New ministerial directives

The Associate Minister of Finance (the Minister) issued a new ministerial directive letter to Land Information New Zealand (LINZ) on 6 June 2024 (the new letter). The new letter replaced the previous government’s directive letter dated 24 November 2021. The new letter changed policy settings associated with the Overseas Investment Act 2005 (the Act).

Ministerial Directive Letter - 6 June 2024

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What is a directive letter and how does it work?

The Act allows the Minister to direct the regulator (LINZ) 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
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 decision makers may exercise their discretion under the Act.[1]

Other directives

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 the Coalition Government’s commitment to:

lifting New Zealand’s productivity and economic growth to increase opportunities and prosperity for New Zealanders
improving the efficiency and effectiveness of the public service, and
implementing an active foreign, defence and trade policy agenda.

The policy statement says that attracting overseas investment is necessary to realising the goal of growing prosperity for all New Zealanders and that overseas investment provides better access to markets, technology and capital, and, as a result, a more productive economy.[2]

Observing that overseas investment is generally beneficial, LINZ is directed to administer the regime in a manner that focusses on realising the benefits of overseas investment to support the Government’s economic objectives.

LINZ is directed to consider every opportunity to:

minimise compliance costs on investors
impose a burden that is no broader than necessary for LINZ to fulfil its regulatory functions, and
prioritise its resources towards higher-risk applications, recognising that the majority of investment poses no-to-low risk.[3]

The policy statement also communicates the Government’s view that:

where risks are managed by another regulatory regime, they should generally be considered sufficiently mitigated unless there is compelling evidence to the contrary
generally, any conditions imposed on a transaction should be no broader than necessary to provide confidence that statutory tests in the Act will be met.[4]

The letter notes that the national interest test is a ‘backstop tool’ that allows the Government to block transactions that are contrary to the national interest.

LINZ is directed to draw a transaction to the attention of the Minister of Finance under section 20B of the Act if there is reasonable cause to believe an investment:

could pose risks to New Zealand’s national security or public order,
could have outcomes that would be significantly inconsistent with or could hinder the delivery of other Government priorities,
could pose a risk to the Crown’s obligations under the Treaty of Waitangi, or
relates to a site of national significance.[5]

When undertaking a detailed assessment of whether a transaction is contrary to the national interest, LINZ must acknowledge the starting assumption of the test is that overseas investment is in the national interest, and be cognisant of Treasury and partner agency guidance.[6]

Directives

The Minister issues a variety of directives in the new letter, including:

A ‘benefit to New Zealand’ directive – directing LINZ to recognise Government policy priorities and giving guidance in situations where strong benefits are identified.[7]
A ‘risk based’ approach directive – noting that effort should be focussed on higher risk transactions.[8]
A time frame expectation – directing LINZ to allocate its resources so that 80 per cent of consent applications are assessed within half the relevant time frame in the Overseas Investment Regulations 2005 (Regulations).[9]
Directives regarding the treatment of applications in the build-to-rent sector, [10] and
Miscellaneous directives that are minor and/or technical in nature.[11]

These directives are general rather than strict in nature and are discussed in more detail below.

Benefit to New Zealand directive

The Benefit to New Zealand directive directs LINZ to recognise, when applying the benefit to New Zealand test:

policy decisions made by Cabinet (amongst other matters),
the objectives set out in the Coalition Agreements that underpin the formation of the Government, and
the Speech from the Throne that sets out the Government’s policy priorities.[12]

Noting the Government policy priorities set out earlier in the letter [13], LINZ is directed that where an investment demonstrates strong benefits under one or two benefit factors, other factors may require less consideration if the threshold for meeting the benefit test is clearly met without reference to them.[14]

Scope of the directive

The directive applies to all applications considered under the benefit to New Zealand test.

Effect of the directive

Section 17(1)(e) of the Overseas Investment Act 2005 (Act) notes that a factor for assessing the benefit of overseas investments in sensitive land includes whether the overseas investment will, or is likely to, give effect to or advance a significant Government policy.

The directive has the effect of clarifying what matters may be considered as a Coalition Government policy.

The directive guides LINZ that it need not focus assessment on minor benefits in situations where there are one or two strong benefit factors. For example, if there is a clear economic benefit likely to be delivered (such as an investment creating hundreds of jobs), there would be less need to assess other claimed benefits e.g. small environmental benefits.

Risk-based approach directive

The risk-based approach directive reflects the Government’s position that overseas investment is generally beneficial and that the majority of overseas investment poses no-to-low risk to New Zealand. [15] This includes streamlined assessment process for most applications (other than those which are higher risk).

