Australian citizenship – be careful what you wish for!

Very soon, Kiwis who have been living in Australia for 4 years will be able to apply for citizenship through the recently announced fast-track process. This will bring all the benefits of being an Australian citizen that has otherwise been unavailable for Kiwis, such as access to welfare support and student loans, and will be a very compelling proposition for many Kiwis living over the ditch and those considering the leap.

But as with most things in life, where there is a positive, there is often also a negative. Before rushing to apply for Australian citizenship, anyone eligible should ensure they consider the tax implications of doing so, especially if they have assets left behind in New Zealand.

How are Kiwis taxed in Australia?

Generally speaking, Kiwis living in Australia typically qualify for some concessionary income tax rules. Anyone tax resident in Australia is usually subject to Australian tax on their worldwide income. But Kiwis that are not permanent residents or Australian citizens often qualify to be “temporary” tax residents.

The key benefits of being a temporary tax resident are:

1. They can usually exclude their foreign investment income from their Australian tax returns, such as interest, dividend, or rental income from New Zealand (or anywhere else); and
2. Overseas assets are generally not subject to Australia’s capital gains tax (CGT).

What happens now when a temporary tax resident becomes an Australian permanent resident or citizen is that they lose the benefit of being a temporary tax resident. This means that their foreign income will become taxable in Australia, although they may get a foreign tax credit for tax paid in New Zealand or elsewhere on that income to help offset the Australian tax liability. But the biggie is CGT – if they have rental properties in New Zealand for example, or have kept their house or bach here, these could become subject to CGT on any gain in value from the date of losing their temporary tax resident status.

The tax consequences of the policy change, or indeed whether there might also be tax law changes, were not commented on when the policy was announced. At the time of writing this article our colleagues in Deloitte Australia were still to receive clarification from the ATO as to how Kiwis applying for citizenship would be affected and in particular at what point they will cease to be temporary tax residents.

Should New Zealanders apply for Australian citizenship?

Obviously, there is no single right answer here, as everybody’s circumstances are different. But some of the factors to consider would include:

1. The level of non-Australian income - how much tax is paid on that income in New Zealand or elsewhere, and the relative difference between the tax rates in the two countries will be important considerations; and
2. The level of non-Australian assets - if a Kiwi has significant New Zealand assets that will become subject to Australian CGT, and which would not be taxed here, then becoming an Australian citizen could be quite costly in the long term. 

A word about trusts

Australia taxes trusts and trust distributions very differently to New Zealand. The first key difference is that if a trustee of a New Zealand trust moves to Australia, that trust may become subject to tax in Australia even if it has no income from Australia. Any Kiwis with family trusts here should get advice about what to do before moving to Australia – they may want to change trustees or move assets out of the trust.

The second key difference is that a Kiwi in Australia may be taxed on distributions received from offshore trusts, even if these are capital distributions. It is really important to consider this before making any distributions from New Zealand trusts to beneficiaries in Australia.

Parting words

Applying for Australian citizenship really is a case of buyer beware. If this is something you are considering, we recommend you contact your usual Deloitte tax adviser for guidance.

June 2023 - Tax Alerts