As part of the changes, legal high manufacturers would face $180,000 application fees and up to $2 million in testing costs for each product, Associate Health Minister Peter Dunne announced yesterday.
A minimum purchase age of 18 will be introduced, and dairies barred from selling the products.
Mr Dunne said the unregulated legal high industry was worth "tens of millions of dollars", and the changes would put the onus of proof on manufacturers rather than the taxpayer.
The Government was not legalising drugs or creating a black market, he said.
"However, our position will still be that not using these products is the safest option."
The Ministry of Health would regulate the new testing regime.
Regulators would look at toxicity, adverse effects and mental health effects.
"We are putting in place some pretty strict standards and restrictions to make sure that only the safest come through the net," Mr Dunne said.
Manufacturers did not respond to questions posed by the Otago Daily Times yesterday.
Drug Foundation New Zealand chief executive Ross Bell said, while the costs of the new regime appeared prohibitive, "I think there will be enough money to be made for people to have a crack.
"This is an industry when BZP was on the market, that was estimated at $25 million."
BZP was banned in 2008.
The established manufacturers employed the services of top lawyers and chemists, and "they will certainly go for it".
Possible new products could mimic "chill-out pills and speedier drugs such as ecstasy", synthetic cannabis also being a possibility.
Mr Bell hoped any legal product would be sold in a plain pack containing health warnings, and attract excise funding for prevention and education programmes.
The legislation was a world first, and was a "much better system than leaving it for the criminal black market".
Dunedin toxicologist Dr Leo Schep, of the National Poisons Centre, said some products could "tick all the boxes".
However, pharmaceutical company Pfizer had invested millions of dollars and years trying to develop a synthetic cannabinoid product, but the "psychoactive effects were too great".
Sergeant Chris McLellan welcomed the announcement, and said Dunedin police would continue to monitor the sale of existing products, such as K2.
Last year, the Government introduced temporary class drug notices that have taken 28 substances and more than 50 synthetic cannabis products off the market.
Legal high legislation
• Legislation would go before Parliament by end of the year and become law by next August.
Strict testing regime:
• Manufacturers must pay $180,000 application fee and up to $2 million in testing costs.
• Health Ministry regulators could take two years to test each new product.
• Testing likely to include human clinical trials in New Zealand.
Tough new penalties:
• Eight years in prison for importing, making or supplying banned substances.
• Two years in prison for importing, making or supplying untested substances.
• $300 fine for individuals possessing unapproved substances.
Restrictions on sale:
• Minimum purchase age of 18.
• Restrictions on labelling, packaging.
• Ban on sales at dairies and no advertising except at point of sale.
