Currently, the Overseas Investment Act requires overseas persons to gain consent before they can increase an already consented-to holding. Consent is required regardless of the size of the increase, or whether the increase has any effect over the degree of control that an investor has over the holding. The same rules will apply to the national security and public order call-in power once it commences (discussed in more detail later)–that is, small incremental investments are potentially subject to screening.

There are exemptions to the consent requirement. The exemptions are narrow, but they were expanded following the passage of the Urgent Measures Act. However, despite the expansion of exemption criteria, submitters have told us that the exemptions still do not allow them to do everything they would like to do. The complexity of the exemption regime is also an issue.

We acknowledge that a regime based on individual exemptions does not help reduce the administrative burden on investors. Applying for an exemption has many of the same costs for investors as applying for consent. To address these issues, we believe a new approach is needed.

Therefore, we recommend removing the consent requirement (or in the case of the call-in power, notification requirement) for investors who only make additional, incremental investments that do not result in a material change in ownership or control. A material change would be defined by whether an investment exceeds an ownership or control limit. The ownership or control limits would be more than 25; 50; 75; and 100 percent, and they align with concepts in the Companies Act 1993. The limits reflect the point at which an investor at a general meeting can: block a special resolution, block an ordinary or special resolution, pass an ordinary or special resolution, or obtain total control of the company.

Our amendment would decrease the regulatory burden of the regime, which is consistent with the Government’s overall policy intent of recent changes to the overseas investment regime. By reducing regulatory costs on additional investments, we believe that our amendment would increase New Zealand’s attractiveness for productive investments, and that this would benefit New Zealand’s economy.

Although our amendment would reduce the Government’s ability to screen some small changes in ownership, it would not increase the risks associated with overseas investment. Those risks would remain well managed because:

• investors who make additional investments have already gone through the consenting process, and have been deemed suitable to invest in New Zealand (or made a notification under the call-in power)

• significant changes in ownership would remain subject to review

• investments in strategically important assets would still be subject to review if the investment granted disproportionate access or control (such as a board seat). A review would be required even if a control limit was not breached.

The Urgent Measures Act introduced a national interest test for overseas investment. The policy intention behind the test is that it should be used only where necessary to protect New Zealand’s core national interests.

However, to help provide investors with certainty, the national interest test automatically applies to certain investments that may warrant greater scrutiny.

This includes certain investments made by foreign governments, whether in their own right or through an investment vehicle, such as a trust or a company. Those investments warrant greater scrutiny because they pose a greater level of risk. For example, a foreign government may use investments to gain control over sensitive New Zealand assets in order to further strategic objectives. In an attempt to manage those risks, the test is meant to automatically apply to investments by foreign governments where they are obtaining a degree of control over sensitive New Zealand assets.

However, both submitters and the regulator have told us that the test is routinely capturing investments that do not pose risks to New Zealand’s national security or national interest. For example, if a number of foreign governments seek to invest in the same thing but none have a degree of control in their own right, the test would still automatically apply. This is contrary to Parliament’s intent.

In addition, the Act does not distinguish between active and passive government investors, so the test is applied to both. For example, many pension funds are not controlled, directed, or influenced by a foreign government and therefore will often be passive foreign government investors. Such investments pose no strategic risk.

Applying the national interest test in such cases is imposing disproportionate costs, complexity, and delays on otherwise productive investments. For example, a potential investor would need to pay a $52,000 fee when the test is applied to an investment. This undermines the policy intent of the reforms to the regime, which is to attract low-risk investments from sources of overseas capital.

To address this issue, we recommend inserting clause 10A, section 20A. Our amendments would mean that the national interest test only applied automatically to transactions that genuinely warrant greater scrutiny. For example, it would automatically apply if a single foreign government held more than a 25 percent interest in an investor that was seeking to acquire sensitive land or a sensitive New Zealand asset. Currently, that threshold is 10 percent.

Finally, we recommend empowering the Minister to exempt passive foreign government investors from automatic application of the test (clause 10B new section 20AA). The criteria for such exemptions would be set by regulations.

