Explanatory note
Introduction
This Supplementary Order Paper (the SOP) proposes amendments to the Overseas Investment Amendment Bill (the Bill) that was introduced into Parliament on 14 December 2017. The Bill contains amendments to the Overseas Investment Act 2005 (the OIA).
The OIA requires consent to be obtained for overseas investments in sensitive New Zealand assets. In particular, the OIA requires consent to be obtained for overseas investments in sensitive land (see Schedule 1 of the OIA) and sets out criteria that must be met for consent to be given.
Purpose of SOP
The purpose of the SOP is, first, to bring overseas investments in sensitive land that involve forestry rights or certain other profits à prendre within the scope of the OIA and, secondly, to set out new tests for consent where an overseas investment in sensitive land relates to forestry.
A profit à prendre is a type of interest in land that gives the holder of the interest the right to take part of the land, for example, to cut and remove timber from the land or to remove parts of the soil such as coal, gravel, or stone.
General policy statement
Forestry is a sector of strategic importance to New Zealand. Forestry accounts for around 3 percent of New Zealand’s GDP and is New Zealand’s third-largest export product earner behind dairy and meat. Forestry is a long term investment. Security of tenure and the ability to realise investment are both crucial to investment. The three main types of ownership are freehold, leasehold, and forestry rights.
A proprietor of land may create a forestry right under the Forestry Rights Registration Act 1983 (the 1983 Act) that permits the holder of the right to carry out forestry activities on the land, for example, the right to establish, maintain, and harvest a crop of trees on the land. The 1983 Act deems a forestry right created under it to be a profit à prendre. Rights related to trees in forests may also be created as profits à prendre on a non-statutory basis.
Just about any forest that can be sold as a freehold or leasehold in the land can alternatively be sold as a forestry right. Forestry rights can be for longer than one rotation of trees. While freehold and leasehold purchases of forests are screened under the OIA, purchases of forestry rights are not.
The forestry sector is reliant on direct overseas investment in a way that neither other rural land nor residential land are. Although current information on overseas investment in forestry is not definitive, research suggests that up to 70 percent of the plantation forest trees (including long term control of, but not always freehold ownership, of the underlying land) are in overseas ownership. Further detail on plantation forests in New Zealand is available at—
The proposed approach includes forestry rights under the OIA, but then imposes a very light-handed checklist screening regime, which will enable overseas purchases if the test is met. There is no evidence that this will have a substantial effect on commercial values. Overseas investors in forestry via freehold ownership, leasehold arrangements and forestry rights have welcomed the announcement, which suggests we will be stimulating rather than inhibiting forestry investment overall.
The one billion trees programme is an important component of this Government’s strategy for driving regional economic growth. Encouraging high quality overseas investment is crucial to achieving the one billion trees programme.
Stakeholders have provided feedback that the existing screening regime for overseas investment in freehold and leasehold land involves lengthy delays and expense; investors complained of processes taking many months, with application fees of up to $49,000 per transaction or up to $54,000 where significant business assets are also included. They will also incur substantial legal costs in preparing their applications. The changes proposed in the SOP are designed to streamline and speed up processing of applications regarding forestry compared to using the current tests.
The SOP also removes a gap in the current screening regime where some interests in land, specifically easements and profits à prendre, are currently exempted from the OIA screening regime as an interest in land. Forestry rights (included those created under the 1983 Act) are a type of profit à prendre and are currently not screened. This is despite the fact that forestry rights can grant a high degree of control over large parcels of New Zealand land for large periods of time.
It is important that forestry rights are included within the screening regime prior to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) entering into force. It will be possible to tighten or further loosen the criteria applied to forestry investment in the future if required.
Forestry rights brought within scope of OIA
Overseas investments in sensitive land that involve forestry rights, whether created under the 1983 Act or as profits à prendre on a non-statutory basis, are currently exempted from the scope of the OIA. This is because forestry rights fall within the definition of exempted interest in section 6(1) of the OIA. The SOP proposes replacing the definition of exempted interest with a new definition of that term (see new clause 5A(1)). Excluded from the new definition of exempted interest are regulated profits à prendre, which are defined to include forestry rights (see the new definitions of forestry right and regulated profit à prendre inserted by new clause 5A(2)).
