The NZ Initiative's Khyaati Acharya asks: How much more dismal will private investment be if New Zealand begins to subject its own residents to the onerous requirements of the overseas investment legislation?

The NZ Initiative's Khyaati Acharya asks: How much more dismal will private investment be if New Zealand begins to subject its own residents to the onerous requirements of the overseas investment legislation?

By Khyaati Acharya*

Any discussion around foreign direct investment in New Zealand is guaranteed to provoke hearty debate.

More often than not, public uproar over the issue tends to be spurred on by media reports of an impending sale of New Zealand land to overseas interests. High profile disputes centre on local opposition to the sale of sensitive farmland; think Lochinver Station, the Crafar Farms or the Glenorchy campground.

This time however, the issue has been forced into the limelight following the new definition for what is officially meant by ‘overseas investor’.

Last week, the Overseas Investment Office announced that it would “now view trusts or custodian companies based overseas as an ‘overseas person’ when they are involved in holding shares in a company where more than 25% of the shareholding is owned by overseas entities”.

It is an announcement that has caused quite a commotion, with those on either side of the fence lobbing proverbial rocks at each other. Why? Because it represents a new hurdle for potential Kiwi investors in what is already overly burdensome investment regime for foreign investors. And it is a change that risks complicating commercial life for many Kiwi businesses.

Law firm Russell McVeagh blew the whistle on the announcement, stating the new definition is much wider than it used to be. The new interpretation of “overseas investor” may capture a large number of existing share investors and make it difficult for even Kiwi investors to be granted consent. This could mean that if a New Zealander is looking to buy shares in a New Zealand company that owns sensitive land here and is 25% or more foreign owned, the New Zealander will have to apply for consent under the Overseas Investment Act 2005.

This is a considerable regulatory hurdle for Kiwis who simply have shares held on their behalf by a custodian who happens to be an overseas person.

Russell McVeagh has acknowledged that the OIO has allowed some exemptions, however, these are only provided on a confidential basis. The unintended consequence of not publicly disclosing exemptions, according to the law firm, is that “a New Zealand-listed company, or even an investor in such a company, will not accurately be able to assess whether a transaction will require consent”.

New Zealand is hardly a market leader for foreign investment. Ironically, as a country built upon foreign capital, we are recognised as having one of the most onerous and restrictive investment screening regimes in the developed world. How much more dismal will private investment be if New Zealand begins to subject its own residents to the onerous requirements of the overseas investment legislation?

The New Zealand Initiative has found that New Zealand’s regime ties applicants up in red tape without any apparent change in material outcomes. What then is the point? Few, if any, could regard this as satisfactory. In addition, the stringent requirements of New Zealand’s regime surely have a chilling effect on the number of investor applications, although the extent of this overall is unobservable.

The noose on foreign investors is already too tight. The OIO’s change in definition may now mean many New Zealander investors too, are treated as foreign investors. Which means they will then presumably have to abide by the same requirements, and prove that they are of good character and possess strong business skills relevant to the prospective investment. They will also need to demonstrate that their investment will generate substantial and identifiable benefits (that would not occur otherwise) to New Zealand and New Zealanders. The new interpretation of what precisely is meant by ‘overseas investor’ may now mean Kiwi investors too will be subjected to these overly stringent prerequisites.

The announcement by the Overseas Investment Office is a step backwards. The only acceptable outcome to the announcement, according to Russell McVeagh, is that the OIO revert to the original interpretation when assessing overseas ownership of listed companies.

If New Zealand is to prosper to the best of its abilities, government must be intent on providing an environment that better facilitates private investment, innovation and risk-taking, by both local and foreign investors, not making it more difficult. This means a commitment to principles like neither subsidising nor discriminating against foreign investors compared to local investors, eliminating tedious regulatory hurdles, and protecting the freedom of Kiwis to sell their assets to whomever they wish.

