New rules will combat companies used to skirt foreign house buyers ban, Minister says

Sunday, 27 March 2022

Family law professor Mark Henaghan believes many properties are put into trusts by landowners to avoid their tax burden.

New rules that will increase the transparency of companies and reveal their beneficial owners will help identify overseas buyers using companies to skirt the foreign home buyers ban, Minister of Commerce David Clark says.

A university law expert however warns trusts remain a blind spot for regulators, and says the Government should also work to make them more transparent to stop rule-breakers shifting strategy.

The ban on foreign home buyers was imposed by the Labour Government in 2018, but due to the continued opaqueness of trusts and companies, the Overseas Investment Office (OIO) relies on the honesty of lawyers setting up such entities and those facilitating transactions to detect rule breakers.

Land Information New Zealand (LINZ) head of regulatory practice Rebecca McAtamney said the OIO was aware some overseas investors tried to use trusts and companies to conceal their property ownership.

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Clark said he had been advised the OIO welcomed the increased transparency new measures would bring, which should help deter those seeking to disguise beneficial ownership.

“They also note that the changes have the potential to lead to more prosecutions, as it will make it easier to detect foreign ownership,” he said.

The focus of the new rules was to protect New Zealanders from money laundering, tax evasion and the financing of terrorism.

Auckland University law professor Mark Henaghan said it was strange the Government was not addressing the opaqueness of both companies and trusts in new legislation, which would stop rule breakers switching strategy.

“If there are legal devices to be used to get around those [bans], and we are going to cut off one – which is the use of a company – but we are not going to cut off another, which may be the use of a trust, that's a gap in the law. That’s how I see it,' Henaghan said.

Trusts are increasingly used to hold property in New Zealand, with property data firm Valocity reporting a 48 per cent increase in the use of trusts to own homes since 2015.

Henaghan said foreign buyers may also send money to relatives in New Zealand to set up a trust, which would made it harder to identify a foreign buyer.

Toitū Te Whenua Land Information New Zealand (LINZ) head of regulatory practice Rebecca McAtamney says the Overseas Investment Office is aware of foreign buyers trying to use trusts to dodge regulations.

“The other way it can be done is people can actually send money over here to set up a trust, now how are you going to trace that?” he said.

“Particularly in Chinese culture people loan money all the time to do things for them – it’s pretty common.”

Clark said while trusts were not strictly captured under the new rules, if a company had a trust in its beneficial ownership structure, the register would likely pick up information about the trust also.

He said the overseas investment regime depended on the professionalism of a chain of participants, from real estate agents to conveyancers and solicitors.

“In addition, the Overseas Investment Office carries out spot checks and monitoring activity, and uses and shares intelligence to oversee the requirements of the Act,” Clark said.

Auckland University law professor Mark Henaghan says if a market is going to be regulated, legal devices that allow people to dodge regulators should be dealt with.

Recent example of company used to skirt rules

A recent prosecution taken against a Korean man who illegally bought a $3 million property in Helensville, 40 kilometres west of Auckland, reveals how companies could be used to dodge the foreign home buyer ban.

In this case Won Joo Hur, a Korean citizen, bought the property without the required consent from the Overseas Investment Office using a company owned by his lawyer's wife.

He was fined $100,000, while his lawyer, Jaeho Choi, was ordered to pay $30,000 by the High Court in Auckland, and was suspended from practicing for five and a half months.

In this case McAtamney said the matter came to the attention of regulators in September 2016 when it received an email from Choi asking about Hur’s options.

When asked whether the OIO would have recognised the breach without the lawyer coming forward, McAtamney said: “We cannot say with certainty, therefore it would be inappropriate to speculate.”

There was no court-ordered disposal of the property, because Hur's wife had become ordinarily resident in New Zealand since the property was purchased and was therefore entitled to make the purchase. She bought the property in her name following a public auction.

Overseas Investment Act focused on beneficial owners

McAtamney said

the Overseas Investment Act focused on who the beneficial owner of a property was, not who was recorded as the owner, and using trusts and appointing New Zealanders as trustees to avoid the need for consent was illegal.

She said it was difficult to know when an overseas investor had established a trust to acquire property, as trusts were not registered, and property records did not list beneficial owners on the title.

“However, the OIO has broad information gathering powers, and we will use them if we suspect a breach of the Act has occurred,” she said.

In January last year reforms to the Trusts Act created new reporting obligations on trustees and more stringent rules about how trusts should be set up.

A Government spokeswoman said the Law Commission considered creating a register of trusts in its Review of the Law of Trusts but did not recommend one because the vast number of trusts meant the work to create it would be substantial.