1. Type of development able to obtain exemption certificate to sell a portion of their units to overseas persons without the overseas buyer being subject to an on-sell condition The Committee sought additional information on how large apartment complexes would be defined in the Bill if recommendation 31 in the Departmental Report was adopted. It is proposed that developers (irrespective of citizenship or residency-status) would be able to apply to the Minister (or the Overseas Investment Office (OIO) under delegation) for an exemption certificate to sell a proportion of the units in a development to overseas persons without the overseas buyer being required to on-sell the unit, as long as: the development consists of one or more multi-storey buildings; and each multi-storey building has at least 20 dwellings. Further, if the developer is an overseas person and the land they are acquiring for the development is residential land (or is otherwise sensitive land), then they must also obtain consent (along with consent conditions), either separately or at the same time as they apply for the exemption certificate. This proposed definition is broadly consistent with that used in Australia to determine eligibility for a New Dwelling Exemption Certificate. 2. Differences between the proposed New Zealand foreign investment regime and Australia s foreign investment regime as they relate to new apartment developments The Committee sought additional information on how recommendation 31 in the Departmental Report (that is, giving the Minister or the OIO (under delegation) the power to provide an exemption certificate to developers of large apartment complexes to sell a share of units in those developments to overseas persons without those overseas buyers being subject to the on-sell condition) differs to Australia s New Dwelling Exemption Certificate regime, which was part of the background for this recommendation. While the treatment of developers under the two regimes is broadly similar (that is, they can apply for a certificate that will mean that they face less stringent restrictions on the sale of relevant units to overseas persons), there are significant differences between Australia s foreign investment regime and the proposed New Zealand regime as they relate to what is required from the overseas purchasers of new units in large apartment developments (irrespective of whether the development has an exemption certificate). The key differences between the two regimes are that the following additional features would apply under the proposed New Zealand regime. If purchased from a developer with a New Zealand Exemption Certificate (as proposed in recommendation 31): Treasury:3946786v1 IN-CONFIDENCE 1
o the overseas person purchasing the unit would need to obtain consent from the regulator; and o the overseas person (or their associates) could not occupy the unit. If purchased from a developer without a New Zealand Exemption Certificate: o the overseas person purchasing the unit would need to obtain consent from the Minister (or the OIO under delegation); and o the overseas person would need to on-sell the unit within a specified period of construction being completed. The differences between the regimes are explained further below. Purchases of units in developments where an exemption certificate has been granted for a proportion of those units to be sold to overseas-persons without an on-selling condition being imposed In New Zealand it is proposed that developers will be able to apply for an exemption certificate to sell a proportion of new units to overseas persons without the buyer being subject to an on-sell condition where: the development consists of one or more multi-storey; and each multi-storey building has at least 20 dwellings. The proportion is to be set by the Minister in regulations and can range from zero to 100 per cent. It is proposed to initially be set at 60 per cent. Overseas persons will then be able to apply for consent under the Overseas Investment Act 2005 (OIA), to purchase a unit off-the-plans in a new development where the developer has received an Exemption Certificate from the Minister (or the OIO under delegation), without the buyer being required to on-sell the unit once the development is complete. The overseas buyer will, however, be unable to occupy the unit or make it available to their associates. In Australia, developers can apply for a New (or near new 1 ) Dwelling Exemption Certificate if the development consists of one or more multi-storey buildings that will be built under one development approval and consist of at least 50 dwellings, has development approval from the relevant government authority; and if applicable, foreign investment approval was given to purchase the land and that conditions are being met. This certificate allows the developer to sell a proportion of the development s units to foreign persons, with this proportion capped at 50 per cent in legislation for applications received from 9 May 2017. Approval is granted to the developer as long as the purchase is not contrary to the national interest. 2 1 A near-new dwelling means a dwelling that has never been lived in, was sold but failed to settle. 2 The national interest test is not defined in legislation and the Minister (or their delegate) is able to consider any factor deemed relevant to each application. Formal regulatory guidance indicates that factors relevant to obtaining a New Dwelling Exemption Certificate include: the fitness and proprietary of the applicant; the marketing schedule; information on the specific units to be built; and ownership information of the development. Treasury:3946786v1 IN-CONFIDENCE 2