------------------------------------

*Khyaati Acharya is a research assistant at the New Zealand Initiative, which provides a fortnightly column for interest.co.nz.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

28 Comments

You ask what is the point of New Zealand's regime in regards foreign investment. I would ask you, what is the point of foreign investment if it will not "generate substantial and identifiable benefits (that would not occur otherwise) to New Zealand and New Zealanders"?
Take your example of a company where 25% of the shareholding is owned by overseas entities. If this company's investments were NOT providing benefits that wouldn't otherwise be provided, then the change in the definition has worked as intended. The NZ investor that wants to invest in this company should therefore find opportunity to invest into a NZ owned company, hence the point of the rule in the first place.

I think that the only reason you are arguing against this definition change is that you are against ANY restriction on foreigners investing into NZ. Your case that it will adversely affect the poor little NZ investor is pulling an extremely long bow.

Please back up your statement "The noose on foreign investors is already too tight". Surely you are not talking in the context of the Auckland housing market?

It's likely that there are a number of foreign investors that have avoided paying tax on their earnings. If that's the case they owe IRD a lot of money. There does need to be a noose around the neck of those avoiding paying tax in any country.

What if these tax dodgers owe IRD hundreds of millions of unpaid taxes? We should persue that unpaid tax money, and if necessary recover the payments by force.

If the tax dodgers have filed false statements then tax fraud is an issue. Let's put the noose around tax fraud and pull it tight. IRD's penalty rates for unpaid tax is brutal but a good way to send a message to these international criminals.

Just another example of many where ordinary hard working kiwis are denied anything resembling a level playing field in their own country a bloody disgrace yet national go up to 50% in the polls it beggars belief

This is a Dp.

I'm not sure if others felt the same way but the basic jist of the article seems to read 'We're going to blanket tax all Investors foreign/ overseas and Kiwi residents".

Extract from article: New Zealander investors too, are treated as foreign investors. Which means they will then presumably have to abide by the same requirements, and prove that they are of good character and possess strong business skills relevant to the prospective investment. They will also need to demonstrate that their investment will generate substantial and identifiable benefits (that would not occur otherwise) to New Zealand and New Zealanders.

Humm... Also going from that articles extract, it seems that Mom and Pop investors will be forced out along with those who want to keep their property and let it out whilst they move overseas for a while.

As Investors will also need to demonstrate that their investment will generate substantial and identifiable benefits (that would not occur otherwise) to New Zealand and New Zealanders???
Really how???

If that is the scenario for the future I have no problem with it.
Credit becomes a reward for the competent and and recklessness is punished by withdrawal of credit and the right to participate in companies.
That takes us from the current situation when failure of the reckless becomes tax on the cautious, one way or the other.
Try that for size.

Well if you think about it, it's an uneven playing field. Since Overseas investors can get much lower mortgage rates if they want to invest in foreign property like New Zealand. So that's hardly fair on us Kiwis.

if you want to keep playing the current system that is the way.
The financial system is a casino where the chance of gain is loaded against you from the start.

Humm... It's not a case of playing the system it's a case of creating a fair system and one that does not lock out Kiwis form being able to afford a home and or investment for their future.

Just saying that Overseas investors that want to use NZ as a bank account should be taxed more than NZ residents.

Im all in favour of that.
Do you have a new plan that doesn't look like the old plan.
-The Who

Yes it's call Capital Gains Tax at a higher rate for Overseas Investors say 45% (Rather than the current 33%), and not limited to when they purchased or how long they've owned their property investment.

So this higher rate CGT tax is aimed at Overseas Investors who live abroad and not NZ Citizens or Residents who have had to let out their home to work abroad and have then decided to sell (So it's a bit more lenient than the UK CGT system, though that is a much lower rate than here at the moment).

That should hopefully redress the property market balance, otherwise in a few years we are going to be headed for a property crash after our interest rates have hit zero. And FTB's still can't get on to the market due to Overseas investors continuing to hoover up the property market here. The madness has to stop somewhere.

Good post CJ. But I fear its all too late to avoid a pop. http://www.theaustralian.com.au/business/property/why-the-property-bubbl....

