Consultation on land holding costs and new China DTA

Consultation on land holding costs and new China DTA

Key features of the new DTA include lower withholding rates and a revised Permanent Establishment article. Read the article below to find out more.

Darshana Elwela

Partner - Tax

KPMG in New Zealand


Tax treatment of land holding costs

A consultation document released this week considers the tax treatment of “holding costs” (such as interest, rates, insurance and repairs and maintenance) associated with owning land that is taxable on sale. It considers tax deductibility of these costs for a range of “use” scenarios.

Private use

The key question is what land holding costs should be deductible if the land is used privately (either partly or wholly) before sale? An example is a holiday home, which if sold within the bright-line test period will be taxable.

The document seeks feedback on three possible options for the treatment of holding costs when land is used privately:

  • Apportionment of the costs between the private use and the gain on sale. This would allow any costs apportioned to the (taxable) sale to be deducted.
  • Allow full tax deductibility, including for the private use period(s).
  • Denying any tax deductions.

Officials’ preferred option (“proposal”) is to deny all deductions, even though apportionment of the costs is recognised as the most accurate option.

Vacant land

A related question is the tax treatment of holding costs for any period the land is vacant (i.e. unoccupied). Officials’ preference is to relate the tax treatment for any unused period(s) to any other uses of the land, when it is owned.

For example, if the land is used privately when owned, the vacant period would also be treated as private use (so no holding costs would be deductible). In contrast, if the land is wholly vacant or unused, and is held for a land dealing, development or building business or to erect a rental property, the vacant period would be considered income earning (and holding costs would be deductible).

Ownership through an entity

The proposal to deny deductions for land holding costs for private use would apply consistently to individuals, partnership, trusts and look-through companies.  

For ordinary companies, the proposal is that the current interest deductibility provisions would remain, as any private use of land by shareholders is already subject to market value rental or deemed dividend consequences.

Other changes

The consultation document also proposes legislatively clarifying that the cost of any capital improvements and acquisitions to land is deductible, if the gain is taxable (notwithstanding the general permission and private limitation on expenditure).

Our thoughts

This latest consultation document follows an earlier consultation on strengthening the rules for taxing land where there is a regular pattern of sales (you can read that Taxmail here).

The general proposition is that the where costs are incurred in deriving income, those costs should be deductible. The complexity is where there is a combination of taxable, private and (in some cases) no use of the land, while it is owned.

Officials’ preferred approach is to give prominence to any private use. The justification for this is any apportionment of holding costs is likely to be complex and inconsistent with other parts of the tax system where apportionment is not required. Officials' also point to the Tax Working Group’s capital gains tax design recommendation to disallow deductions where land is used privately.

This, to us, ignores the general proposition above. Where land will be taxable (under the bright-line test or the other land provisions), the costs associated with holding that land (in particular any interest costs) must at least partly relate to an income earning use (i.e. will be incurred to derive any taxable gain on sale). This is notwithstanding any private use. In our view, this strongly suggests that some apportionment is justified. While an exact apportionment may not be feasible, a 50:50 apportionment of costs appears to be a reasonable starting point. 

Submissions on the consultation document are due by 1 November. 

New DTA with People’s Republic of China

Earlier this year, New Zealand and the People’s Republic of China signed a new Double Tax Agreement (“DTA”).

On 30 September, New Zealand completed its domestic procedures to give effect to the new DTA. The new DTA will enter into force once China has also completed its domestic procedures. Once in force, it will replace and modernise the existing treaty, which was signed in 1986. 

Some key highlights of the new DTA include:

Withholding rates

A 5% withholding rate will apply for dividends paid to a company shareholder holding at least 25% of the company paying the dividend. A 15% withholding rate will apply in other cases.

A 0% withholding rate will apply for dividends paid to either Government, or to specified Governmental entities, for shareholdings of 25% or less in the company paying the dividends. A 0% withholding rate will also apply for interest paid to certain Government owned entities.

Permanent establishment  

The Permanent Establishment (“PE”) article has been expanded to include the changes in Article 12 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (“MLI”). The new PE article targets the avoidance of a PE through commissionaire or similar types of arrangements. This means that a New Zealand PE will prima facie arise for a company resident in China where a closely related party habitually plays the principal role leading to the conclusion of contracts on behalf of the Chinese entity.


Unlike many of New Zealand’s recent DTAs, the new Royalties article applies to equipment leasing. Such lease payments will continue to be taxed as royalties rather than being taxed under the Business Profits article. (If treated as Business Profits, such payments would only be taxable if the non-resident has a PE in New Zealand or China.) 

Effect of the MLI

While both countries have signed the MLI, China has not yet ratified it. Further, many of the MLI articles would not apply to the existing DTA given differences in New Zealand and China’s positions. 

However, the new DTA incorporates some of the MLI provisions, such as Article 12 (PE – see above),  Article 3 (relating to fiscally transparent entities) and Article 4 (which provides for mutual agreement by tax authorities to determine which jurisdiction an entity is resident in the case of dual residence). 

A final word on the MLI, a number of New Zealand’s DTAs have been (or will soon be) updated for various MLI provisions. (Which MLI Articles apply will depend on the choices made by New Zealand and the partner country.) A selection of “updated” DTAs and their application dates is contained below. 

DTA MLI updated provisions to apply to:
Withholding tax Other taxes - income years beginning on or after
Australia 1 January 2019 1 July 2019
Canada 1 January 2020 1 April 2020
Ireland 1 January 2020 1 November 2019
Japan 1 January 2019 1 July 2019
Netherlands 1 January 2020 1 April 2020
UK 1 January 2019 1 April 2019


For further information, please contact Darshana Elwela.


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