We believe that, even with these changes, the regime would still be effective at managing risks through the national interest test. The Minister would still have discretion to apply the test when relevant risks are identified. In addition, the test will continue to automatically apply to investments by foreign governments in strategically important businesses (SIBs).

The Minister making a national interest assessment has no explicit ability to impose conditions on the subsequent transaction.

The bill would enable the Minister to decline to give consent for transactions that are not in the national interest (clause 10C, section 20C). We believe that it is important to enable Ministers who are making a national interest assessment to take a graduated approach to managing risk when approving such transactions.

We recommend amending the bill to enable the Minister who is making a national interest assessment to impose conditions on a transaction (clause 10C, section 20C(3)).

The Urgent Measures Act added a national security and public order call-in power to the overseas investment regime. The call-in power enables the Government to screen overseas investments in SIBs, and to target investments that would not otherwise be screened. The Government could then impose conditions on, or in extreme cases block, investments that pose a significant national security or public order risk.

The call-in power is due to come into effect once the temporary emergency notification regime (ENR), a key provision of the Urgent Measures Act, is repealed. The Urgent Measures Act stipulates that the ENR must be repealed when the effects of the COVID-19 pandemic no longer justify it.

Some submitters are concerned that the scope of the call-in power is too broad. They have told us that the call-in power will inadvertently capture transactions which were never intended to be covered by the provision. We heard from submitters that this will include, for example, routine purchases that are retail in nature.

We recommend amending the bill to limit the scope of the call-in power. By limiting its scope, we believe that the power would only apply to transactions that actually pose a risk to New Zealand’s national security.

The ENR in force currently requires overseas investors to notify the Government of their intention to make controlling investments in businesses or assets. As previously stated, the current ENR must be repealed once the effects of the COVID-19 pandemic no longer justify it.

However, the bill would empower the Minister to reinstate an ENR through regulations (clause 18, new section 60A).

Some submitters believed that an ENR should be reinstated only by an Act of Parliament. They did not think that it would be appropriate for an ENR to be reinstated by the use of regulations. Rather, they maintained that reinstating an ENR by primary legislation would attach a greater level of scrutiny to the reinstatement. Those submitters believed that an ENR warrants more scrutiny because it would be a substantive policy change.

We believe that a future emergency could mean that the Minister needed to quickly reinstate an ENR. Relying on the parliamentary process would risk undue delays that could hamper the effectiveness of a timely ENR reinstatement.

However, given the significant implications of reinstating an ENR, we recognise the importance of providing a high degree of certainty and transparency regarding any future use of this mechanism.

We therefore recommend amending the bill to include additional safeguards and constraints on ENRs. Our recommended amendments would stipulate that:

• before reinstating an ENR, the Minister must consult the Minister of Foreign Affairs

• the Minister must be satisfied that the regulations used are no wider than is necessary to manage the risks to New Zealand’s national interest

• any regulations that reinstate an ENR must be accompanied by a statement setting out the specific reasons for the reinstatement

• any regulations made under the empowering provision are reviewed every 90 working days.

We also recommend an amendment to make it clear that an ENR may only be used for the specific purpose intended in the Urgent Measures Act. That is, an ENR’s only purpose is to require an overseas investor to notify the Government of any investments which would otherwise not require consent.

In addition, the bill would clarify that, after an ENR has been reinstated, a Minister’s power in respect of an ENR would be limited to transactions that are contrary to New Zealand’s national interest.

The bill stipulates that an overseas investment in farm land would be subject to a more stringent set of requirements than would otherwise be applied. A Ministerial directive letter already sets out more stringent requirements for overseas investments in farm land. The bill would embed those requirements in legislation.

The bill would require the Minister, when considering a potential investment in farm land, to give high regard to the potential economic benefits of the investment. As a part of this consideration, the Minister must have regard to whether the investment involves the participation of New Zealanders or the creation or retention of jobs, introduction of technology or business skills, increased exports, or increased processing of primary products (clause 8, new section 16A(1C)).

