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A select committee report on changes to overseas investment rules has proposed relaxing some of the planned restrictions on foreign buyers which could have hindered development, but the amendments raise a number of new issues that require close examination.
Overall, the report by the Finance and Expenditure Committee (FEC) on the Overseas Investment Amendment Bill (the Bill) demonstrates greater leniency toward foreign buyers to ensure that the Bill does not inhibit residential development or development by businesses. The FEC has clearly put a lot of thought into its report and has sought to address many of the "unintended consequences" raised by submitters.
However, amid significant re-drafting of the Bill, we can see a number of complexities that will need careful consideration if the Bill is passed in its current form.
New exemptions, new requirements
The Bill introduces a number of new "exemptions" and provides greater power to the OIO to grant specific "case by case" exemptions. This is a welcome change.
- The Bill seeks to encourage large developments of new dwellings. Developers will be able to seek an exemption to avoid their overseas buyers being forced to sell the unit once construction has been completed (provided that the unit is held as a rental property or a shared equity development or sold under a "rent-to-buy" model). For large multi storey apartment developments there will be a limit on the number of dwellings owned by foreign buyers. It is intended that initially the limit will be set at 60%.
- Overseas investors will be permitted to purchase hotel units in hotel accommodation if they lease the hotel unit back to a manager or operator.
- Network utility operators will be exempt from buying residential land for providing their essential services.
- One development, the Te Arai development near Mangawhai, has been given a specific exemption for 15 years from the date that the Bill comes into force. We expect this will set some precedent for other similar developments wanting to seek their own specific consent using the OIO's expanded exemption powers.
The Bill also amends the immigration law residence requirement and introduces a new tax related requirement for overseas buyers wanting to buy residential land.
Residence class visa requirement
It had earlier been proposed buyers would need to hold a permanent resident visa – technically only issued some years after taking up a residence visa (after migrants have met the requirements of section 49 of the Immigration Act).
Modified tax resident requirement
Buyers will now need to also be "tax resident" in New Zealand. However, this tax resident test is not the same as the income tax test. Buyers will only satisfy the rules when:
- They have been residing in New Zealand for 12 months (already in the earlier draft).
- They have during that 12 month period been personally present in New Zealand for at least 183 days (this does not need to be an uninterrupted period).
Unlike the income tax test, the OIO's tax resident test:
- Is only met at the end of the 183 day period.
- Cannot be satisfied by having a permanent place of abode in New Zealand.
This will mean that:
- Buyers will also become tax resident in New Zealand under the Income Tax test.
- Income tax residence will 'relate back' to the first of the 183 days during which they are present in New Zealand.
Qualifying overseas buyers will still have the benefit of the transitional resident provisions (which afford significant protection from New Zealand tax on overseas income for four years). The effect of the new OIO requirement may necessitate buyers seeking the protection of that four-year exemption period sooner than they may have preferred. They may then "run out" of transitional resident protection more quickly than before.
It will be obvious that great care will be needed to coordinate the OIO, immigration and tax rules.
Streamlining approvals
The FEC has gone some way to try to appease the many submissions by foreign-owned "New Zealand" businesses by providing a streamlined approval path if they wish to buy residential land for non-residential purposes, or for residential purposes to support a business. We expect a number of submitters will be disappointed that they still need to obtain OIO consent. However, those application will not be subject to the "counterfactual analysis". Such consents will be subject to conditions imposed by the Minister to ensure that the land is only used for the purposes for which it was purchased.
The committee has also developed in greater detail the "standing consent" concept, which will apply to purchasers of residential land and forestry activities.
Forestry
The FEC has retained the inclusion of "forestry rights" and "profits a prendre" (which enable a person to take something such as minerals or crops from land owned by another) as "sensitive land". The changes to the forestry provisions appear to be relatively modest compared to the changes to the residential land aspects of the Bill.
New certificate requirement for all residential land acquisitions
Finally, the FEC has introduced a new requirement for any person (including New Zealand citizens) to provide a statement, made to the best of their knowledge and belief, whether a purchase of residential property requires consent under the Bill. This will mean that all purchasers (foreign buyers or New Zealand citizens) will need to obtain advice from their lawyers about the meaning of the certificate, which will no doubt increase conveyancing costs for all. A purchaser's lawyer will not be permitted to transfer a property without the necessary statement or if the lawyer has reasonable grounds for believing the statement is not correct in a material particular.
Next steps
We look forward to the second reading of the Bill in Parliament as we expect there is still some way to go before we have a final position on the outcome of the Bill.
If you have any questions on the proposed changes or would like to discuss how the changes may affect your current or proposed transactions, please contact us.