Residency changes for New Zealand citizens living in Australia

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June 15, 2023 | My Tax Accountant |

Originally included in Member Newsletter 17 | 19 May 2023 from the Tax Institute. I strongly encourage any reader of this article to join the institute.

In a joint media release on 22 April 2023, the Government announced that the pathways to Australian citizenship would be ‘streamlined’ from 1 July 2023 to assist the large population of NZ-born people presently residing in Australia. Currently, NZ citizens with a valid NZ passport do not need to apply for a visa before coming to Australia. On entry to Australia, they are granted a visa if they apply and meet the criteria for a Special Category visa (subclass 444) (SCV). The SCV does not limit the duration of their stay in Australia.

Under the proposed change, NZ citizens living in Australia will have a direct pathway to Australian citizenship. From 1 July 2023, SCV holders will be able to choose to apply for Australian citizenship without first having to obtain permanent residency, as long as they meet other eligibility requirements, such as the four-year residency requirement. It is unclear at this stage whether the holding of an SCV — which will treat a holder as a permanent resident for citizenship purposes — will affect the holder’s status as a temporary resident for tax purposes.

At the end of June 2021, approximately 559,980 NZ-born people were living in Australia. This makes this cohort the fourth largest migrant community in Australia, equivalent to 7.5% of Australia’s overseas-born population and 2.2% of Australia’s total population.

Changes in this area could impact a large number of taxpayers. The changes could also have significant income tax ramifications for tax practitioners who will need to actively turn their minds to this issue for impacted clients.

Context for changes

To better understand the impact of the changes, it’s important to analyse the relevant legislative framework. Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines a temporary resident as a person who:

  • holds a temporary visa under the Migration Act 1958;
  • is not an Australian resident according to the meaning of that term in the Social Security Act 1991 (SSA); and
  • does not have a spouse who is an Australian resident within the meaning of the SSA.

A person is not a temporary resident if they are an Australian resident (within the meaning of the ITAA 1997) and any of the conditions listed above are not satisfied.

Following the legislative chain, subsection 7(2) of the SSA defines an ‘Australian resident’ as a person who resides in Australia and is:

  • an Australian citizen;
  • a holder of a permanent visa; or
  • a protected special category visa holder.

Current practical outcome

With that overview of the legislative framework, what do these provisions actually mean in practice?

Currently, many NZ-born people stay in Australia indefinitely as temporary residents by continuing to meet the definition in subsection 995-1(1) of the ITAA 1997 as extracted above, assuming they continue to meet all the requisite conditions. Being classified as a temporary resident has some advantages from a tax perspective.

The assessable income included in a temporary resident’s income tax return is broadly limited to the following:

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

Generally, temporary residents do not need to declare their worldwide income in their Australian tax return as an Australian resident is required to. Foreign income that doesn’t have to be declared potentially includes income received by a temporary resident from a NZ family trust, or rent received from the lease of a foreign property owned by the temporary resident.

Practical impact of the proposed changes

As a result of the proposed changes, temporary residents from NZ who choose to apply for Australian citizenship may no longer meet the definition of a temporary resident for tax purposes. NZ residents currently on an SCV who become Australian citizens will still need to satisfy the individual tax residency rules, as set out in section 6 of the Income Tax Assessment Act 1936 (ITAA 1936).

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

  • foreign income that was previously outside the scope of the Australian tax system may now need to be captured;  
  • 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 for impacted taxpayers 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).

Common trust issues

Taxpayers who have entitlements from NZ express trusts, particularly trusts with real property, may face additional layers of complexity. This is particularly relevant for current NZ citizens. It is estimated that, as of December 2020, there were between 300,000 and 500,000 trusts in NZ, accounting for approximately one trust for every 10 people. This number may have increased over time.

Anecdotal evidence suggests the use of NZ trusts is prevalent across the current NZ-Australian temporary resident population, and that people do not usually sever their relationship with their NZ trusts when they migrate to Australia.

If a trust relationship is maintained by a NZ person when immigrating to Australia, several issues can arise. Some of the most common issues faced by, and questions raised by, Trans-Tasman clients are set out below.

The key considerations when NZ residents dispose of their NZ property held in a trust include:

  • While the client is still a temporary resident: Generally, only temporary residents who make capital gains directly in their personal capacity can utilise section 768-915 of the ITAA 1997 and disregard a capital gain under Subdivision 855-A of the ITAA 1997. Temporary residents who derive a capital gain made by another entity, such as by way of a distribution from a family trust, cannot utilise these provisions and are unable to disregard the gain. Therefore, deriving income from a NZ trust as a temporary resident could result in an assessable capital gain without access to the general CGT discount.
  • After the client has become an Australian resident: The net capital gain is usually assessable and allow taxpayers to utilise the general CGT discount (if the relevant conditions are met) after the necessary adjustments are made to the asset’s cost base.

The circumstances in which NZ-born clients will be required to declare the trust income in their Australian tax return will depend on a number of factors. Due to the operation of subsection 95(2) of the ITAA 1936, a NZ trust will also be an Australian resident if it has an Australian resident trustee at any time during an income year. Therefore, consideration of the relevant Double Tax Agreement will be necessary to properly assess whether the trust income is included in an Australian tax return.

With the upcoming changes, it is important for tax practitioners working with NZ-born clients to understand and explain the tax consequences if they choose to become an Australian citizen. These issues may become more prevalent over time as Australia continues to build our Trans-Tasman relationships.

Disclaimer: This document should not be interpreted as tax advice. All information is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.