If the certificate is granted, the developer is responsible for paying any relevant fees (though it is possible for the developer to separately agree that the foreign investor pay the fees directly), meeting ongoing reporting requirements, and complying with other minor conditions (for example, marketing all available units for sale in Australia). Once this certificate has been granted, a foreign person can purchase a unit in the relevant development in Australia without applying for individual approval (in most cases). 3 That is, their purchase is not subject to the national interest test or any other kind of screening. There are no constraints on the purchaser s use of the property and no on-sell conditions are imposed. Purchases of units in developments where an exemption certificate has not been granted for a proportion of those units to be sold to overseas persons without an onselling condition being imposed In New Zealand it is proposed that an overseas person will be able to apply for consent under the OIA to purchase a unit in a new development (of any kind) off-the-plans. If the purchase is approved, the overseas person will be required to on-sell the relevant unit once the development is complete. In Australia a foreign person will be able to apply for approval to purchase a unit in a new development (of any kind) as long as the unit has never been occupied. Approval is subject to the purchase not being contrary to the national interest, with formal guidance indicating that foreign persons cannot purchase established dwellings as homes, for use as a holiday home or to rent (that is, the proposed purchase must be of new housing). This does not forgo consideration of other matters, including the fitness and proprietary of the applicant. If the purchase is approved, there are no constraints on the foreign person s use of the property and no on-sell conditions are imposed under the Australian regime. 3 The value of a foreign person s investment in a development with an Exemption Certificate is normally limited to a cumulative total of $3 million. If a purchaser seeks to invest beyond this amount they would individually need to seek foreign investment approval, with this approval subject to the investment not being contrary to the national interest. Further, if more than 50 per cent of the units were to be sold to overseas persons, each sale over and above the 50 per cent threshold would be conditional on the buyer passing the national interest test. Treasury:3946786v1 IN-CONFIDENCE 3
3. The application of the Investor Test to overseas persons acquiring units in large apartment complexes The Departmental Report indicated that overseas persons seeking to acquire a unit in a large apartment development (irrespective of whether the developer held an exemption certificate) 4 under the increased housing pathway (Recommendation 31) would need to satisfy the Investor Test as a condition of receiving consent. In response, the Committee sought additional information on how the Investor Test is currently applied under the OIA. Following additional consultation with, and the receipt of additional information from, the OIO, Ministry of Business, Innovation and Employment (MBIE) and the Government, officials are now of the view that applying the Investor Test to overseas persons seeking consent to acquire a unit in a large apartment development on residential (but not otherwise sensitive land) would be inappropriate. This is because: applying the Investor Test which could take around 21 working days to process and cost around $35,000 5 would reduce the attractiveness of such units to overseas persons, which may limit the extent to which the increased housing pathway proposed for inclusion in the Bill achieves its objectives; and existing mechanisms such as anti-money laundering and other generally applicable rules would be sufficient to mitigate potential concerns addressed by the investor test (such as investor character) given the low-risk nature of the asset. Officials do not recommend that the Investor Test be removed as a condition applied to an application for consent to acquire residential land under any other pathway (beyond the Departmental Report s recommendation in relation to the commitment to reside pathway). The test provides authorities with the ability to verify that overseas persons are of good character. However, officials judge that large apartment developments have particular features that justify different treatment for overseas purchasers. In particular: proportionately, the costs associated with the Investor Test are more material given the, on-average, lower cost of units in large apartment complexes relative to other types of sensitive land, including residential land; there are fewer risks associated with the ownership of a unit in a large apartment development by an overseas person than other types of sensitive New Zealand assets (particularly given that the overseas person (or their associates) will be unable to reside in the unit); large apartment developments can make a significant contribution to the overall growth in New Zealand s housing supply; and 4 If an overseas person seeks to acquire an interest in a unit in a large apartment development and the development is covered by an exemption certificate, that person will not be required to on-sell the unit once construction is complete (subject to the proportion of units in the development available to be sold without an on-sell condition in the Regulations). If the development does not have an exemption certificate, the overseas person will have to sell the unit a specified period after construction being completed. 5 These estimates are based on existing processing times and fees for consent applications processed by the OIO that are most analogous to those proposed under the screening regime, which would include residential land within the sensitive land category. Treasury:3946786v1 IN-CONFIDENCE 4
