Chinese / Australian Tax & Residency


Double tax agreements, residency and income treatment are just some of the considerations that Chinese investors have to be aware of when buying Australian Assets

Chinese investors have long seen Australia as an opportunity to acquire Australian property assets, however like any non-resident, they face many tax considerations in doing so. 
Some of the key issues faced by Chinese investors include:
  • Double tax agreements between Australia and China
  • Residency rules for investors in Australia and China
  • The way that income, profits or capital gains are treated in either country
  • The decisions required around how property is owned, e.g. ownership structures and funding those investments
Let's explore these in further detail. 

Double Tax Agreements

Non tax-residents are generally taxed based on where they currently reside, subject to any double tax agreements that may be in place. The Chinese Double Tax Agreement (DTA) came into force on 28 December 1990. 

Applying the DTA

In Australia, the DTA covers agreements on Federal income taxes and resource rent tax for offshore petroleum projects (exploration or exploitation), however it does not apply to State or Territory taxes, Australian GST or other types of Australian taxes imposed by the Commonwealth of Australia. In China, the DTA applies to income tax imposed by the People's Republic of China but not Hong Kong or Macau.

Residency rules for Individuals 

For Chinese investors, residency rules are important to understand, particularly where their tax liability is likely to arise. Under the Chinese DTA, individuals are considered to be a resident of Australia if they are fully liable to tax under Australian tax law. 

From the Australian perspective, an individual is considered to be a resident for tax purposes if they actually reside in Australia. There are further  statutory tests for residency including:

Whether the individual's permanent place of abode is in Australia 

Whether they have been in Australia continuously or intermittently for more than half of the income year;

However one of the issues that arises is when the individual purchases property for private use, as a residence for a child studying in Australia or they spend less than 183 days per year in Australia. The individual is liable to tax in Australia from sources derived in Australia, but they do not live in Australia, then they are considered a non-resident. 

Residency rules for companies

A company is an Australian resident for tax purposes if it:
  • is incorporated in Australia, 
  • carries on business in Australian with central management and control in Australia
  • the business is carried on in Australia with voting power allocated to shareholders who are Australian residents

What happens if a person is permanent resident in both countries? 

The definition of a 'resident' can actually occur in both Australia and China at the same time, which is where tie-breaker rules apply. 

If both tax systems claim an individual as a resident for tax purposes, then 'tie breaker' rules would deem the person to be a resident of one country for the purposes of the Double Tax Agreement. 

In practice, the tie breaker rules look at the country in which the person has a permanent home and the closest economic and personal ties to determine the country in which they should be taxed as a resident for tax treaty purposes. 

For companies, the rule is applied where its management or head office is situated. If the management is one country and the head office is in another, then the person would be a resident solely of the country where the head office is situated.

Temporary residency rules

Generally speaking, temporary residents are taxed as if they were non-residents by treating all foreign income as non-assessable, non-exempt and disregarding all capital gains from non-taxable Australian property.

Source of income

Chinese investors who derive income from their Australian property assets may be taxed in Australia if the property is located here and 'income' may come from direct use, leasing of the asset or its use in any other form of 'real property', for example, a lease of land and any other interest, such as the extraction of natural resources (e.g. minerals, oil, gas etc.).

Australian tax applies irrespective of whether the recipient of any income maintains a permanent establishment in Australia.

Disposing of Australian real property

Under Australian tax law, the tax treatment that applies to disposing of assets depends on the type of asset being disposed of, for example, trading stock, revenue assets or capital assets. 
Even if the asset is considered as a capital asset under the CGT provisions, there are still various issues to consider such as:
  • Taxable Australian property
  • Indirect Australian real property interest
  • Holding/investment structure
  • CGT discount
  • Financing investments
When investing into Australia, a non-resident would prefer funding by debt rather than by equity due to the deductibility of interest expense on the debt. Under the Chinese DTA, the interest withholding tax is 10% whilst the dividend withholding tax is 15%. 

It then introduces another tax issue where there is debt funding, how Australia's thin capitalization rules would apply. The purpose of the thin capitalization rules is to disallow part of finance costs, when the amount of debt exceeds the specified limits. The recent changes have somewhat relaxed these rules.

Speak to an Australian-based cross border specialist

Cross-border taxation rules and strategies are by their nature complex and for that reason, any Chinese investor should seek a local advisor to ensure that any investments are structured properly for maximum asset protection and tax efficiency on an ongoing basis with the exit strategies in mind. 

Please contact us on 02 9957 4033 to speak to Matt Zhou or one of our International Tax team for guidance. 

Download PDF version of Chinese-Australian Tax and Residency

Last updated December 2014. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant

[1]  Agreement between the Government of Australia and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Chinese DTA);
[2] Agreement between the Government of Australia and the Government of the People's Republic of China for the Avoidance of Double Taxation of Income and Revenues Derived by Air Transport Enterprises from International Air Transport Chinese (Airline Profits) )Agreement).

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