For the majority for transactions which have lower risks LINZ is directed to:

carry out less verification of the claims made by investors
consult with other government agencies in limited circumstances
generally impose conditions that are no broader than necessary to provide confidence the statutory tests in the Act will be met.

LINZ is directed to focus its effort on higher risk transactions, which may include:

transactions proposed by first time investors
transactions proposed by those with poor compliance histories
transactions involving high public interest
transactions involving especially sensitive assets, and
transactions where investors are making obviously unrealistic claims.[16]

Scope of the directive

The directive applies to all applications under the Act.

Effect of the directive

The effect of this directive will streamline the assessment process for low risk applications.

Applicants will be asked to provide fewer supporting documents with their applications.
Consultation with other Government agencies is less likely to occur.
Conditions imposed are likely to be more standardised and focus on the key benefits or the requirements of the relevant statutory test.

Timeframe expectation

LINZ is expected to assess 80 per cent of consent applications within half the relevant time frame in the Regulations.[17]

The directives above will likely have the effect of reducing processing time for the majority of applications. The timeframe expectation sets out the estimated effect of the directives on the timeframes for assessing consent applications.

Applicants should note that the risk and complexity profile of any particular application may not be immediately apparent and should therefore not assume that the reduced timeframes will necessarily apply to them.

LINZ is to report annually to Ministers and the public in its annual report on the extent to which this target has been met. Reporting on consents under the ‘one home to live in’ pathway [18] will be done separately from reporting on other consent pathways. [19]

Scope

The directive applies to consent applications only. Variation and exemption applications, applications under the standalone investor test, and notifications under the national security and public order risks management regime, are not consent applications and are not subject to the timeframe expectation [20]. However LINZ will be investigating whether there are options for making some of these decisions more quickly too.

Build to Rent directive

This directive provides interim guidance to encourage investment in the Build to Rent sector. It sets out the Government’s current interpretation and approach to assessments under the benefit to New Zealand and increased housing tests. [21]

The directive explicitly states that overseas investment in Build to Rent, including in existing Build to Rent developments is a clear example of a benefit to New Zealand. It notes that the benefits that flow from addressing the risk of stranded assets and from the continued operation of an existing large-scale housing development may be sufficient to satisfy the Benefit to New Zealand test, even if no other benefits will result from the investment. [22]

Schedule 2 clause 20 of the Act requires that, to obtain an exemption to the on-sale requirement under the increased housing test for large-scale rental arrangements, investors are required to be “in the business of providing new residential dwellings”. In determining whether a person meets these requirements, LINZ is directed to:

consider the nature of any existing business (including related entities)
consider what overt steps have been taken to commence providing residential dwellings by one or more of the required arrangements (and especially overt steps taken to enter the built-to-rent market), and
not require investors to have previously completed or operated a Build to Rent development. [23]

Scope of the directive

The directive applies to investment in the Build to Rent sector.

Effect of the directive

This directive makes it clearer for investors that investments in Build to Rent developments can meet the Benefit to New Zealand test.

This directive also provides an illustration of how the “reduced risk of illiquid assets” can be considered under the benefit to New Zealand test. It also notes an explicit example of where this might apply is where an overseas person is purchasing an existing built-to-rent development, and that purchase would better ensure the asset remains liquid.

Miscellaneous directives

The new letter provides a number of directions on minor or technical matters, including:

How to determine the intention to reside in New Zealand criterion in section 16(1)(c)(i) of the Act. [24]
Timeframes for assessment stages when considering transactions that may invoke the national security and public order call-in power notification. [25]
LINZ’s requirement to notify the owner of its decision on any acquisition of fresh and seawater areas within twelve months of the water areas acquisition notice being registered or provided. [26]
Exemptions in situations where the Act defines ‘overseas person’ in a way that results in some entities and managed investment schemes that are majority owned or funded by New Zealanders and have a strong connection with New Zealand, as being required to obtain consent. Exemptions should generally be granted to such non-listed bodies corporate, managed investment schemes and limited partnerships, where they meet certain criteria unless good reason exists not to. [27]
Examples of circumstances where an applicant may be eligible for an exemption from the farm land advertising requirement, under section 20 of the Act, including: where there is substantial compliance; where the exemption is for future advertising; and where there is only one natural buyer. [28]

What is a directive letter and how does it work?

Government policy statement

Other directives

The new letter

Government policy statement

Directives

Benefit to New Zealand directive

Scope of the directive

Effect of the directive

Risk-based approach directive

Scope of the directive

Effect of the directive

Timeframe expectation

Scope

Build to Rent directive

Scope of the directive

Effect of the directive

Miscellaneous directives

Other resources