Last Tuesday, our neighbouring Government announced its 2012 Budget. There were a number of interesting changes which are important to reflect upon in the lead up to New Zealand’s 2012 Budget.

A lot of the provisions signalled in the Australian budget will ensure that residents on lower incomes will come out better off than they were.

There has been a significant increase in the tax-free threshold, from $6,001 to $18,201. However, the increase in this threshold is offset by a raise in tax rates, meaning that those with a taxable income of $80,000 or higher receive no benefit.

Several changes will also see non-residents who have invested in Australia (ie many New Zealanders) negatively affected. The Australian Government needs money and they plan to get it from the wealthy and foreigners.

There are three key changes that may affect us in New Zealand.

The first is a further reduction in living away from home allowances and benefits (LAFHAs). As most Kiwis go into Australia as temporary residents, this change will hit them hard. Housing and food costs will now either be taxable to the employee, or the employer if it is subject to fringe benefit tax (FBT). Until now, a New Zealander working temporarily in Australia could ask their employer to allow some of their salary, say $52,000 of a $232,000 salary, as a housing expense (not unreasonable at say $1,000 per week for a Sydney rental property). That $52,000 would have been tax exempt which, under Australian rates, would give the employee an extra $23,400 a year. The tightening of this budget has seen this benefit canned for temporary residents.

This change will affect many New Zealand employers that want to send employees to Australia on secondment opportunities.

It will also severely restrict the Australian employer’s ability to attract the right people as LAFHAs have been a cost effective way of offering New Zealand employees ‘tax packaging’ arrangements, to offset the very high cost of living in Australia. Australian employers with significant numbers of expatriates in Australia or large secondment programmes will be the most heavily affected. These businesses may find they need to consider downsizing their programmes or even look to move part of their operations offshore.

These changes are intended to apply from 1 July 2012 to any arrangements entered into post-Budget night. The small piece of good news is that existing arrangements can run for another two years, with the current treatment being grandfathered until 1 July 2014.

The Australian Government has also increased the personal income tax rates and thresholds that apply to non-residents’ Australian income ‘to better align with the rates and thresholds that apply to residents’.

From 1 July 2012, the first two marginal tax rate thresholds will be merged into a single threshold. The marginal rate for this threshold will align with the second marginal tax rate for residents (32.5%) and will apply to all taxable income below $80,000. From 1 July 2015, the same marginal rate will again rise from 32.5% to 33%. For an income of $75,000 per year this equates to an additional tax hit of $2,245 in 2012/13  compared with 2011/12.

In addition to this, the Government has removed the 50% capital gains tax (CGT) discount for non-residents on any capital gains accrued after 7.30pm (AEST) on 8 May 2012.

Many Kiwis with rental properties in areas of Australia, such as the Gold Coast, will now pay more tax on their rental income under the increased tax rate, and have any capital gains made subject to the full CGT.

The best course of action for those property owners would be to get their property valued as soon as possible as the CGT discount will remain available for capital gains that accrued prior to Budget day. So if a property was bought for $300,000, and the value had climbed over the last few years so it was now worth $400,000, that $100,000 gain would still receive the 50% discount when the owner sells.  

Looking at these changes, one might ask if  the New Zealand Government should be introducing anything along the same lines. The Australian Government is clearly trying to placate local voters, and in our view most of these changes would not be suitable for the New Zealand Government  to adopt.

The Government is in a difficult fiscal situation. They have no money and the huge cost of the Christchurch earthquakes to cover. Perhaps enforcing a CGT but limiting it to non-resident investors would be one way to aid this issue. However it wouldn’t do much for attracting that greatly desired international investment.

Further enquiries, please contact:

Murray  Brewer           
Partner, Tax
T +64 (0)9 308 2570
E Murray.Brewer@nz.gt.com