such developments are more reliant on significant upfront financing than other types of residential housing developments. Recommendation Amend the Bill to allow overseas persons to obtain consent to acquire an interest in a unit in a large apartment development under the increased housing pathway without passing the Investor Test. Additional information: Application of the Investor Test under the OIA Under the OIA, overseas persons seeking to acquire consent to purchase sensitive New Zealand assets must satisfy the Investor Test. This test has four core criteria, with the OIO required to gain positive assurance that the purchaser complies with each of the requirements. Business experience and acumen: Applicants must demonstrate that they/the relevant overseas person have business experience and acumen relevant to the overseas investment being made. o For example, acquisition of an apartment could only require demonstration of prior property ownership and financial capacity in most cases. Demonstrated financial commitment: Applicants must demonstrate that they/the relevant overseas person has taken actions that demonstrate commitment to the investment for example, incurring due diligence costs and engaging professional advisers. Good character: Applicants must demonstrate that they/the relevant overseas person is of good character. This test requires the OIO to consider offences or contraventions of the law (by an individual or by another entity where the individual applicant had a 25 per cent or more ownership or control interest), whether resulting in a conviction or not, but is not limited to just these matters. Other factors, including mitigating factors, deemed relevant by the OIO can be considered in determining whether the applicant is of good character. Ineligible individual(s) under the Immigration Act: Applicants must not be of the kind referred to in section 15 or 16 of the Immigration Act 2009. These sections broadly provide that no visa or entry permission be granted, and no visa waiver may apply, to any person who: o has been sentenced to more than five years imprisonment or more than 12 months imprisonment in the previous 10 years; o has been the subject of a removal order; o has been removed or deported from any country; o is likely to commit an offence that is punishable by imprisonment; o is or is likely to be a threat or risk to security, public order or the public interest; or o is a member of a terrorist entity designated under the Terrorism Suppression Act 2002. Treasury:3946786v1 IN-CONFIDENCE 5
While the criteria are the same for all applications, in assessing applications the OIO has flexibility to ensure that its assessment is commensurate with the risks associated with each individual application. This flexibility is particularly apparent in respect of the business experience and acumen component of the test, where more or less specific expertise may be required depending on the investment s nature. For example, the OIO has advised that in respect of an individual seeking consent to acquire a small lifestyle property it will generally only investigate matters such as previous property ownership and the applicant s financial capacity. In contrast, an investment in a large gold mine, appropriately, needs to meet a much higher standard. The OIO s risk-based and investment specific approach is reflected in the average processing times for different types of applications for consent. Processing residencybased applications 6 (that is, people moving to New Zealand permanently) take 21 working days on average. This compares to 44 working days on average to assess applications for consent for an overseas person to acquire significant business assets. 7 The fee associated with applications for consent under the OIA is currently set on a cost-recovery basis through regulations as $35,500. 8 4. Volume of applications expected to be received under the new investment screening regime The Committee sought updated estimates on the volume of applications for consent expected to be received by the OIO. The OIO currently process around 150 applications each year for consent to acquire sensitive land. Noting that these estimates are subject to a high degree of uncertainty due to the difficulty in predicting any behavioural change among overseas persons in response to the Bill, if the recommendations in the Departmental Report were adopted officials anticipate that this would increase to between approximately 3,200 and 4,000 applications per year, with around 3,500 applications per year possibly a more accurate estimate. 9 6 To receive consent, applicants must pass the Investor Test and satisfy the OIO that they intend to reside in New Zealand indefinitely. 7 Average times to assess applications are counted from the date on which a complete application is received by the OIO. The timeframe only includes the number of working days that that the application is under active consideration by the OIO. It excludes days where: the OIO is waiting for applicants to provide further information; the applicant is consulting with a third party about the application; or the OIO s recommendation is with Ministers for decision. 8 For consent for a transaction involving a land decision only, on the basis of section 16(1)(e)(ii) of the Act (where section 16(1)(e)(iii) is not applicable). 9 This number may be subject to further refinement as decisions are made on the final form of the Bill. Treasury:3946786v1 IN-CONFIDENCE 6
