Information about the new ministerial directives, including the ‘rural land’ and ‘forest land’ directives, and the effect they have had on the assessment of applications.
The Minister of Finance (the Minister) issued a new Ministerial Directive Letter to the OIO on 28 November 2017 (the New Letter). The New Letter replaced the previous Government’s directive letter dated 8 December 2010 (the Previous Letter). The New Letter significantly changes policy settings associated with the Overseas Investment Act 2005 (Act).
The New Letter has been in force for over 6 months and we now have sufficient experience with the letter to comment on how it has affected our assessment of consent applications. This page is the first in a working series of technical commentary focusing on areas of interest for investors and their advisors.
- All applicants should read the New Letter before applying for consent.
- This commentary has been prepared by the OIO and reflects our experience with the New Letter to date. It is not attributable to Ministers and does not add to or alter the New Letter.
- Our intention is to review this page after we have considered more applications under the New Letter.
- Examples provided on this page are for illustrative purposes only. Each application must be considered on a case-by-case basis and having regard to the particular facts.
- Investors seeking more specific comment about how the directives relate to their proposed investment are encouraged to organise a pre-application meeting with the OIO.
- The next commentary in our series will focus on the proportional nature of the benefit assessment under the Act (i.e. how the nature of the interest and assets being acquired influences the assessment).
What is a directive letter and how does it work?
The Act allows the Minister to direct the regulator (the OIO) on certain matters in the form of a Ministerial Directive Letter. These matters include:
- the Government’s policy approach to overseas investment in sensitive New Zealand assets;
- the relative importance of different benefit factors for particular types of assets; and
- matters relating to the regulator’s functions, powers, or duties.
Government policy statement
Directive letters are a way for the Minister to communicate the Government’s policy towards overseas investment. This can provide important guidance for overseas investors about the Government’s views on overseas investment including the types of investment it welcomes or is concerned about and why. The policy statement can also provide context for directives and insight into how Ministers may exercise their discretion under the Act.
Benefit test directives
Directive letters cannot alter the criteria for consent set out in the Act. However, they can direct the OIO on the ‘relative importance’ of different benefit factors for particular assets, requiring stronger benefits in some areas over others. In this way, the Minister can influence the focus of the benefit assessment, making it more difficult for investments that do not align with the directive and supporting those that do.
Some points about benefit test directives:
- A directive does not prevent the OIO from elevating, or recommending that Ministers elevate, the importance of other factors where appropriate.
- Directives do not alter the proportional nature of the benefit assessment. The assessment is still undertaken having regard to the interest (e.g. freehold vs leasehold, majority v minority) and investment (high country station vs small forestry block) being acquired - the greater the interest / assets being acquired the greater the benefits required.
- There is no requirement that all (or any) factors of high relative importance are met. Deciding whether the benefit test is met involves a collective assessment of all benefits likely to result from the investment. However, it will be more difficult to obtain consent if the investment does not deliver strong benefits under factors of high relative importance.
- Directives can be expressed in general or strict terms. General directives provide some flexibility for the OIO to consider the circumstances of each investment, and policy rationale for the directive, before applying them (noting that clear and persuasive reasons are required before the OIO will, or will recommend, that a directive be dis-applied).
The Minister can issue directives on other matters including how applications should be assessed, the monitoring of conditions, and operational matters more generally.
The New Letter
Government policy statement
The New Letter contains a new policy statement on the merits of overseas investment which acknowledges both the potential benefits and harm which can result.
The policy statement states that the Government welcomes high quality overseas investment, particularly when that investment has certain characteristics. These characteristics are economic, environmental and social in nature and are listed in the statement. However, we note that having one of the listed characteristics does not necessarily make an investment ‘high quality'.
The New Letter states “the overall policy approach is to achieve a balance between the need for highly beneficial overseas investment and the need for New Zealand to maintain ownership and control of sensitive New Zealand assets.”
The policy statement also:
- communicates the Government’s view that farm land (along with strategic infrastructure) is viewed as an important productive asset; and
- reiterates the purpose of the Act, stating that “it is a privilege, not a right, for overseas persons to own or control sensitive New Zealand assets and that privilege must be earned and maintained”.
