In April, the Australian Government announced a direct pathway to citizenship for New Zealand citizens who live in Australia for four years or more and meet certain requirements. While the announcement is welcomed for many reasons, the tax consequences remain unclear.
Since 26 February 2001, New Zealand citizens living in Australia have held a ‘non-protected’ Special Category Visas (SCV) and been treated as temporary residents. Temporary residents have a favourable Australian tax status in that they are only taxed on Australian sourced income.
Once a temporary resident becomes a permanent resident or Australian citizen, foreign income is exposed to Australian tax consequences. Having a spouse who is an Australian permanent resident or citizen may also expose a temporary resident’s foreign income to Australian tax consequences.
Prior to 26 February 2001, New Zealand citizens living in Australia held protected SCV and were eligible for Australia’s social security system. Protected SCV holders are not considered temporary residents and are therefore taxed in Australia on worldwide income.
With effect from 1 July 2023, all New Zealand citizens holding an SCV will be considered permanent residents for citizenship purposes. What is unclear from the initial announcement is whether they will remain temporary residents for tax purposes.
From a New Zealand trust perspective, generally an Australian resident beneficiary (who is not a temporary resident) must pay income tax in Australia on all distributions received from a foreign trust. It may be possible for trustees to stream corpus (original trust settlements) to the Australian resident beneficiary free of tax, but the corpus must be easily identifiable and tracked. Tracking corpus is not something many New Zealand trusts do as it is not necessary from a New Zealand tax perspective. A resettlement can be appropriate in some circumstances to identify and increase corpus.
If you have any questions about what actions a New Zealander living in Australia as a temporary resident, particularly those with trust structures in New Zealand, should take prior to 1 July 2023, Hesketh Henry would be happy to work with Australian advisers to clarify your position and any necessary trust changes.
Disclaimer: We do not provide tax advice. However, we regularly interact with clients and their specialist New Zealand and Australian tax advisers on private wealth matters. The information contained in this article is based on our working knowledge, is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal and tax advice should be sought where required.