New powers to be introduced to overseas investment rules
Associate Finance Minister, the Hon. David Parker, has announced further changes to the Overseas Investment Act (the Act).
The changes signalled include:
National interest test
A new national interest test would grant the Minister power to decline an application where the Minister considers the investment not to be in the national interest. The Hon. Minister Parker has indicated that this test would apply to critical infrastructure such as ports, airports, telecommunication and electricity infrastructure.
While the details of this test are yet to be revealed, it is likely to follow a similar model to the test applied in Australia which considers factors such as:
- impact on the economy,
- impact on the community,
- national security,
- taxation, and
- the character of the investor.
(some of which already apply in New Zealand’s overseas investment regime)
‘Call in' powers
A new power will be introduced for Ministers to ‘call in' transactions involving strategically important assets that would not otherwise be subject to the Overseas Investment regime. It is expected that this power would be used in transactions involving military technologies and direct suppliers to New Zealand’s defence and security agencies.
Water bottling test
The changes will include a requirement to consider the impact of a transaction involving sensitive land on water resource and the sustainability of any proposed water bottling enterprise.
The maximum penalties for non-compliance with the Act will increase to $10 million. The current maximum penalty is $300,000 or three times the quantifiable gain made on the sale of a property, whichever is higher. It is not clear from the announcement whether the three times gain methodology will be retained.
Other changes announced by Hon Minister Parker include:
- the introduction of exemptions from the regime for low risk transactions, such as those involving assets that are majority owned and controlled by New Zealanders (hopefully to simplify also the regime applicable to listed companies),
- legislated timeframes for processing applications, and
- incorporating terms of the current Ministerial directive into the Act. That directive requires overseas investors in farmland to demonstrate a substantial benefit to New Zealand.
The practicalities of how these changes will work in practice will be key.
As with all changes like those announced, the devil will be in the detail.
A national interest test should be well defined and clear as to when, and who, it applies to. A test that relies on Ministerial discretion without legislative guidance is likely to create uncertainty among investors.
The introduction of a ‘call-in' power for transactions that would not otherwise be caught by the overseas investment regime is concerning. Again, it would need to be clear as to when, and who, it applies to, ensuring market participants have certainty as to when a transaction might be ‘called in'.
We hope that the other matters being considered in the review, such as rationalising the transactions caught by the legislation will still be progressed as part of the current round of reforms.