not have sufficient rights in respect of the land to ensure that the requirements are met. This discretion is very pertinent to forestry right holders, who often only have limited rights to commit to undertaking any activities or actions (outside of usual forestry activities) in respect of the land over which the forestry right has been granted.

The explanatory note accompanying the SOP offers further clarity by noting that the intent is that the approach to forestry rights (and it appears, forestry investment) will be a “very light-handed checklist screening regime”. The changes proposed in the SOP under this section appear to put the framework in place to allow this to occur, however until the accompanying regulations are issued, the position will not be clear.

Forestry standing consents

The SOP also introduces a new concept of a “forestry standing consent” (Consent). A person may apply for a Consent in advance (ie for an unspecified transaction or series of transactions) for forestry investments. Consents can be obtained either for transactions that satisfy the special forestry regulations referred to above or not. Stricter provisions apply for those Consents that do not rely on the special forestry regulations, including more onerous reporting requirements and the possibility of a forced land sale in the event the Ministers subsequently decide that notwithstanding the Consent holder’s view, the benefit to New Zealand test has not been satisfied.

In order for the Ministers to grant a Consent for transactions that will satisfy the special forestry regulations, the Ministers must be satisfied that:

  •  The overseas person will be of good character, demonstrate financial commitment to the investment and have relevant business experience and acumen;
  • The Consent holder will comply with the requirements:
    • not to enter into a transaction in reliance on the Consent unless it has assessed that the benefit to New Zealand test will be met by way of satisfying the requirements of the new special forestry regulations; and
    • to report to the OIO in relation to each transaction entered into in reliance on the Consent
  • The applicant has and will continue to have adequate processes in place for identifying existing things that the special forestry regulations require to be maintained or protected;
  • The applicant has a strong record of identifying and then maintaining or protecting existing things that the special forestry regulations require to be maintained or protected.

The Ministers will be entitled to impose conditions in respect of Consents including (for example) limiting the size, or geographic areas, of the forestry interests which may be acquired under the Consent.

While Consents involve a degree of risk because the Ministers or OIO may subsequently decide that a transaction completed in reliance on a Consent was not satisfactory, it appears that Consents may be of use to both purchasers of forestry investment (eg where an offshore investor intends to acquire a sizeable forestry estate in New Zealand by way of a series of discrete investments) and to vendors (eg to enable a sale to proceed swiftly a vendor may wish to apply for a Consent prior to finding a purchaser).

Overall, the SOP will likely have a marked effect on the way in which overseas investment in forestry is regulated and approached by the OIO and the Ministers. Overseas forestry investors should be mindful of these impending changes and seek further advice if they intend to acquire or sell interests in forestry in New Zealand.

Update on the Bill in relation to residential matters

As a further update to our comments on the Bill and its changes to overseas persons buying residential land, the Select Committee has now been directed to report back on the Bill by 31 May 2018 (the original reporting back date was 20 February 2018).


Want to know more?

A copy of the SOP can be found here. The Treasury has also produced a useful Consent-summary showing how consents for forestry investment can be obtained if the changes set out in the SOP are enacted

If you any queries about the SOP, the Bill or overseas investment in forestry or otherwise, please contact our specialist Overseas Investment team and/or Forestry team.

PDF Version: New Supplementary Order Paper amending the Overseas Investment Amendment Bill