Thanks Tui12, And yes you're probably right. Though I can't view your link as I'm not a subscriber to theaustrailian.com any chance you could post copy and past some of the info?

Btw I do think the major reason for the property bubbles in NZ, Oz, Canada and UK are due to Overseas Investors from all over the world (And probably quite a few cases related to money laundering).
As and example; not sure if you saw the BBC article about how the Chinese have been sneaking their cash out of China and investing it in foreign property.

Here's the link: http://www.bbc.com/news/world-asia-china-35957228

And then have a look at the Juwai website: http://iq.juwai.com/en
Take a look at NZ on their map, hopefully that will help to give a bigger picture.

If they've got that much capital to throw around then the an afford to pay more tax!

Ok,
My plan would be to quota immigration and ballot or bid on being in the quota.
And that includes NZ's that think they can work overseas and return when the going gets rough.
Of course, no immigration approval...no right to purchase...

Well curbing immigration to accept quality migrants would be a good plan though I wouldn't be too harsh on Kiwi's who need to work abroad, as that can help to bring new business back to NZ when they want to return home. So we want to attract our Kiwi's home again.

We already have the attraction of a beautiful country and a relaxed society...apart from Jaffas..
We can afford to be demanding about who who we let back into the country.
I've worked with NZ expats in Aus and they prefer Aus but when the work runs out they are our problem...let them eat cake I say.

many of my friends from the UK liked the idea of coming out til they saw the low wages, then laughed and said no way.

Got news for you

30 years ago wages in NZ were quite a lot higher compared to wages in Australia
Not counting mining wages in outback Western Australia - before the mining boom

Since then, NZ has flooded itself with migrants, competing for jobs in the service sector. The export sector has not grown to a commensurate degree, with the result static export revenues are being stetched over more and more people, resulting in lower qualities of life, and all the other benefits that go with it

Australia runs a much tighter immigration program

Got data for you.

New Zealand: 25% foreign born
Australia: 28% foreign born

Sorry to torpedo your flawed narrative.

Since it's been 30 years since the glory days, I think something else is to blame for the low wages, not necessarily the immigrants. The focus on commodity and extractive industries, perhaps?

(Source: Statistics New Zealand & Australian Bureau of Statistics)

The point I'm making is Australia had a 20 year mining boom with phenomenal wages and incomes the benefit of which permeated throughout the country, and, many of the migrants came for and went into the mining sector because of those fantastic wages. Resulting in which the country was able to sustain and support a 28% influx of migrants and refugees

NZ on the other hand has not seen the same boom conditions, resulting in which the pie has not grown anywhere near the same extent, and that pie has to be spread around a lot thinner

A good assumption Iconoclast.
So now our itinerant children return.
In that scenario Auckland will be a mess for a long time unless some control is exerted.

My data point starts 20 years ago. When I came here I took a wage drop but it was fairly cheap to live, so with the lifestyle it balanced OK, not so cheap 20 years later and the consumer choice sucks, let alone the retail prices.

The problem is they dont pay NZD tax. So they can work in say the UK or OZ for 10~40 years, pay no NZ tax, come back and expect full Public services.

If it was me I'd say your working life is 40 years, you spent 32 years aboard so you get 8/40ths of the NZD OAP

Actually, MSD requires all NZ Super appliers to declare what other countries they worked in over their whole working life, and insists they apply for pension benefits from those countries. Any/every cent due goes to them (MSD) in return for the full NZ Super. (I know; it is a painful experience to record accurately a lifetime of periods working offshore because it is a surprise that you needed to keep those records including those tax and payment numbers, in my case some 30+ years ago. The folks at MSD are annoyingly relentless in following this up. It dominates your life until it is resolved.)

Thanks, so I will have to note that down as well. I think a relation's case 23 pence UK gets transferred to them every 3 or 4 months, seems a waste of effort in processing and bank fees.

So a new immigrant and their "piggy-backed "family are way better off?.

In my opinion you are heading in the right direction.
Their amusing comment was if you wanted work then come to Australia, if you didnt want to work, stay in
NZ.