The recent debate over foreign ownership is being influenced by misunderstandings. In particular, there is confusion about the differences between investing in land and investing in other assets.
There is no doubt that New Zealand agribusiness needs foreign investors in processing and marketing. It would be great if it were not necessary, but it is. Unfortunately, Kiwis do not have the money to make these investments themselves. We have seen this in the dairy industry with NZ Dairies at Waimate, and with Synlait in Mid Canterbuy We have seen it in the agribusiness servicing sector with PGG Wrightson. We have also seen it in the meat industry, with Silver Fern Farms struggling to find the capital they need, and in all likelihood they too will have to go overseas for equity capital. In general, this foreign capital allows investment in new technology and also in market development that would not otherwise occur. Of course not all of these investments are successful, but that is the nature of business.
In contrast, foreign investment in land does not typically lead to new things being done. Overseas investors of farm land will typically do the same as the Kiwis, although managed from afar. A risk with this type of investment is that it pushes up land prices and crowds out Kiwi farmers.
Land is special and ownership entails special responsibilities of care and nurture. People sometimes raise an eyebrow in surprise when I say that land can never be owned in the way that other assets are owned. But when I point out that a person is free to do whatever they like with an asset such as a car or computer, including destroying that asset if they wish, then the realisation dawns. Most people do intuitively understand that, in contrast, if you damage land you will end up in the courts. What this means is that so called ‘ownership’ of land gives ‘use rights’, but also lots of responsibilities. At least some of us think those responsibilities are a lot easier to enforce if the owners actually live here in New Zealand.
In recent days I have heard senior politicians musing about whether the current interest in our land by foreigners is a short term thing of passing, or is it long term. I can assure them that the interest by foreigners in buying our land can only increase if it is legal for them to do so. Therefore, clarity over the legal situation is important. It would be much better if the rules were clear cut, rather than leaving it to the case by case judgement of a Foreign Investment Board.
The reason foreigners want to buy our land relates to the profits they can make. In particular, it is easy for a foreign owned firm to structure itself so it pays either zero or minimal income tax on New Zealand farming operations. The way it does this is to load up the New Zealand subsidiary with debt from another company that is also linked to the parent. Existing rules allow interest on debt up to 75% of total NZ assets to be tax deductable under what is known as ‘thin capitalisation’ rules. Next year the allowable limit drops to 60%. Even at 60%, it is possible to soak up all of the profit from either a dairy or sheep farm and pay no tax. The interest is then remitted to an offshore country, and in all likelihood that will be to a ‘tax haven’ country.
In addition, New Zealand effectively has no capital gains tax, unlike other countries such as the USA and Australia. This can be another big attraction for foreign investors in our land. Whether or not we should have a capital gains tax is another matter which I will not enter into here. There are pluses and minuses to that one. But I do make the point that it is the absence of a capital gains tax that is helping to make our land so attractive to foreigners.
I have previously written that most of our forest lands are already owned by foreigners, and that much of our vineyards are also foreign owned. In the past, dairy farms were not particularly attractive, because ‘hands-on’ management was important. But that is all changing, and already it is possible to sit in a far off land and monitor milk production on a daily basis. It is also becoming increasingly easy to monitor pastures from afar.
So what I say as clearly as possible is that we need to sort out our policies around land ownership right now. In the process of doing so, we also have to make sure that we don’t cut off the foreign investment that we need in processing and marketing.