Diana Clement: Australia never looked better

If proposals to tax Kiwis' overseas investments go through, will the last person to leave New Zealand please turn out the light when you go.

I have to admit I nicked this idea from a headline in England's Sun newspaper. But unless the Government has a change of heart over proposed tax changes, New Zealand's brain drain is only going to be heightened. Investors who remain will find the playing field changed. From April 1, share and fund investments in countries outside of Australasia will be subject to capital gains tax - including ones made through local fund management companies.

This week will be a telling time for those individuals teetering on the edge of packing their bags and leaving - of which there are many if letters to newspapers and the word of accountants and financial planners is to be believed.

First of all Australia introduces new rules today, which means that most Kiwi passport holders heading over the ditch to work will not be taxed on their worldwide income. And then on Friday, submissions close on the Government's tax bill - which among other things includes the proposals to impose a capital gains tax on overseas share investments. Thousands of individuals, professionals and groups are expected to make submissions.

All of this - just a week after it was revealed that we're losing more skilled people overseas than are coming here. That is despite a four-year tax holiday for new migrants.

Those who think it is all hot air should listen to Murray Brewer, associate tax at Grant Thornton Auckland, who says his practice has clients who have already left the country - the capital gains tax proposals being the last straw.

Brewer says that departing comments from his clients included: "We've worked hard for 20 years to build up retirement assets such as a share portfolio. We cannot simply sit here and watch them disappear."

Another said: "We certainly have no interest in paying tax on previously accumulated savings that, when we migrated, we were led to understand would be out of bounds of the IRD." "These issues should also be considered in a much wider context," says Brewer. "Against a background of record tax takes and disincentives to invest offshore, [Finance Minister Michael] Cullen is exhorting New Zealanders to save."

But saving to move to Australia might be a better move for the long term financial wealth of many Kiwis. Spicers Wealth Management has highlighted that Kiwis who earn less than $150,000 per annum pay more income tax than Australians. Australia has a similar system to Working For Families, so Spicers excluded that from their calculations.

"If we look beyond just that tax issue and consider the wider issue of disposable incomes, it becomes obvious that from a financial perspective, our transtasman cousins are significantly better off," says Rozanna Wozniak, author of the Spicers research and economist at subsidiary Arcus Investment Management.

The average New Zealander working full time earns $42,000 a year, compared with his or her Australian cousin who earns the equivalent of $63,500. That's $322 a week. Add to that salary difference the fact that Australian employers make contributions to employees' superannuation accounts - taxed at just 15 per cent - and the salary incentives to jump ship become even more compelling.

This isn't just the case for low-income earners. According to the results of a New Zealand Institute of Chartered Accountants survey, members working here earned an average of $117,000 in 2005. The average earnings for institute members who were working in Australia was $169,000.

Brewer says Australia's exemptions for worldwide income, tax effective remuneration rules and higher salaries are advantages that will continue to prove too appealing to many Kiwis. "These advantages will no doubt move new migrants to treat New Zealand as a revolving door through which they will exit once their four-year tax holiday ends."

In many cases Australia's higher salaries are enhanced further because "living away from home" allowance rules give employees tax-free accommodation and food allowances. "These benefits can dramatically reduce personal income tax costs," says Brewer. To take advantage of such allowances it's important to get your tax planning in advance of jumping the ditch.

There is of course the cost of living. According to the Economic Research Institute - an American organisation that compares the cost of living between cities - Sydney is 53 per cent more expensive to live in, mainly due to the high cost of rental housing. Elsewhere in Australia, the differences are not as stark.

So how does the average Australian's investments grow compared with ours? Fundsource, which did a comparison of balanced (50 per cent growth and 50 per cent income) managed funds, found that the median fund in Australia grew 20.3 per cent for the 12 months to March 30, net of fees and tax, and the equivalent New Zealand fund grew 14 per cent. Over a three-year period annual growth on those median funds was 16.1 per cent in Australia and 10.5 per cent for New Zealand.

This singles out just one class of investment. Interest rates in Australia are lower, so fixed interest investors are likely to do better here in the current market.

It should be added that the tax on Australian funds is currently 15 per cent and on NZ funds, 33 per cent. However, the current tax bill in New Zealand is looking to alter that so that investors receive distributions taxed at 19.5 per cent or 33 per cent, depending on their marginal tax rate, which alters, if not levels, the playing field.

What's more, Wozniak says the outlook for the Australian economy medium term is rosier than ours. "Our economy is going to struggle. In comparison [Australian] interest rates are lower, and the economy is performing better than ours." The housing market has done its correction and achieved a soft landing, she adds, and is likely to start moving up again. Ours is likely to head in the opposite direction.

All in all, says Ross Butler, acting chief executive of the Institute of Financial Advisors, the capital gains tax proposals in the bill are: "Crazy". With only some assets subject to the tax [local shares and funds, and both local and overseas property will be excluded] investors will make decisions based on tax considerations. "Anything that is based on tax goes off the end of the rails," says Butler.

Submissions on the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill can be emailed or sent to parliament or your local MP.

Information is on the website: Office of the Clerk of House of Representatives