This compares to the 4,700 consent applications per year officials expected under the Bill as initially drafted. 10 The primary drivers of this difference are: the recommended expansion in the definition of those deemed to be ordinarily resident in New Zealand (who do not have to obtain consent) to include both permanent resident visa holders and resident visa holders (halving the expected number of applications under this pathway to around 2,500); and the proposal to enable overseas persons to obtain consent to acquire units in large apartment developments without an on-sell condition being imposed (where the developer has received an exemption certificate) (increasing the number of applications by up to 1,500). The maximum estimated number of applications for consent under the increased housing pathway is based on: that there were around 3,200 building consents for apartments last year; that this number is expected to rise by around 20 per cent by 2020; that around 90 per cent of units in New Zealand are in developments with at least 20 units; 11 and an assumption that up to 50 per cent of these units will be sold to overseas persons (consistent with submissions from developers). Officials judge, however, that the actual number of consent applications received under the increased housing pathway is likely to be closer to 1,000. This is based on: data on the number of residential transfers that did not involve a citizen, permanent resident, or other resident visa holder relative to total Real Estate Institute of New Zealand sales in the fourth quarter of 2017, and applying this ratio across the number of new apartment units estimated to be at the marketing stage across New Zealand; and an assumption that up to 150 developers will apply to the OIO each year for consent to build new housing on residential land. Officials are conscious of the increased resource burden on the OIO resulting from the Bill and are working with Ministers on a funding model that will allow adequate OIO resourcing to process applications, monitor compliance and take enforcement action. This includes the continued application of the existing cost-recovery model by way of an application fee, which will also discourage applications for consent that are unlikely to succeed. This will potentially have the added benefit of decreasing processing times for applicants under the new regime relative to a model that did not include this feature. 10 While we expect that there will be fewer applications overall, this is likely to be offset by the fact that applications for consent under the new builds pathway are likely to be more complex. 11 This is based on RCG data for Auckland, adjusted slightly down to reflect lower density development across the rest of New Zealand. Treasury:3946786v1 IN-CONFIDENCE 7
Ministers have not yet determined what fee will apply to applications from overseas persons to buy units in large apartment developments under this pathway, but fees will be set on a cost recovery basis. 5. Obligations on conveyancing services providers in relation to certifying transactions The Committee sought additional information on how the proposed certification requirements for conveyancing services providers in the Departmental Report compares to conveyancing services providers certification requirements under the Residential Land Withholding Tax (RLWT) regime. The Bill as introduced requires a lawyer or a conveyancing practitioner ( conveyancer ) who is acting in relation to the purchase of residential land that is sensitive land to certify that, to the best of the conveyancer s knowledge, the purchaser will not breach the OIA by giving effect to the transaction. The recommended change to the Bill is to require a conveyancer to obtain a statement from a purchaser about the purchaser s compliance with the OIA, on which the conveyancer could reasonably rely. The purchaser s statement would have to be in an authorised form for the purposes of the OIA. The proposed change is comparable to the certification requirement for conveyancers associated with the RLWT. In particular, both regimes start with a primary obligation on the purchaser and then the conveyancer must check that: the purchaser has fulfilled their obligations (that is, provided the relevant statement); and it is reasonable for the conveyancer to rely upon that statement. Under the RLWT regime, if a person sells residential land within the bright-line period, that seller must complete the required form indicating whether or not the seller is subject to RLWT and provide that form to the conveyancer. 12 The conveyancer checks that the form has been completed and checks whether accompanying documents can be reasonably relied upon; the conveyancer has no requirement to carry out any further investigation. 