As discussed in our Overseas Investment update earlier this month (available here), the Government has announced significant reform of the Overseas Investment Act 2005.
Associate Minister of Finance, David Seymour, has described the reforms as a package that "will speed up decisions and provide more confidence to investors, while protecting our national interests."
Existing Forestry
As a result of the upcoming changes, investment in existing forestry (i.e. the acquisition of forestry rights and land used, exclusively, or nearly exclusively, for forestry activities), which currently falls under the industry specific "Special test relating to forestry activities" (Special Forestry Test), will instead be subject to a streamlined "National interest test" (National Interest Test), alongside other asset classes.
"Phase one" of the new National Interest Test will entail a rapid triage and risk-assessment process which will allow the OIO to grant consent to low-risk applications within 15 working days. This is a significant reduction from the current assessment timeframe of 55 working days for a Special Forestry Test application.
Only those applications that the OIO identifies as having national security risks, or which fall within a high-risk class of investment (such as investments in "strategically important businesses" and investments by foreign governments (or their associates)), will proceed to "phase two".
The Government intends to empower the regulator to impose conditions on consent granted under "phase one" of National Interest Test to realise the benefits of the investment, and, where appropriate, minimize risk. The OIO has indicated, in a forestry context, these conditions could be the same as the standard conditions currently imposed under the Special Forestry Test, namely:
- an obligation to continue to use land exclusively, or nearly exclusively, for forestry activities;
- an obligation to harvest and to replace each harvested crop of trees with a new crop of trees;
- an obligation not to register the crop of trees as “permanent forestry” (or any category similar to permanent forestry) in the Emissions Trading Scheme established under the Climate Change Response Act 2002; and
- an obligation to maintain existing arrangements.
We consider the continuation of the standard conditions imposed under the Special Forest Test, designed to keep land in rotation forestry, would represent a missed opportunity by the Government.
It is worth noting that the Special Forestry Test was originally introduced as an alternative to the Benefit Test to facilitate the acquisition of existing forestry land by overseas investors who historically struggled to demonstrate the required point of difference from a hypothetical New Zealand investor under the counterfactual test. With a clear shift in focus away from a benefits analysis, it is not immediately apparent to us what basis exists for the standard conditions to be imposed.
A requirement that existing forestry land must remain a single asset class, does not take into account the significant challenges in land use since the Special Forestry Test was enacted in 2018. We would like to see Government recognition that there will be circumstances when it will be necessary, and the best use of land, for existing plantation forestry to transition into permanent forest or other coexisting uses, such as for windfarm generation or other infrastructure, but which is clearly not farmland or residential land.
Farm-to-Forest Conversions
Reflective of the special status of farmland, the Government's reforms will not modify the current consent requirements for investment in farmland, which require that overseas investors meet both the 'Investor Test' and the 'Benefit to New Zealand Test' (Benefit Test).
Accordingly, applications for farm-to-forestry conversions will continue to be made under the Benefit Test. As noted in our publication back in April 2024 (available here), these applications have historically taken longer, cost more, and given rise to greater transactional uncertainty than applications made under the Special Forestry Test. The difference between the consent pathways available for existing forestry and conversion forestry, particularly in terms of time and cost, is set to become more pronounced once existing forestry applications are being determined under the streamlined National Interest Test.
At this point, it is unclear whether the benefits that forestry conversion applicants will need to demonstrate to satisfy the Benefit Test will remain the same under the new OIO regime, but our expectation is that the evaluation of afforestation opportunities in New Zealand will continue to require careful consideration of the land use capability (LUC) class of the land, which categories rural land based on its suitability for different productive uses. The OIO's current approach to the assessment of benefits in farm-to-forest conversions, favouring LUC class 5 and above land, is already aligned with the ETS policy changes announced by the Government in December 2024, which include:
- A moratorium on registering exotic species of forest land in the ETS if planted on LUC class 1 to 5 farmland (being land most suitable for arable and pastoral use); and
- A national annual hectare limit of 15,000 hectares of exotic forest land registered in the ETS if planted on LUC class 6 farmland (under a "first-in, first served" allocation system).
Ministerial Directive Letter
An updated Ministerial Directive Letter will be issued before the new legislation is enacted to help guide the OIO's decision-making when assessing applications under the new National Interest Test. The Ministerial Directive Letter will also direct the regulator to "appropriately consider historic land use to manage cases where vendors convert farmland for another use not captured under the farmland definition prior to selling, to avoid the consent process". The OIO has confirmed it will continue to look closely at the acquisition of forestry land that was recently used as farmland, such as newly planted first rotation forests, in particular testing to see whether there is any relationship between the vendor and investor, but considers that the new Ministerial Directive Letter will endorse the OIO's current approach rather than requiring any change in focus.
Legislation is expected to be enacted before the end of 2025. We will provide an update once the draft legislation is released. In the meantime, please reach out to one of our experts if you would like to discuss the above.