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The Legal and Tax Considerations for Chinese HNWIs Investing in Australia Property Market

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clebourgeois

Chinese HNWIs are investing heavily in Australian property, with an estimated $70 billion in demand over the next 5 years. This document outlines the key legal and tax considerations for such Chinese investors. Legally, foreign investors must obtain approval to purchase properties that increase housing supply, such as new developments, vacant land for construction, or properties for redevelopment. Failure to obtain approval can result in fines or imprisonment. Tax considerations include paying both Australian and Chinese capital gains tax on profits, as well as income tax, land tax, and being able to deduct certain property expenses.

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1 THE LEGAL AND TAX CONSIDERATIONS FOR CHINESE HNWIs INVESTING IN AUSTRALIA PROPERTY MARKET June 2015 Foreword The Chinese real estate boom in Australia will only be accelerating. It is predicted that an additional $70 billion demand for real estate from Chinese HNWI investors and immigrants over the next five years to 2020. It is an inevitable trend since China is undergoing its unprecedentedly greatest wealth creation, and Australia is on China’s doorstep. Although the recent enforcement of Foreign Investment Review Board (FIRB) regulations, reporting requirements and fines have been more stringent, it is believed that it will only have a marginal effect on demand. In 2014-15, Chinese HNWI investors and immigrants spent $9.5 billion on residential real estate, which was up 65 percent from the year before and equivalent to 18 percent of the new national housing supply. (Note: Foreign investors are restricted mostly to buying new property.) Purchases were concentrated in Australia's two largest cities, Melbourne and Sydney. Given the aforesaid property boom, we are going to walk through the legal and tax considerations for Chinese HNWIs investing in Australia property market in this article.
2 Legal Considerations If Chinese want to buy a property in Australia, they must obtain prior approval from the FIRB of Australian Government. The reason why they need to have a prior approval is that, the Australian Government believes foreign investment in the property sector should increase the supply of housing, and should not be speculative in nature. Hence, the policy is designed to channel foreign investment into Australia for increasing the supply of new housing. Chinese can normally obtain approval to purchase (i) vacant land, as long as they start continuous construction within twelve months; or (ii) existing residences for redevelopment, provided that this will increase the supply of housing as well as the house must remain unoccupied during redevelopment; or (iii) units, townhouses and house/land packages in a new development. Chinese can buy the aforesaid properties before construction, during construction, or when the dwelling is newly constructed, given that the dwelling has never been occupied or sold; and no more than fifty percent of the dwellings in any one development are sold to foreign investors. Since Australia’s foreign investment policy is designed to increase the supply of new housing, Chinese cannot normally obtain approval to purchase houses, flats or units which have been occupied. However, there are two exceptions to this rule: (i) if Chinese temporarily resident in Australia for more than twelve months, who are purchasing a home there; or (ii) if Chinese companies buying a house for their senior executives who will be living in Australia for more than twelve months. But what if Chinese don’t obtain approval? They may have to terminate the contract or sell their new property, probably at a significant loss, if they don’t obtain the necessary approval beforehand. Furthermore, Chinese could also be fined or imprisoned if they (i) provide false or misleading information; or (ii) don’t comply with a development condition; or (iii) purchase a property after their application has been rejected; or (iv) didn’t apply for approval and their purchase was not conformed with Australia’s foreign investment policy. Tax Considerations Since China adopts a worldwide tax basis concept for both of her individual residents and corporates, when Chinese investors purchase property in Australia and eventually dispose it with capital gains, they are not only required to pay the Australia capital gains tax, but they also need to pay China income tax at 25% for the capital gains as their ordinary income, and the