13 Importantly, despite this change, it will remain an offence for a conveyancer to be involved in a contravention of the OIA, such as by aiding or abetting a contravention. 6. Exemptions for additional classes of utility service providers 12 Tax Administration Act 1994 section 54C - Information in relation to payment of RLWT. 13 Note: Under the RLWT regime, the conveyancer is also the withholding agent ; that is, they are responsible for withholding the RLWT owed to Inland Revenue from the relevant residential land purchase amount. This is similar to employers responsibility to withhold PAYE income tax owed by an employee from their salary. The RLWT requirements and obligations for the conveyancer to be the withholding agent are separate from the conveyancer s requirement to obtain the seller s statement about whether the seller is subject to RLWT Treasury:3946786v1 IN-CONFIDENCE 8
The Committee asked officials to determine whether the proposed exemption for utility service providers in respect of the acquisition of residential land that is sensitive land for core business purposes should be extended to potable, waste, and storm water service providers (broadly water service providers ). Officials judge that an extension of the proposed exemption to water service providers is not, on balance, required. This is broadly because the potential number of cases requiring an exemption are deemed to be low (a judgement corroborated by the absence of industry submissions on this issue), while the legal risks of extending a class exemption are reasonably high. In regards to the use of any such exemption, it should be noted that: local authorities are legally responsible for providing water services and cannot be overseas persons. Local authorities therefore do not require consent to acquire land for water service provision, making an exemption redundant; where an overseas person developer seeks to provide an in-house water utility as part of a wider commercial service offering on residential land for example, to support a campground the overseas person would be required to obtain consent to acquire the land, with the utility service merely being a component of this application; 14 and in the rare and thought to be currently non-existent - scenario where an overseas person needed to acquire or lease residential land to operate a water utility, but not provide any other commercial services, compliance costs would be reduced through the existence of the streamlined approval pathway for the use of residential land for non-residential purposes. While this does mean that in rare cases the Bill may result in increased compliance costs for water service providers, this must be balanced against the fact that: a broader legislative exemption particularly in respect of storm and waste water services would be legislatively complex. This is because there are not clear and narrow definitions of water service providers to draw upon in the Bill (unlike the other categories of utilities proposed to be exempted), which creates the risk of loopholes that facilitate the Bill s circumvention; and the Minister, or OIO under delegation, has an exemption making power that could be used consistent with the Bill s intent to exempt utility providers from the need to obtain consent to acquire residential land for core business purposes in any rare cases identified. Consequently, to ensure that the Bill achieves its objectives, a broader class exemption for water utilities is not supported. 7. Exemption for the Te Arai development 14 In such circumstances the proposed streamlined approval path for the non-residential use of residential land would be available, reducing regulatory and delay costs for applicants. Treasury:3946786v1 IN-CONFIDENCE 9
The Committee sought additional information to justify the proposed 15-year exemption for the Te Arai development from the Bill. The Government is of the view that the special circumstances of the Te Arai development (constituting the 616 hectare Mangawhai North Forest and the adjoining 754 hectare Mangawhai South Forest) and its stage of development justify the proposed narrow legislative exemption. The Government proposes that a targeted (rather than broader) legislative exemption is the most appropriate way to ensure that the project proceeds without creating a new pathway in the Bill for others to use. The Government also notes that once the 15-year exemption period lapses, the development will become subject to the same rules as other residential land that is sensitive land. Treasury:3946786v1 IN-CONFIDENCE 10
8. Exemption for spouses/partners/de-facto partners under the Commitment to reside in New Zealand pathway The Committee sought additional information on the proposed exemption for spouses/partners/de-facto partners under the Commitment to reside in New Zealand pathway. In particular, the Committee sought officials views on whether this exemption could result in increased cases of immigration fraud. The proposed exemption would be limited to where the residential land is relationship property under the Property (Relationships) Act 1976. It would be based on an existing exemption under regulations 33(1)(m) and (n) of the Overseas Investment Regulations 2005, which provides an exemption for the partners of a person who is a New Zealand citizen or ordinarily resident in New Zealand. In the absence of an exemption mechanism, a non-residence class visa holder would be restricted from purchasing a property to live in with a partner on a residence class visa. This