The bill’s more stringent requirements for investments in farm land are in recognition of the high value, both economic and cultural, that New Zealanders place on farm land.

Some submitters, however, expressed concern that the Overseas Investment Act’s definition of farm land includes land that is not productive for farming. We believe that embedding the more stringent requirements that would be applied to farm land under the bill would not be necessary where the land in question is not productive for farming. Restricting investments in unproductive farm land would not to serve the policy intention of the bill. In order to be subject to the more stringent requirements, the land must be used principally for agricultural, horticultural, or pastoral purposes, or for the keeping of bees, poultry, or livestock. For example, the bill may restrict investments in land that has been used for temporary grazing, and is not otherwise suitable, or used, for agricultural purposes.

We recommend amending the bill so that the Minister need not always apply the more stringent benefit test of clause 8, new section 16(1C). The Minister would not be required to apply this test if the land in question is not productive for farming, and the land is likely to be promptly used for commercial, industrial, or large residential developments (20 or more new dwellings) (clause 8, section 16A(1D)(c)).

We encourage the Minister, when assessing whether an investment qualifies under clause 8, section 16A(1D)(c), to ensure that the provision does not apply in a way that creates a perverse incentive. We do not believe it would be appropriate to incentivise vendors to diminish the productive capability of farm land in order for the land to fulfil the criteria of this provision.

The regulator, through the imposition of conditions on the acquisition of farm land by overseas persons, and the Resource Management Act 1991, both provide other mechanisms to protect against land being eroded in this way and should continue to be used.

The bill stipulates that farm land must be advertised in New Zealand before an agreement to sell the land to an overseas person is entered into (clause 7, section 16(1)(f)). This would slow down transactions and impose advertising costs on vendors.

We believe that in some circumstances this provision would be unnecessary. For example, if the land is defined as farm land for technical rather than substantive reasons and is not productive as farm land, we believe that there may be good reasons for that land not to be advertised. Therefore, we recommend amending the bill by allowing the Minister to take into account the nature of the land when considering an exemption from the farm land advertising requirements.

The bill as introduced would empower the Minister to consider the nature of an investment and the investor when granting an exemption from the advertising requirements, but not the nature of the land itself. Therefore, to prevent unnecessary costs on relevant transactions, we recommend that the Minister also be able to take the nature of the land into account when determining whether an exemption from the farm land advertising requirements is warranted (clause 10, section 20(1)(a)).

The benefit to New Zealand test is designed to ensure that investments in sensitive land and fishing quota will benefit New Zealand. It does so by focussing on the benefits of a transaction, rather than requiring a holistic cost–benefit assessment.

During the time this bill has been before Parliament, the issue of whether the benefits test allowed a holistic cost–benefit assessment was the subject of judicial review proceedings (Coromandel Watchdog of Hauraki v Minister of Finance & Others [2020] NZHC 2345). The judgment confirmed that under the Act’s current drafting, a holistic cost-benefit assessment is not possible. The bill is designed to reach the same position as this judgment, with the exception of the new factor that relates to investments in water bottling.

To ensure that the position reached in this case is maintained, we recommend that the benefit to New Zealand test include examples of the types of matters that can be assessed and how that assessment will occur. These amendments will provide greater certainty for investors and the regulator on the Act’s operation.

The operational funding of the Overseas Investment Office (OIO) is intended to be recovered from applicants through fees. However, that has not been the case and the OIO has accumulated a significant deficit in recent years. The accumulated deficit is at least partly attributed to the Act’s current fee provisions.

We recommend amending the bill to better ensure that fee payers bear the true cost of the work involved in assessing applications. To do this, we recommend two amendments to the bill. The first amendment would require the Minister to conduct regular fee reviews (clause 19, section 61(4)). The second amendment would expressly provide that fees and charges can be set to meet any under-recovery, or to allow for any over-recovery, in the preceding 4 financial years (clause 19, section 61(1)(e)). This is known as a surplus and deficit recovery fee model.

