Deloitte Tax Services partner Andra Glyn-Jones gave the marketplace useful update on the good and bad outcomes of some regulatory changes, actual and mooted, in New Zealand and Australia that are affecting local employment costs.
Bad
The Australian Tax Office (ATO) has issued ruling which changes how short-term secondments to Australia are taxed, with costly bottom-line implications for transTasman enterprises.
If New Zealand employee spends time in Australia working for the Australian company and reporting to Australian management, it’s likely that portion of their salary will be taxable in Australia. Previously, the employee would have been exempt from tax if they spent less than 183 days there and remained New Zealand employee. The ATO has issued ruling interpreting the treaty exemption as only applying if neither the contractual nor the ‘in substance’ employer is in Australia.
The ruling states that there is no effective date for this view – it is effective retrospectively and there is no indication of the number of days spent in Australia it will apply to. So companies sending Kiwis employees across the Tasman on assignment for anywhere between one and 183 days will find themselves with an Australian tax liability.
The Australian company must withhold PAYE, which means that the New Zealand employer must either apply for reduced rate certificate or pay too much PAYE and file for refund at the end of the year. For higher paid employees it may be that more tax will be paid in Australia than would have been paid in New Zealand. If so the employee will need to file two tax returns (one in Australia and one in New Zealand), and pay more tax. Although tax credit for the tax paid in Australia will be available in New Zealand it will not extend to more than the average rate of tax payable by the individual in New Zealand.
Employers must consider equalising the employee’s earnings, leading to further compliance and remuneration costs. Employers should review all short-term secondments to make sure they understand the new rules and ensure, where possible, that the employee was not an ‘in substance’ employee of an Australian entity.
Good
On the up side, the New Zealand Government has recognised the need to attract skilled workers to New Zealand and issued discussion document proposing exemptions from tax on offshore investments for some employees coming here.
Regulators propose applying the rules to both returning Kiwis and others coming to New Zealand for the first time. The discussion document suggests some alternatives such as broad exemption for three-year period or narrower one for seven-year period.
But in whatever form it is enacted, this move will lower costs for New Zealand employers because expatriates will not need to be compensated for extra tax paid on offshore investments and the compliance costs relating to their tax affairs will be lower. Highly talented people may be encouraged to use their skills in New Zealand because tax will not be turn off, though once they understand our tax regime they may want to leave after the exemption period is over!
The IRD is working to put some legislation in place but not until later in the year and, not in the next income tax bill as previously signalled. Views have, however, changed and the IRD is proposing mid point between broad and narrow exemptions by ensuring that interest and dividends from offshore would continue to be taxed in New Zealand along with income earned in New Zealand. They are also considering whether to extend the proposals beyond employees.
The ATO bad news, unfortunately, is already with us while the good news is still to be implemented. However, the New Zealand proposals are big step forward for employers wanting to hire talented people from offshore.