could extend to situations where, for example, a permanent resident (who is not ordinarily resident) moves to New Zealand with a non-resident spouse. Addressing these impacts requires either introducing a modified consent pathway or an exemption. To avoid legislative and administrative complexity, officials recommend an exemption. Establishing a modified consent pathway would likely involve the creation of specific conditions applicable to non-resident spouses. In addition, issues with a modified pathway would include; the modified pathway would require both partners to reside in the dwelling as their main home or residence, but also need to provide flexibility to deal with relationship separations without mandating that the non-resident spouse must move out. the Commitment to reside in New Zealand pathway has been designed for residence visa holders, who have the ability to reside in New Zealand indefinitely and are less likely to trigger a requirement that they dispose of their property. However, temporary visa holders are more likely to be required to leave New Zealand and the pathway would need to find a way to assess a commitment to reside in New Zealand in light of these different circumstances. Under an exemption, there would still be a sufficient degree of commitment to reside in New Zealand via the person s partner being required to meet the requirement that the dwelling is their main home or residence and requirement to be present in New Zealand for at least 183 days a year (unless given special permission). In saying this, officials recognise that an exemption for partners does create potential risk for avoidance of the OIA. An overseas person could avoid OIA screening requirements by entering into a marriage, civil union, or de facto relationship and then dividing relationship property. This risk, however, is perceived to be low particularly because temporary visa holders or non-resident spouses who come to New Zealand on a partnership visa have to satisfy a number of immigration tests to prove their relationship. Further, officials from Treasury:3946786v1 IN-CONFIDENCE 11
Treasury, Immigration New Zealand, and MBIE consider this exemption to present a low compliance risk in the context of the regime as a whole given existing incentives to commit fraud related to, for example, access to social security and healthcare benefits. Consequently, officials do not believe that this exemption will have a material impact on the amount of immigration fraud committed in New Zealand. The need to enter into a marriage, civil union or de facto relationship to access the exemption is also likely to deter deliberate avoidance. Legal costs associated with division of property and potential agreements to contract out of the Property (Relationships) Act 1976 also provide a barrier to this type of avoidance. Furthermore, even if an exemption was not provided for partners of a consent holder under the commitment to reside in New Zealand pathway, there would continue to be the potential for avoidance under the existing exemptions for partners of a person who is a New Zealand citizen or ordinarily resident in New Zealand. In light of the legislative complexity associated with creating a modified consent pathway, and our assessment that compliance risks are low, we recommend an exemption. 9. The OIO s information gathering powers The Committee requested that the Treasury consult further with the Office of the Privacy Commissioner (OPC) in respect of the proposed changes to the OIO s information gathering powers (recommendation 63 in the Departmental Report). Treasury contacted the OPC on 11 April 2018 to seek its views on the Government s proposal to clarify the extent of the OIO s information gathering powers, being clear that it is limited to situations necessary to: monitor compliance with the OIA; investigating conduct that constitutes or may constitute a contravention (or involvement in a contravention) of the OIA; and enforcing the OIA and associated regulations. This contrasts to the original Bill where the wording was broader, allowing the OIO to gather information as necessary for administering or enforcing the OIA. While the wording would have been limited by the context of the statutory provision, the proposed new wording assists to provide greater clarity as to what the OIO could require information to be provided for. On 13 April 2018, the OPC stated that while it viewed the recommended approach as an improvement relative to the original Bill, it remains concerned by the proposed expansion of the OIO s information gathering power to the residential property market. The OPC therefore continues to recommend that the OIO s information gathering powers be unchanged from the Act as currently drafted. Treasury:3946786v1 IN-CONFIDENCE 12
In contrast, officials judge that maintaining the status quo would significantly undermine the integrity of the Bill. As currently enacted, the OIO needs to have a reason to suspect an offence has been committed before it can require information. This sets a very high threshold before information can be collected and would not allow the OIO to effectively oversee compliance with the rules. It is important that the OIO have the explicit power to gather information necessary to monitor compliance with the screening regime to ensure that relevant enforcement mechanisms are sufficiently robust to incentivise overseas persons ongoing compliance with the OIA. Treasury:3946786v1 IN-CONFIDENCE 13