The Minister issues a variety of directives in the New letter, including:
- A Rural Land directive - replacing the previous ‘large farm’ directive with a broader directive that aligns with the Government’s policy on overseas investment;
- A Forest Land directive - encouraging overseas investment in forestry that increases value added processing of raw products and the advancement of the Government’s forestry-related strategies;
- A Sponsorship and Donations directive - communicating that the Government does not seek financial contributions in support of consent applications; and
- An Intention to Reside directive – focusing this consent pathway on migrants in the process of moving to New Zealand.
These directives are general rather than strict in nature and are discussed in more detail below.
The New Letter also (among other things):
- Emphasises the Government’s desire that the “process of granting or refusing consent be robust and generate high quality outcomes”;
- Supports the OIO’s use of a risk-based and proportionate approach to application assessment, third party consultation, and the verification of application information more generally;
- Revises the position on special land to record that the Government places a high value on special land and will acquire it where it is in the public interest; and
- Directs the OIO to increase the level of information on its website about applications under assessment and decisions made under the Act.
Some of the above supports initiatives already in place as a result of the OIO’s Quality Programme. Other matters, such as increasing the amount of application related information on our website, will be the subject of new initiatives.
Rural land directive
The Rural Land Directive emphasises the privilege associated with the ownership or control of rural land, and the importance of such land to the New Zealand economy.
The directive seeks to ensure that this privilege is earned by requiring stronger benefits under factors that the Government considers best align with its policy on overseas investment. These factors are the:
- ‘jobs’ factor;
- ‘new technology or business skills’ factor;
- ‘increased export receipts’ factor;
- ‘increased processing of primary products’ factor; and
- ‘oversight and participation by New Zealanders’ factor.
The directive specifically references the Government’s view that “overseas investment in the primary sector can be less compelling given that we are already world leaders in this area.” This statement reflects the Government’s view that some types of overseas investment in rural land do not substantially add anything new, or create additional value to our economy.
Scope of the directive
The ‘rural land’ directive is intentionally broad, applying to all non-urban land over 5 hectares (excluding associated land) that is not forest land. This was considered appropriate because it aligned with an existing land sensitivity in the Act, corresponded to a higher benefit threshold (i.e. benefits from overseas investments in non-urban land over 5 hectares must be ‘substantial and identifiable’) and effectively captured all land used for primary production. It also provides certainty to investors as to when it will apply.
The broad nature of the directive addresses, among other things, the Government’s concern that the previous ‘large farm’ directive was too limited, only applying to very large farms (more than 10 times the average farm size).
Effect of the directive
The Rural Land directive has influenced the assessment of affected applications. In applying the directive, we have found that the nature of that influence varies depending on the characteristics of the investment.
Investments with a sufficiently beneficial point of difference that connects with factors of high relative importance are supported by the Rural Land Directive. Examples of investments that in our view may align with the directive include:
- Investments involving a change to a higher and better land use (e.g. pastoral farming to pip fruit);
- Investments which both improve the relevant assets and involve significant New Zealand ownership and control of the investor / investment; and
- Investments which demonstrate a causal connection with highly beneficial development (e.g. the expansion of a facility or development of a new export market).
It is more difficult for investments to gain consent if they do not align with the directive. Examples of investments that in our view may not align with the Rural Land Directive include:
- Investments based on a ‘better farmer’ narrative which propose marginal, or incremental, improvements to the assets;
- Investments where the primary benefit is a change in management system (e.g. moving from a high input to low input farm system);
- Investments where the primary benefit is tenure security for the investor (e.g. seeking ownership of land to secure a supply source that they could continue to access without the investment); and
- Acquisition of lifestyle blocks for non-economic reasons (e.g. use as a personal residence).
It is important to note that the OIO had already, prior to the New Letter, increased the level of scrutiny and verification measures it applies to significant investments through its Quality Programme (including significant investments in rural land). The effect of this is separate to, and should not be attributed to, the Rural Land Directive.
Forest land directive
The Forest Land directive recognises that “overseas investment in the forestry sector, and the associated downstream processing industries, has the potential to add significant value to the overall economy and the environment.”
