Overseas Investment Act – removal of the forestry rights exemption and streamlining forestry applications

Friday, March 23, 2018

On 20 March 2018, a Supplementary Order Paper and associated draft Regulations (SOP) were introduced containing further amendments to the Overseas Investment Act 2005. The amendments set out in the SOP will be considered alongside those already contained in the Overseas Investment Amendment Bill that was introduced in December 2017.

The changes in the SOP are primarily focussed on the acquisition by overseas persons of interests in forestry land, or land to be used for forestry purposes. The changes reflect earlier media statements made by Hon David Parker about the Government’s intentions to bring forestry rights under the Overseas Investment Office (OIO) regime.

The changes “at a glance”

In summary, the key changes being introduced by the SOP are:

1. Forestry rights - Forestry rights (and some other rights to take resources) will now be subject to the Overseas Investment Act regime.

2. Streamlined approval paths - The SOP looks to deliver on Government announcements to provide streamlined approval paths for forestry investments, in recognition of the importance to New Zealand of quality overseas investment in forestry:

2.1 Investments in new forest – Overseas persons wishing to lease or purchase land for the purpose of establishing new forest must satisfy the existing “benefit to New Zealand” test, but benefit from a counterfactual test that does  not require consideration of the actions of an actual or hypothetical third party purchaser.

2.2 Investments in existing forests – Overseas persons wishing to acquire any interest in land already used for forestry purposes will benefit from a new “benefit to New Zealand test”. The new test essentially means that the overseas person is not required to show any “added benefit” resulting directly from their investment. Provided existing supply arrangements are continued, any existing environmental protections are maintained, and there is a commitment to replanting, the fact that the land will continue to be used for forestry purposes is sufficient.

3. Standing Consents - Overseas investors that expect to make forestry investments in reliance on the new tests can apply for “standing consents” in respect of future transactions. Land interests can then be acquired in reliance on the standing consent.

Further detail on the changes contained in the SOP is set out below.

Forestry rights and other profits à prendre

Currently, forestry rights are excluded from the application of the Overseas Investment Act, due to their recognised status under the Forestry Rights Registration Act 1983 as a “profit à prendre”. A profit à prendre is a right to enter onto another person’s land and to take some natural resource, such a mineral deposits, timber, crops or pasture, and they are currently exempted interests under the Overseas Investment Act.

This exclusion for forestry rights has been recognised by many as an anomaly in legislation that otherwise requires consent for an overseas person to acquire a leasehold interest in forestry land exceeding 3 years. However, in a changing OIO regime, and in particular following the introduction of the OIO’s “counterfactual” test, the exclusion has been relied on as a commercially recognised method of obtaining long term forestry rights over land without the added delays, costs and uncertainty associated with an OIO consent application.

The SOP removes this exclusion and brings forestry rights within the OIO consent regime. It also brings within the OIO consent regime other “profits à prendre” (other than rights to take minerals) where the land covered by the profit à prendre is exclusively or principally used for the purposes of that profit à prendre. Classes of profit à prendre can be excluded from the regime by Regulation.

The SOP introduces special rules about when consent is required in relation to overseas investments involving regulated profits à prendre:

  • The acquisition of forestry rights will not require consent if the area of the relevant forestry right, together with the area of any other forestry rights acquired by the overseas person (or any associate) in the same calendar year, is less than 1,000 hectares.​

    This includes the area of any forestry rights acquired directly, and any forestry rights held by an entity in which the relevant overseas person has a 25% or more ownership or control interest.
     
  • For other regulated profits à prendre, the relevant area threshold is 5 hectares, assessed cumulatively across adjoining land parcels.

The usual “associate” provisions in the Overseas Investment Act apply to capture investments made by associated persons.

Streamlined approvals and standing consent regime for forestry investments

The SOP looks to deliver on Government announcements to provide streamlined approval paths for forestry investments, in recognition of the importance to New Zealand of quality overseas investment in forestry.

These are implemented by the introduction of new “benefit to New Zealand” tests and the ability to apply for standing consents. The relevant test for any forestry investment will depend on (i) the nature of the investment (e.g. freehold, leasehold, forestry right, or investment in a forestry company), and (ii) whether the investment is in existing forestry assets or is for the purpose of establishing new forest.

Essentially, the intention behind the current draft appears to be that:

  • Where an overseas person acquires an interest in land for the purpose of establishing a new forest, they must still satisfy the current “benefit to New Zealand” test under the Overseas Investment Act (assessed against a number of economic and non-economic factors). However, they will benefit from a different counterfactual test. This process does not apply where the interest is acquired by way of forestry right – all forestry right acquisitions, whether for new or existing forest, can rely on a new “benefit to New Zealand” test that is specific for forest investments.
  • Where an overseas person acquires any interest in land currently used for forestry purposes (including through investing in a forest owning company), they benefit from a new “benefit to New Zealand” test that is specific for forest investments. Essentially the new test provides that there is adequate “benefit to New Zealand” if land is already used for forestry will continue to be used for forestry. No element of “added benefit” is required. 