The SOP proposes inserting new Schedule 1A into the OIA (see new clauses 5B and 5C). Part 1 of new Schedule 1A provides that consent for an overseas investment in sensitive land that involves a forestry right is not required if the area of land covered by the forestry right is less than 1 000 hectares (see clause 2(1) of new Schedule 1A). However, this threshold rule may be disapplied in a calendar year if, during the calendar year, the overseas investor (and any associated investors) invest (directly or indirectly) in forestry rights covering a combined area of 1 000 hectares or more (see clause 3 of new Schedule 1A).
Other profits à prendre brought within scope of OIA
Overseas investments in sensitive land that involve profits à prendre that are not forestry rights are also currently exempted from the scope of the OIA because they fall within the definition of exempted interest in section 6(1) of the OIA. As mentioned above, the SOP proposes replacing the definition of exempted interest with a new definition of that term (see new clause 5A(1)). Excluded from the new definition of exempted interest are regulated profits à prendre (see the new definition of that term inserted by new clause 5A(2)). A profit à prendre (that is not a forestry right) is a regulated profit à prendre if the area of land covered by the profit à prendre is (or will be) used exclusively or principally for the purposes of the profit à prendre. But a profit à prendre is not a regulated profit à prendre if it consists only of rights to take minerals.
The new definition of regulated profit à prendre also includes a power to provide, by regulations, that classes of profits à prendre (other than forestry rights) are not to be treated as regulated profits à prendre.
Part 2 of new Schedule 1A (see new clauses 5B and 5C) provides that consent for an overseas investment in sensitive land involving a regulated profit à prendre (that is not a forestry right) is not required if the area of land covered by the profit à prendre is less than 5 hectares (see clause 5(1) of new Schedule 1A). However, this threshold rule may be disapplied if the overseas investor (and any associated investors) hold (directly or indirectly) regulated profits à prendre in respect of the land in question, or any associated land, covering a combined area of 5 hectares or more (see clause 6 of new Schedule 1A).
Criteria for consent where overseas investment in sensitive land relates to forestry
The SOP proposes amending new section 16E, as inserted by clause 11 of the Bill as introduced into Parliament. New section 16E sets out the benefit to New Zealand test that must potentially be met in order for consent to be given for an overseas investment in sensitive land. The SOP’s proposed amendment does 2 things.
First, the amendment allows a modified benefit test to be applied in certain circumstances where the overseas investment in sensitive land relates to land that will be used for forestry (see new section 16E(2) and (3) and (9) and (10)). The modified benefit test provides for a comparison of the expected result of the overseas investment in sensitive land against what is expected to occur if the investment is not made and there are no future changes to the ownership or control of interests in the land. This is different to the counter-factual analysis that is currently applied for the purposes of the benefit test, which requires a comparison of the expected result of the overseas investment in sensitive land against what is expected to occur if the investment is not made. In some cases, this can involve a comparison against an alternative New Zealand investor, rather than assuming no future changes to the ownership or control of interests in the land.
Secondly, the amendment allows a special benefit test to be applied in certain circumstances where the overseas investment in sensitive land relates to forestry (see new section 16E(4) to (10)). Some of the requirements of the special benefit test will be set out in regulations. The requirements set out in regulations may include requirements that must be met after the overseas investment in sensitive land is made, including requirements about the following:
activities that must, or must not, be carried out on the land that is the subject of the overseas investment in sensitive land:
the maintenance or protection of things that exist when the overseas investment in sensitive land is made:
outcomes that must result from the overseas investment in sensitive land.
There is also a power to modify these requirements if the overseas investor will not have sufficient rights over the land in question to ensure that the requirements are met.
The SOP proposes amending new section 16F, as inserted by clause 11 of the Bill as introduced into Parliament. The amendment will require any consent granted under the special benefit test to be granted subject to conditions that attach to the requirements that must be met after the investment in sensitive land is made.
The SOP proposes amending clause 14 of the Bill as introduced into Parliament to insert new sections 23B and 23C into the OIA. New sections 23B and 23C will enable standing consents to be granted in advance to overseas investors under the modified benefit test or the special benefit test, subject to certain conditions.
Consequential amendments
The other amendments proposed by the SOP are consequential on the amendments described above.
Departmental disclosure statement
The Treasury is required to prepare a disclosure statement to assist with the scrutiny of this Supplementary Order Paper. The disclosure statement provides access to information about any material policy changes to the Bill and identifies any new significant or unusual legislative features of the Bill as amended.
Regulatory impact assessment
The Treasury produced a regulatory impact assessment on 27 February 2018 to help inform the new policy decisions taken by the Government relating to the contents of this SOP.
A copy of this regulatory impact assessment can be found at—