The changes we recommend also confirm that the existing deficit can be recouped through fees that are set after commencement, to the extent that the deficit arose in the preceding 4 financial years (Schedule 1, clause 40A). This would provide an option for some of the current deficit to be paid for by future fee-payers, rather than taxpayers.

This provision is intended to enable the regulator to spread the costs of infrastructure expenditure (for example, new systems to operationalise this bill) to future fee payers who will benefit from that expenditure and smooth fees over the four year cycle. The provision is not intended to enable the OIO to make up for losses on expenditure that they have not appropriately charged previous fee-payers for. While the provision is intended to allow some smoothing of fees over the cycle, it would be inappropriate if it was used by the regulator to regularly over-charge future fee payers for their services because it has not previously set fees at a sufficient level.

The Urgent Measures Act established a regime for agencies to exchange information on transactions that could give rise to national security or public order risks.

However, the regime could unintentionally restrict other lawful means to exchange this information, such as through the Privacy Act 2020. The regime is also restrictive in the sense that it prevents agencies from accessing or using this information to undertake activities related to managing those risks.

In addition, the intelligence community has submitted that restrictions in the Act on information sharing have the potential to place New Zealanders at risk. The information sharing regime prevents the New Zealand intelligence community from using information to support their other mandated functions. Those functions include protecting New Zealand’s national security and international relations.

We recommend amending the bill to address these issues. Our amendments aim to ensure that the regime does not impose any restrictions on agencies’ use of lawful means for sharing personal and non-personal information.

We recommend making it clear that agencies that receive information can use it for purposes in connection with national security and public order (clause 20C, section 126(3)(a)).

Finally, we recommend making it clear that agencies within the New Zealand intelligence community may use relevant information in performing their other statutory functions (clause 20C, section 126(3)(a)).

The Overseas Investment Act allows for investors to obtain “standing consent” to acquire multiple pieces of sensitive land for residential or forestry activities (section 20A). The intention behind this provision is to not hinder additional investments by investors who have already received consent.

We are concerned that the standing consents could be used to acquire land used in carrying on a SIB without scrutiny, in a manner that could undermine New Zealand’s national interest.

We recommend amending the bill to limit the scope of standing consents to acquire land for forestry or residential purposes. Our amendment would stipulate that standing consents could not be used to acquire land or assets used in carrying on strategically important business (clause 10E, section 23A(3)).

We recommend amending the bill to make it clear that the rules of the existing overseas investment regime would apply to all applications received by the regulator before the commencement of this bill. The bill would apply to all other transactions, including transactions entered into but not yet given effect (clause 36(2)(b) and (c), new Part 5, Schedule 1AA).

We also recommend adding a provision which stipulates that only interests in land obtained after the bill takes effect should be counted when determining the total term of interest in land (clause 37A, new Schedule 1AA). This would ensure that the provisions for calculating the total terms of interest in land do not have retrospective effect.

The Overseas Investment Act applies to all interests in land that are not specifically exempted. There are, however, some interests in land that are low risk and should not be subject to screening under the Act. For example, covenants are currently subject to the Act, despite them posing little risk. On the other hand, we recognise that covenants can theoretically be used to obtain an interest in land similar to that which would require consent.

To manage these risks, we recommend amending the bill to empower the Minister to recommend regulations that would exempt estates or interests in land on either an individual or class basis from the need to obtain consent (clause 19A, section 61B(c)(ix)).

Section 61B(c)(viii) of the Act allows the Minister to exempt from the requirement for consent entities that are fundamentally New Zealand owned or controlled, or have a strong connection to New Zealand.

On reflection, we consider that the third limb of this provision is redundant and should be removed. To do this, we recommend inserting clause 19A, section 61B(c)(viii) into the bill.

Without change to the empowering provision, exemptions could be granted that were inconsistent with the Act’s purpose. This is because the Act is clear that the degree of New Zealand ownership and control is what determines whether an entity is an overseas person and should be subject to consent requirements, not other matters such as New Zealand employees or having headquarters in New Zealand.