Tax impacts of proposed changes to NZ citizens living in Australia

In a recent media release on 22^nd April 2023, the Australian Government announced that they are looking to make the ability to obtain Australian citizenship a much simpler process for NZ citizens who are residing in Australia.

Current Rules

Practical Process

Currently, the process for NZ citizens to become Australian citizens is quite lengthy and expensive, with the steps broadly as follows;

• On entry to Australia, NZ citizens are granted a visa if they apply and meet the criteria for a Special Category visa (subclass 444) (‘SCV’)
• The NZ citizen then needs to apply for ‘permanent residence of Australia’.
• The NZ citizen can then apply for ‘citizenship’ to Australia, after meeting specific criteria, part of which is the length of residency requirements.

It is important to note that the Special Category Visa does not limit the duration of their stay in Australia, however, does not entitle the individual all the same benefits of being an Australian citizen.

Tax Impact

Generally, most New Zealand citizens stay in Australia indefinitely as temporary residents by continuing to meet the definition of a temporary resident under the Australia’s income tax law.

Broadly, the tax advantages of being classified as a temporary resident is that, in Australia, the assessable income which they are taxed on includes;

• income earned in Australia;
• capital gains on Australian assets; and
• any income earned from employment and services performed overseas while they are a temporary resident of Australia.

Proposed Changes

Practical Process

Expected to be in force from 1 July 2023, the new proposed rules are expected to streamline the pathway to Australian citizenship, by effectively bypassing the requirement to obtain permanent residency in Australia. The new process would loosely be;

• On entry to Australia, NZ citizens will be granted a visa if they apply and meet the criteria for a Special Category visa (subclass 444)
• Specific Category Visa holders will be able to choose to apply for Australian citizenship without first having to obtain permanent residency
• SCV holders will still need to be meet certain eligibility requirements, such as the four-year residency requirement.

Tax Impact

Australian citizens do not fall under the categorisation of temporary residents, and therefore generally cannot access the relative tax benefits associated with that title.

From a practical perspective, the tax liabilities of these individuals living in Australia may be impacted in the following ways:

• They will need to declare their worldwide income in their Australian tax return, including income from NZ, such as family trust distributions and net rental income;
• Capital gains tax (CGT) consequences may arise, including:
  • the ability of impacted taxpayers to use, in whole or in part, the general CGT discount and the main residence exemption; and
  • the need to determine the cost base of their foreign CGT assets, particularly CGT assets in NZ for which there are no requirements to keep cost base records (as NZ does not have a CGT regime)

Conclusion

It is expected that these proposed changes will encourage more and more NZ citizens to become Australian citizens, to gain certain benefits associated with Australian citizenship, which have long alluded NZ citizens living in Australia in a SCV.

While this change is expected to strengthen the ties between Australia and New Zealand, it is important for NZ citizens who are wanting to apply for Australian citizenship to be fully aware of what their tax impacts may be.

If you would like to understand more about how these proposed changes to residency may impact your Australian tax affairs, please contact LINK Advisors, and we can assist you.