Chinese & Australian Tax Residency for Property Investment
INTERNATIONAL TAX FACTSHEET
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.
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.
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 Peoples' Republic of China but not Hong Kong or Macau.
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.
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
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.
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.
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.
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 a tax deduction for part of finance costs, when the amount of debt exceeds the specified limits. The recent changes have somewhat relaxed these rules.
The last prosecution of a foreign national for non-compliance with FIRB's rules was as far back as 2006, which led to FIRB's reputation for being toothless.
However, the Australian Government announced earlier in 2015 that it would be introducing a number of reforms focused on procedures and enforcement provisions, effective on 1 December 2015:
- The Australian Taxation Office will take over the residential real estate functions and improve compliance and enforcement through sophisticated data-matching program and specialized staff with compliance expertise.
- Stricter penalties will make it easier to pursue foreign investors breaching the rules.
- the existing criminal penalties will be increased from $90,000 to $135,000 for individuals and up to three years in jail and up to $637,500 for incorporated entities;
- Third parties who knowingly assist a foreign investor to breach the rules will also be subject to civil and criminal penalties. This may include people such as real estate agents, conveyances and family members.
- A reduced penalty period will apply until 30 November 2015 to encourage investors that have breached the rules to voluntarily come forward
- Increased scrutiny around foreign investment in agriculture.
- From 1 March 2015, the screening threshold for agricultural land was lowered from $252 million to $15 million (cumulative).
- A $55 million threshold (based on the value of the investment) for direct investments in agribusiness will be introduced to capture certain downstream activities with links to primary production.
- Increased transparency on the levels of foreign ownership in Australia through a comprehensive land register.
- An agricultural land register with information provided directly to the Australian Taxation Office by investors was established from 1 July 2015. Further information is available at: www.ato.gov.au/aglandregister.
- The Government is in negotiations with state and territory governments to use their land titles data to expand the register to include all land (including residential real estate).
Temporary residents and foreign investors must seek approval from the Foreign Investment Review board before buying Australian property. The requirements are different for each group:
Temporary residents on spouse, 457 or student visas must:
- Obtain approval from FIRB before purchasing a property
- Buy an established dwelling and be living in it whilst in Australia.
- Buy new property or vacant land to build new dwellings and if the property is for investment rather than to live in, comply with Australian tax reporting.
- Temporary residents do not need to get FIRB approval if buying the property with an Australian citizen spouse as 'joint tenants'.
Foreign investors are subject to different rules than temporary residents. Foreign investors must:
- Obtain approval from FIRB
- The investment property must be a new property or vacant land or established dwellings for redevelopment
- Not buy established dwellings as an investment property
- Foreign investors can buy new property in their own name and rent it out to their children, provided the child is a temporary resident e.g. a student or on an approved visa.
Foreign investors who buy property in Australia will now face applications fees for buying Australian property, which is:
- A $5,000 application fee for properties valued at less than $1 million
- A $10,000 application fee for every extra million dollars in the purchase price.
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
The most significant changes for China-based investors are as follows:
- Foreign investors are no longer eligible to access the 50% CGT discount, which means you pay Australian tax on the full gain, if it's purchased in the individual's name.
- Foreign investors will soon be subject to a 10% withholding tax on the gross sale proceeds of the property as an integrity measure.
There are strategies available to achieve a better after-tax investment return but there is no one-size-fits-all solution.
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 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.
Last updated December 2015. 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.
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