Australian Prime Minister Julia Gillard and John Key have signed a new Investment Protocol under the 1983 Closer Economic Relations (CER) trade agreement, further strengthening the investment relationship between New Zealand and Australia.

The Investment Protocol aligns the CER with contemporary free trade agreements by introducing a number of provisions regulating foreign direct investment between the two countries. In particular, Australian and New Zealand investors will benefit from increases in the screening thresholds above which foreign investments in business assets require regulatory approval.

At present, under New Zealand's Overseas Investment Act 2005 any overseas investor wishing to obtain, directly or indirectly, a 25 percent or more ownership or controlling interest in a 'significant business asset' (such as shares, plant and equipment) worth NZ$100 million or more must obtain approval from the Overseas Investment Office. Once the Investment Protocol takes effect this screening threshold for Australian investors will move to a 25 percent or more ownership stake in business assets worth NZ$477 million or more, which is expected to result in over half of all new Australian investment in New Zealand being exempt from screening. Australian investors, however, will continue to face the same rules as other overseas investors under the Act for investments in sensitive land or fishing quota, and will also be subject to the same rules if the proposed investment in a 'significant business asset' includes sensitive land and/or fishing quota. The Protocol also preserves New Zealand's ability to take measures that could affect investors for a range of purposes, including a specific provision which preserves the right of the New Zealand Government to give preference to New Zealanders with respect to any share sales in State Owned Enterprises.

For New Zealand firms investing in Australian business assets, the new monetary screening threshold before investment approval from Australia's Foreign Investment Review Board is required will increase to A$1.005 billion (up from A$231 million). This provides New Zealand investors with the most liberalised access (along with the US) to the Australian investment market.

The new screening thresholds should reduce compliance costs for investors in both countries through a reduction in application preparation costs and fees. The thresholds will be updated annually based on changes in GDP.

The Protocol is expected to come into force in the second half of 2011, once Australia and New Zealand have amended their legislation and regulations.

Click here for a copy of the Investment Protocol and for further details