The Bright-line Measures: The Tax Implications for China

Abstract

The New Zealand government had been facing criticised for refusing to act on the apparent imbalance in the housing market, particularly in Auckland. The average house price of residential property in Auckland increased by 57% during the period 2007 – 2015. The suggestion has been that the imbalance is caused by the increasing number of residential properties being sold to off-shore Chinese nationals. Chinese nationals have been outbidding New Zealanders at auctions and the perception is that this is driving up house prices. Moreover, while such non-residents are technically taxed on New Zealand sourced income (ss BD1(4) and (5)), practically it has been difficult to enforce even when IRD knows they owe tax. This was particularly so as there was previously no requirement for a non-resident to provide the IRD with any tax information when conducting a property purchase. In the 2015 Budget the New Zealand government adopted a massive policy reversal with one of the stated purposes being to ensure non-residents are paying their ‘fair share’ of tax. The Government’s response includes 4 interrelated measures announced in the Government in Budget 2015 (‘taxing property gains fairly’, 17 May 2015): ¥ Increase in IRD funding to investigate land transactions; ¥ Land Information and Offshore Persons Information Bill; ¥ Bright-line Test for Residential Land Bill; ¥ Residential Land Withholding Tax (‘RLWT’). Thus the reform package does not merely involve the introduction of a new ‘Bright-line’ test in s CB6A ITA 2007. In particular, a major focus of the measures is facilitating the gathering of better tax information in regard to non-residents and the sharing of that information with the tax authorities in their country of residency. They are also part of broader anti-money laundering measures, enacted through the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act). This paper considers the implications of the new ‘Bright-line’ measures for Chinese residents. It will be seen that not only does s CB6A provide a new source of taxation for property gains made by such persons, but the new RLWT will ensure that tax is collected at settlement and remitted to IRD. Further the new land information measures and related changes in the requirements for obtaining an IRD number will significantly impact on Chinese nationals. As already briefly noted, these new measures are also designed to combat the significant money laundering that is currently rife in New Zealand. Further, the new RLWT measures include disclosure requirements by both the vendor and the paying agent (solicitor/conveyancer). It also has implications for the government of the Peoples Republic of China. China has an existing Double Tax Agreement with New Zealand. One role of a DTA is to allocate the taxing rights between the contracting States through distributive Articles, determining whether it is the source country or the country of residence that has the right to tax the income. This paper considers the taxing rights under the China and New Zealand DTA. Moreover, building on the existing Double Tax Agreement (‘DTA’) the new information gathering and sharing measures will assist the Chinese government in ensuring such persons are meeting their domestic tax obligations.