3 elimination or reduction of the potential double taxation on the same capital gains, are subject to the foreign tax credit available in the China-Australia Double Tax Treaty, which in turn is subject to the China tax authority's approval. The following provides some general information with respect to Australian tax laws that affect investment in Australian real estate by Chinese. Tax considerations which should be addressed prior to the purchase of a property include: Income Tax Capital Gains Tax Land Tax INCOME TAX The Australian Income Tax year runs from 1 July to the following 30 June. Accordingly, where Chinese purchase a property during the period 1 July 2015 to 30 June 2016, their first Australian Income Tax Return to include the rental schedule will be in respect of the 2016 financial year. Property investments can be held by individuals, partnerships, joint ventures, unit or discretionary trusts and companies. The ramifications of use of each particular entity should be carefully considered to ensure that the objectives of the investor are accomplished. The 2016 financial year rates of income tax applicable to non-resident individuals (also applicable to Chinese) are as follows: Taxable income Tax on this income $0 - $18,200 $18,201 - $37,000 $37,001 - $80,000 $80,001 - $180,000 Over $180,000 Nil 19c for each $1 over $18,200 $3,572 plus 32.5c for each $1 over $37,000 $17,547 plus 37c for each $1 over $80,000 $54,547 plus 45c for each $1 over $180,000
4  Non-resident minors (i.e. under 18 years old) are taxed at penalty rates  Partnerships and trust are not normally taxed as separate entities. The net income is distributed to the partners or beneficiaries, who are taxed on their share of the net income at the applicable rates for individuals.  Compulsory superannuation rate at 9.5% If a Chinese individual makes a loss for Australian income tax purposes, this loss will be carried forward until the individual makes sufficient Australian income to absorb these losses. The use of companies can become quite complicated and further advice should be sought prior to using a corporate structure. CAPITAL GAINS TAX Capital gains or losses are recognized when a Chinese individual disposes of all or part of an asset acquired on or after 20th September, 1985. Capital gains tax forms part of the income tax and not a separate tax. These capital gains and losses are summed up (with certain exceptions) and tax is imposed on any resulting net capital gain. A net capital loss should be carried forward and offset against capital gains in subsequent years. In other words, a capital loss cannot be set off against revenue income. The tax rate applicable to a capital gain depends on the amount of other taxable income. Accordingly, the entire circumstances need to be taken into account before the tax rate applicable to the capital gain can be ascertained. It should be cautioned that a change of residence status can result in a deemed acquisition or disposal of worldwide assets by virtue of Australian capital gains tax legislation. Hence, the sale of any worldwide asset may produce a capital gains tax liability. Consequently, capital gains tax implications need to be considered before a change of residency status happens. Chinese should take steps to make sure that any assets they acquire are accurately recorded, such that any capital gains tax on disposal can be calculated. For the purpose of calculating capital gains tax accurately, Chinese should record the details include (i) the date of acquisition and disposal of the asset; (ii) the amount paid for the asset; (iii) any incidental costs of acquisition or
5 disposal of the asset (e.g. legal fees, commission, stamp duty, advertising, etc.); (iv) date and amount of any capital improvements to the asset; and (v) any holding costs, such as interest, rates, land tax, insurance, etc. (only if these have not been claimed as a tax deduction beforehand). LAND TAX Example: New South Wales State • Land Tax is assessed by the New South Wales State Government on the unimproved capital value (UCV) of the land only on which the building is constructed. • Land Tax for the next Land Tax year (June to June) is assessed on the basis of land owned in New South Wales as at midnight of the 30th June each year. • For Body Corporates, the UCV and Land Tax is apportioned between the individual owners in the building according to their shares or lot entitlements in the building. • For Non-Residents, Companies and Trusts there is a Land Tax free threshold of A$432,000 of unimproved capital value of land for each owner. For instance, where a Chinese husband and wife jointly own a property, they are entitled to own properties in New South Wales with a total UCV of A$864,000 (A$432,000 x 2 = A$864,000) before Land Tax is payable. • In other words, if the total UCV of properties owned in New South Wales by a Foreign Resident (e.g. Chinese) is below A$432,000, no Land Tax will be payable in future years. INCOME TAX DEDUCTIONS FOR INCOME PRODUCING PROPERTY The deductible expenses at the time they are incurred include: · accountancy fees · bank charges · commissions · electricity · insurance · land tax · management fees · motor vehicle expenses · rates · telephone · advertising · cleaning · repairs & replacements · garden and ground maintenance · interest · lease costs (e.g. legal fee, etc.) · mortgage discharge costs · pest control