Freehold or leasehold interests for new forests

Where an overseas person wishes to acquire an interest in land for the purpose of establishing new forest, and that interest is either a freehold or a leasehold interest:

  • The overseas investor must satisfy the “benefit to New Zealand” test with reference to the factors currently contained in the Overseas Investment Act and Overseas Investment Regulations (and the new Ministerial Directive Letter which places an emphasis on local supply arrangements).
  • In satisfying the “benefit to New Zealand” test, the usual counterfactual test does not apply. The usual counterfactual test looks at what is likely to occur on the land if the overseas person does not acquire the interest – anything that would happen regardless of the overseas investment cannot be relied on to establish “benefit to New Zealand.” This can make the test difficult to satisfy, particularly if a New Zealand purchaser might also establish a forest on the land, and there may be little in terms of a “point of difference” between one forestry investor and the next. The SOP provides that the counterfactual for new forestry investments is essentially the status-quo ownership i.e. what will the current owner do with the land assuming no sale to any third party. This means the overseas person only needs to establish that changing the use of the land from its current use to forestry will bring benefits to New Zealand. 

    What the SOP does not address is the place of forestry rights in the counterfactual assessment. While the owner of the land may not change, the owner could grant another person a long term forestry right that enables them to establish new forest on the land, bringing many of the same benefits that the overseas investor would. On the current draft wording, the possibility of a forestry right would need to be addressed by the overseas investor in its assessment of the likely counterfactual.
     
  • Overseas investors that expect to make investments in reliance on the above tests can apply for “standing consents” in respect of future transactions. The standing consent will essentially give the overseas investor the responsibility of satisfying itself that the benefit to New Zealand test is met for each interest acquired under the standing consent, and they will have to report to the OIO in respect of each acquisition.

    The OIO may impose a condition whereby no forestry activities can be carried out unless and until the relevant Ministers have notified the overseas person that they are satisfied with the overseas person’s assessment of the benefit. Where such a condition is imposed, it may greatly reduce the effectiveness of the standing consent regime, particularly if the timeframes for obtaining the Ministerial notifications are similar to those for obtaining OIO consents. Overseas investors could be left holding land assets that they are unable to develop pending the Ministerial notification.

The above processes do not apply where an overseas investor acquires a forestry right for the purpose of establishing a new forest. In those circumstances, the overseas investor can benefit from the new “benefit to New Zealand” test below.

It is unclear why a distinction has been made between investments by way of leasehold interest (anything exceeding three years) and investments by way of forestry right (which will often be for much longer than a three year period), particularly in light of the Government’s comments that “forestry rights can grant a high degree of control over large parcels of land for multiple rotations over long period of time, so it is important that they are included in the regime.”

Interests in existing forests

Where an overseas person wishes to acquire any interest in land already used for forestry purposes (including the acquisition of interests in an entity that owns or controls such land), or a forestry right for the purpose of establishing new forest:

  • The overseas person can benefit from a new “benefit to New Zealand” test contained in the SOP and proposed new Regulations that effectively require that during the investment:
  • The land is used exclusively or principally for forestry activities;
  • Any existing arrangements in place on the relevant land for protecting areas of significant indigenous vegetation or habitats, protecting historic places, or providing public walking access must be maintained;
  • Any existing contractual obligations to supply logs for processing in New Zealand must be complied with; and
  • New trees must be planted to replace any felled trees.

    This means that the overseas person is not required to show any “added benefit” resulting directly from their investment – subject to the above conditions, the fact that the land will be used (or continue to be used) for forestry purposes is sufficient.

    It is interesting that no emphasis has been placed on increasing supply arrangements with New Zealand processors, given the importance placed on this factor in relation to forestry investments in the Government’s recent Ministerial Directive letter to the OIO.
  • Overseas investors that expect to make investments in reliance on the above test can apply for “standing consents” in respect of future transactions. Because the “benefit to New Zealand” test in this situation is more clear-cut, investments made on the basis of these standing consents are less subject to further OIO scrutiny at the time of investment. The overseas person is still required to notify the OIO of any investments made in reliance on the standing consent.

    One of the requirements to be satisfied before a standing consent can be granted is that the applicant must have a “strong record” of identifying existing matters than require maintenance or protection. It is not clear how a new forestry investor wanting to rely on the standing consent process, or an investor who has not previously acquired land with any features requiring protection, could establish the required “strong record.”

OIO process and timing

Consents under the new counterfactual and “benefit to New Zealand” tests, and standing consents will still require initial consideration by the OIO. The OIO is already under pressure due to an apparent lack of resourcing. The associated timing issues for consent applications will only be intensified by the proposed changes in the residential land space under the Overseas Investment Amendment Bill, and the resulting applications, unless significant additional resources are made available to the OIO. There is no indication that forestry applications assessed under the new regime will be given any greater priority than other applications (including those for residential land).  While the new tests should reduce uncertainty, overseas investors may still face long delays in working through the OIO approval process.

Public submissions

The provisions of the SOP will be considered by the Finance and Expenditure Select Committee alongside the other provisions of the Overseas Investment Amendment Bill. The Select Committee’s report is currently due on 31 May 2018.

Although submissions on the original Amendment Bill are now closed, the Select Committee has now called for public submissions on the SOP. Submissions are due by 10 April 2018 (or 3 April 2018 if the submitter also wishes to appear before the Select Committee in person).

Duncan Cotterill intends to make submissions on the SOP and would like to hear from any clients who might be affected by the proposed changes.

For further information please contact Christina Lefever, Oliver Roberts or Scott Whitaker.

 

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

 

Area of expertise