The directive seeks to encourage “an increase in the value added processing of raw products and the advancement of its forestry-related strategies” by elevating the following factors:
- The 'increased processing of primary products' factor; and
- The 'advance significant Government policy or strategy' factor.
Scope of the directive
The Forest Land directive applies to land that is non-urban and over 5 hectares in size (excluding any associated land), where the existing principal use of the land is forestry. It does not apply to investments where rural land is being converted to forestry (these investments are subject to the Rural Land directive).
Effect of the directive
The Forest Land directive has influenced the assessment of affected applications. In our experience, the directive supports overseas investment in forestry to the extent that it aligns with the directive.
In assessing whether an investment (overall) advances a significant Government policy or strategy such as the Billion Trees Planting Programme, we will weigh up whether it advances or detracts from the objectives of the policy or strategy. Not all overseas investment in forestry will advance the Billion Trees Planting Programme.
When assessing whether or not an investment is likely to result in increased processing of logs, we consider a number of factors including whether the proposed forest management regime is likely to produce logs suitable for domestic processors, whether the investor owns or has existing supply arrangements with processing facilities, and the proximity of local mills and their requirements.
Examples of investments that in our view may be supported by the directive include:
- The acquisition of forest land by investors seeking to satisfy domestic supply agreements or supply their own wood processing facilities in New Zealand; and
- Investments which result in additional planting, species diversification, or generate more logs suitable for domestic processing.
Examples of investments that in our view may not align with the Forest Land directive include:
- Investments involving the accelerated harvest of trees, producing low quality logs for export; and
- Investments by investors seeking log supply for their offshore processing facilities, when those logs would otherwise be used domestically.
Sponsorship and donations directive
The New Letter directs the OIO that the 'consequential benefits' factor, to the extent that it relates to the sponsorship of community projects and donations, is generally of low relative importance. This directive states that “the Government does not seek donations or sponsorship from overseas persons investing in sensitive land.”
Effect of the directive
This directive simply confirms the OIO’s position on sponsorship and donations (refer PeriOIOdical, May 2017). It has therefore had little effect on the assessment of affected applications.
Intention to reside directive
The updated intention to reside directive “supports migrants in the process of moving to New Zealand”, setting the expectation that applicants will:
- Already hold a residence class visa or an entrepreneur work visa (the previous directive indicated that an application for a visa was sufficient);
- Have plans to move to New Zealand within 12 months (the previous directive allowed 5 years); and
- Consent conditions will normally include the requirement the overseas person move to New Zealand within 12 months from the date of consent and become ordinarily resident within 2 years from the date of consent.
We note that the updated intention to reside directive addresses the difficulty in determining whether a visa application will be successful and the likelihood of an overseas person moving to New Zealand.
Effect of the directive
We have found the requirements of the directive to be much clearer, providing greater certainty for applicants and simplifying our assessment process. However, Applicants who do not have immediate plans to move to, and reside indefinitely, in New Zealand are likely to find it difficult to meet the expectations set by the directive.
Read more about the New Letter
- Treasury documents
- Beehive releases (Hon David Parker, Hon Eugenie Sage) (Hon Shane Jones)
- LINZ webpage on delegation and directive letters (includes the New Letter (PDF 467KB))
 The application of the benefit to New Zealand criteria involves the exercise of Ministerial judgement.
 New Letter, paragraph 6.
 New Letter, paragraph 9.
 New Letter, paragraph 8.
 New Letter, paragraph 28.
 New Letter, paragraphs 13 and 14.
 New Letter, paragraph 15.
 The rationale for the design of the Rural Land directive is recorded in Hon David Parker’s (Associate Minister of Finance) paper to the Cabinet Business Committee released by The Treasury here (PDF bytes).
 New Letter, paragraph 18.
 New Letter, paragraph 19.
 New Letter, paragraph 21.
 New Letter, paragraph 22.
 The directive contemplates longer periods for migrants holding an entrepreneur work visa. This addresses the issue that migrants holding an entrepreneur work visa may be living in New Zealand within 2 years, with an intention to do so indefinitely, but may require more time to become ‘ordinarily resident’ (this requires a residence class visa - an entrepreneur work visa provides a pathway to residence but is not a residence class visa).