6 The expenses partly deductible each year include: · borrowing costs · depreciable assets · certain building costs DEPRECIATION ALLOWANCES Depreciation of plant, furniture and fittings, etc. that may be contained within, or form part of, a property, can be claimed as tax deductible expense. Buildings such as high-rises, flats and units include articles of common property are also depreciable (e.g. lifts, fire sprinklers and extinguishers and pools). BUILDING COST The construction costs of certain income producing buildings are allowable as tax deduction. The deduction rate will depend on the date of construction of the building, and whether it was for residential or non-residential usage. Capital expenditures incurred on extension, alterations or improvements are also allowable on the same basis. Furthermore, Chinese buyer of property should also beware that it is necessary for them to obtain a quantity surveyor report to substantiate the construction cost and construction date used to compute the taxation deduction. INTEREST The interest paid on money borrowed to acquire an investment property can be fully claimed as tax deduction in normal circumstances. However, care should be taken where interest is to be paid on money borrowed from an associated non-resident, in such a case limitations are placed on the amount of interest that can be claimed as a tax deduction. Conclusion Australian taxation is among one of the most complicated tax systems in the world. Coupled with the strong compliance enforced by Australian Taxation Office (ATO) and FIRB in recent years to combat illegal purchase of property in Australia property market, foreign investors and immigrants including Chinese should be very cautious to the latest development of the Australian legislations and seek professional advice and solution from a trusted advisor, in order to avoid any unnecessary loss arising from potential non-compliance acts.
7 CONTACT US Masson de Morfontaine is an international legal and tax firm specializes in providing comprehensive professional services for worldwide clients. We are experts particularly keen on helping our Chinese HNWI clients with practical legal and tax advices, immigration visa guidance and applications, in order to make successful cross-border investments in various kinds of property and project in Australia as well as other countries around the world. We are more than welcome to discuss with you about our services. Please call or email us should you require more information. Catherine LE BOURGEOIS Wilson YEUNG Partner International Tax Director +852.3593.4880 +852.3593.4804 catherinelebourgeois@masson-de-morfontaine.com wilson@masson-de-morfontaine.com Disclaimer: This article is issued for information purpose only and it should not be viewed as a professional advice. Accordingly, you should not act solely on the basis of the material contained in this article. We recommend that formal advice be sought before acting in any of the areas. 2015 Masson de Morfontaine Limited. All rights reserved.

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The Legal and Tax Considerations for Chinese HNWIs Investing in Australia Property Market

  • 1. 1 THE LEGAL AND TAX CONSIDERATIONS FOR CHINESE HNWIs INVESTING IN AUSTRALIA PROPERTY MARKET June 2015 Foreword The Chinese real estate boom in Australia will only be accelerating. It is predicted that an additional $70 billion demand for real estate from Chinese HNWI investors and immigrants over the next five years to 2020. It is an inevitable trend since China is undergoing its unprecedentedly greatest wealth creation, and Australia is on China’s doorstep. Although the recent enforcement of Foreign Investment Review Board (FIRB) regulations, reporting requirements and fines have been more stringent, it is believed that it will only have a marginal effect on demand. In 2014-15, Chinese HNWI investors and immigrants spent $9.5 billion on residential real estate, which was up 65 percent from the year before and equivalent to 18 percent of the new national housing supply. (Note: Foreign investors are restricted mostly to buying new property.) Purchases were concentrated in Australia's two largest cities, Melbourne and Sydney. Given the aforesaid property boom, we are going to walk through the legal and tax considerations for Chinese HNWIs investing in Australia property market in this article.
  • 2. 2 Legal Considerations If Chinese want to buy a property in Australia, they must obtain prior approval from the FIRB of Australian Government. The reason why they need to have a prior approval is that, the Australian Government believes foreign investment in the property sector should increase the supply of housing, and should not be speculative in nature. Hence, the policy is designed to channel foreign investment into Australia for increasing the supply of new housing. Chinese can normally obtain approval to purchase (i) vacant land, as long as they start continuous construction within twelve months; or (ii) existing residences for redevelopment, provided that this will increase the supply of housing as well as the house must remain unoccupied during redevelopment; or (iii) units, townhouses and house/land packages in a new development. Chinese can buy the aforesaid properties before construction, during construction, or when the dwelling is newly constructed, given that the dwelling has never been occupied or sold; and no more than fifty percent of the dwellings in any one development are sold to foreign investors. Since Australia’s foreign investment policy is designed to increase the supply of new housing, Chinese cannot normally obtain approval to purchase houses, flats or units which have been occupied. However, there are two exceptions to this rule: (i) if Chinese temporarily resident in Australia for more than twelve months, who are purchasing a home there; or (ii) if Chinese companies buying a house for their senior executives who will be living in Australia for more than twelve months. But what if Chinese don’t obtain approval? They may have to terminate the contract or sell their new property, probably at a significant loss, if they don’t obtain the necessary approval beforehand. Furthermore, Chinese could also be fined or imprisoned if they (i) provide false or misleading information; or (ii) don’t comply with a development condition; or (iii) purchase a property after their application has been rejected; or (iv) didn’t apply for approval and their purchase was not conformed with Australia’s foreign investment policy. Tax Considerations Since China adopts a worldwide tax basis concept for both of her individual residents and corporates, when Chinese investors purchase property in Australia and eventually dispose it with capital gains, they are not only required to pay the Australia capital gains tax, but they also need to pay China income tax at 25% for the capital gains as their ordinary income, and the
  • 3. 3 elimination or reduction of the potential double taxation on the same capital gains, are subject to the foreign tax credit available in the China-Australia Double Tax Treaty, which in turn is subject to the China tax authority's approval. The following provides some general information with respect to Australian tax laws that affect investment in Australian real estate by Chinese. Tax considerations which should be addressed prior to the purchase of a property include: Income Tax Capital Gains Tax Land Tax INCOME TAX The Australian Income Tax year runs from 1 July to the following 30 June. Accordingly, where Chinese purchase a property during the period 1 July 2015 to 30 June 2016, their first Australian Income Tax Return to include the rental schedule will be in respect of the 2016 financial year. Property investments can be held by individuals, partnerships, joint ventures, unit or discretionary trusts and companies. The ramifications of use of each particular entity should be carefully considered to ensure that the objectives of the investor are accomplished. The 2016 financial year rates of income tax applicable to non-resident individuals (also applicable to Chinese) are as follows: Taxable income Tax on this income $0 - $18,200 $18,201 - $37,000 $37,001 - $80,000 $80,001 - $180,000 Over $180,000 Nil 19c for each $1 over $18,200 $3,572 plus 32.5c for each $1 over $37,000 $17,547 plus 37c for each $1 over $80,000 $54,547 plus 45c for each $1 over $180,000
  • 4. 4  Non-resident minors (i.e. under 18 years old) are taxed at penalty rates  Partnerships and trust are not normally taxed as separate entities. The net income is distributed to the partners or beneficiaries, who are taxed on their share of the net income at the applicable rates for individuals.  Compulsory superannuation rate at 9.5% If a Chinese individual makes a loss for Australian income tax purposes, this loss will be carried forward until the individual makes sufficient Australian income to absorb these losses. The use of companies can become quite complicated and further advice should be sought prior to using a corporate structure. CAPITAL GAINS TAX Capital gains or losses are recognized when a Chinese individual disposes of all or part of an asset acquired on or after 20th September, 1985. Capital gains tax forms part of the income tax and not a separate tax. These capital gains and losses are summed up (with certain exceptions) and tax is imposed on any resulting net capital gain. A net capital loss should be carried forward and offset against capital gains in subsequent years. In other words, a capital loss cannot be set off against revenue income. The tax rate applicable to a capital gain depends on the amount of other taxable income. Accordingly, the entire circumstances need to be taken into account before the tax rate applicable to the capital gain can be ascertained. It should be cautioned that a change of residence status can result in a deemed acquisition or disposal of worldwide assets by virtue of Australian capital gains tax legislation. Hence, the sale of any worldwide asset may produce a capital gains tax liability. Consequently, capital gains tax implications need to be considered before a change of residency status happens. Chinese should take steps to make sure that any assets they acquire are accurately recorded, such that any capital gains tax on disposal can be calculated. For the purpose of calculating capital gains tax accurately, Chinese should record the details include (i) the date of acquisition and disposal of the asset; (ii) the amount paid for the asset; (iii) any incidental costs of acquisition or
  • 5. 5 disposal of the asset (e.g. legal fees, commission, stamp duty, advertising, etc.); (iv) date and amount of any capital improvements to the asset; and (v) any holding costs, such as interest, rates, land tax, insurance, etc. (only if these have not been claimed as a tax deduction beforehand). LAND TAX Example: New South Wales State • Land Tax is assessed by the New South Wales State Government on the unimproved capital value (UCV) of the land only on which the building is constructed. • Land Tax for the next Land Tax year (June to June) is assessed on the basis of land owned in New South Wales as at midnight of the 30th June each year. • For Body Corporates, the UCV and Land Tax is apportioned between the individual owners in the building according to their shares or lot entitlements in the building. • For Non-Residents, Companies and Trusts there is a Land Tax free threshold of A$432,000 of unimproved capital value of land for each owner. For instance, where a Chinese husband and wife jointly own a property, they are entitled to own properties in New South Wales with a total UCV of A$864,000 (A$432,000 x 2 = A$864,000) before Land Tax is payable. • In other words, if the total UCV of properties owned in New South Wales by a Foreign Resident (e.g. Chinese) is below A$432,000, no Land Tax will be payable in future years. INCOME TAX DEDUCTIONS FOR INCOME PRODUCING PROPERTY The deductible expenses at the time they are incurred include: · accountancy fees · bank charges · commissions · electricity · insurance · land tax · management fees · motor vehicle expenses · rates · telephone · advertising · cleaning · repairs & replacements · garden and ground maintenance · interest · lease costs (e.g. legal fee, etc.) · mortgage discharge costs · pest control
  • 6. 6 The expenses partly deductible each year include: · borrowing costs · depreciable assets · certain building costs DEPRECIATION ALLOWANCES Depreciation of plant, furniture and fittings, etc. that may be contained within, or form part of, a property, can be claimed as tax deductible expense. Buildings such as high-rises, flats and units include articles of common property are also depreciable (e.g. lifts, fire sprinklers and extinguishers and pools). BUILDING COST The construction costs of certain income producing buildings are allowable as tax deduction. The deduction rate will depend on the date of construction of the building, and whether it was for residential or non-residential usage. Capital expenditures incurred on extension, alterations or improvements are also allowable on the same basis. Furthermore, Chinese buyer of property should also beware that it is necessary for them to obtain a quantity surveyor report to substantiate the construction cost and construction date used to compute the taxation deduction. INTEREST The interest paid on money borrowed to acquire an investment property can be fully claimed as tax deduction in normal circumstances. However, care should be taken where interest is to be paid on money borrowed from an associated non-resident, in such a case limitations are placed on the amount of interest that can be claimed as a tax deduction. Conclusion Australian taxation is among one of the most complicated tax systems in the world. Coupled with the strong compliance enforced by Australian Taxation Office (ATO) and FIRB in recent years to combat illegal purchase of property in Australia property market, foreign investors and immigrants including Chinese should be very cautious to the latest development of the Australian legislations and seek professional advice and solution from a trusted advisor, in order to avoid any unnecessary loss arising from potential non-compliance acts.
  • 7. 7 CONTACT US Masson de Morfontaine is an international legal and tax firm specializes in providing comprehensive professional services for worldwide clients. We are experts particularly keen on helping our Chinese HNWI clients with practical legal and tax advices, immigration visa guidance and applications, in order to make successful cross-border investments in various kinds of property and project in Australia as well as other countries around the world. We are more than welcome to discuss with you about our services. Please call or email us should you require more information. Catherine LE BOURGEOIS Wilson YEUNG Partner International Tax Director +852.3593.4880 +852.3593.4804 catherinelebourgeois@masson-de-morfontaine.com wilson@masson-de-morfontaine.com Disclaimer: This article is issued for information purpose only and it should not be viewed as a professional advice. Accordingly, you should not act solely on the basis of the material contained in this article. We recommend that formal advice be sought before acting in any of the areas. 2015 Masson de Morfontaine Limited. All rights reserved.