Entrapment!

For US expats who moved to Australia decades ago, the idea that they should be filing annual US tax returns may be unreal. Many have been non-compliant for years. Because of this, FATCA and the resulting compliance push have (probably on purpose to some extent) entrapped long-term expats, who have found that the rules have changed while they weren’t looking.

One major area where long-term expats have been entrapped is superannuation. Even the IRS has no idea how to report super. There are two main alternatives during the accumulation phase (this applies to most accumulation accounts) – either just the contributions are taxable in the US, or the contributions plus the income inside the super fund are all taxable currently in the US. Under the first alternative, unless you’re maximising your concessional contributions, most likely Australian tax will be sufficient to offset the additional US tax and you won’t actually be paying US tax. Under the second alternative you may have a net US tax liability in years where your super does very well (in 2013 the median growth super fund returned 17.2%).

The problem comes when it’s time to start drawing on all those lifetime savings. If you’re over 60, then your withdrawals are tax free in Australia. On your US return, however, any portion of the balance that has not already been taxed by the US is taxable when withdrawn. Those who have been reporting contributions all along probably aren’t in too bad shape because their withdrawals will be only partly taxable (the part that represents the income inside the account over the years). Those who were reporting the income as well will have no additional tax on withdrawal (just the tax on the current year income inside the fund). The biggest problem is for those who didn’t know super was taxable in the US (or who weren’t filing) because they have no previously taxed amounts, so withdrawals are fully taxable. And, if the withdrawals are tax free in Australia, then there will be no FTC to offset the US tax liability.

The real injustice in this is that, had expats been reporting super contributions to the US all along, they would have paid no additional US tax on those contributions due to the much higher tax rate in Australia. But, just because they didn’t file returns showing zero balance due, they will pay US tax on 100% of their withdrawals in retirement (when paying little or no Australian tax to use as FTC)!

 

12 thoughts on “Entrapment!”

  1. It was an absolute shocker to learn that the US government could make tax claims on my Australian superannuation. Normal reasoning is that Australian superannuation is Australia’s plan to facilitate retirement of Australian workers, and it has nothing to do with the US government. The next normal reasoning was that even the US government would make such outrageous claims, surely the Australian government would not let those US claims be legal in Australia. Surprise! Why the Australian government would ‘authorise’ US tax claims on Australian superannuation beggars belief. To top off this surreal situation, then, as the blog post notes, someone could find themselves entrapped with US tax on 100% of their Australian superannuation withdrawals upon retirement. How bizarre is that?!

  2. “Entrapment” is the perfect term for this situation. I have felt entirely trapped since discovering my US “obligation” almost a year ago to this day. I am fortunate that I have a few years until I will need to draw upon my super. I hope for something to change, but alas, the people with the power to change things do not want to listen, and refuse to acknowledge the problem. Comments, such as those from our Treasurer (“A matter for the US in the first instance…”), are frustrating and depressing.

  3. Thanks Peter and Susan for your comments.

    For long-term expats, the goalposts have definitely been moved. For super, we don’t even know where the goalposts are. Our Australian government has a responsibility to make sure that its international tax agreements are fit for purpose and are not contrary to domestic policy. Yes, it takes two countries to negotiate a treaty. But just saying that they’re waiting for the US to come to the table isn’t good enough. I would much rather hear that they are pressuring the US to come to the table (even if they have to apply that pressure for a while to get any result). If the US negotiators aren’t told that this is a priority for Australia, then nothing will happen.

  4. The only saving grace is that Republicans have been starving the IRS for years and they can’t afford to deal with tax evaders living in the US, let alone chase people living overseas. They’ve bullied tax authorities overseas into providing them some information, but if you are a long time resident abroad the chances are they don’t know where you are. Relying on poor IRS funding is not great and the real answer is that US law must change to match the rest of the world. But if you have been living abroad for years be very careful about raising your hand to ask the IRS, once they know about where you are they will not leave you alone.

  5. Most US persons living in Australia have/had no idea about US tax compliance and double taxation as they believe/believed some or all of the following: that no one told them, it does not make sense to them, that they are exempt as they are Australian Citizens/Australian Permanent Residents/they were born in Australia, that they live in a relatively high tax country (Australia), they believe the tax treaty will protect them, they think they don’t make enough, or they don’t have any money or income in the US. Others don’t comply because they can not afford the cost which may run into the thousands each year for a simple US return even if no tax is owed.

    Here is a key point: The US AND Australian governments have done very little to inform Australians who are US persons of their US tax obligations under Australian law (the tax treaty). Even the ATO website states that tax treaties “prevent double taxation.” With no other explanation. To many people these words may mean you pay all your Australian tax then you need not pay any more tax to the US. It is much more complex.

    The Australian government ought to ensure that tax obligations are fair and non-discriminatory. The government ought to provide crystal clarity as to tax obligations of Australians. And importantly, The Australian Government should not put the government’s “head in the sand” on the issue.

    Via the FATCA IGA, Australia will help a foreign government (US) enforce foreign extraterritorial law against Australians living in Australia. To make way for FATCA, Australia rewrote privacy law to make exception for an international treaty – FATCA IGA. Discrimination law is yet to be tested – where Australians who are US persons are being singled out for account reporting and extra tax and compliance obligations. Also, FATCA violates the privacy of Australian only family members (think husband / wife) when the ATO reports to the US joint account information. Additionally the financial security of these Australian only family members is undermined by the additional US tax and compliance obligations.

  6. Re dual tax responsibilities it is my understanding that : “Under current law, however, the penalties for not filing the appropriate returns when due can be financially ruinous. The penalties can be waived by either participating in one of the IRS’s catch-up compliance programs or establishing “reasonable cause” for not having filed.

    Does anyone have further info regarding compliance and reasonable cause?

    1. Hi Pat – glad you found us.

      You can read about US compliance for expats over on Isaac Brock – try this page: http://isaacbrocksociety.ca/taxpayer-advocate-service-and-related-matters/

      The IRS currently has a Streamlined Program for US taxpayers living outside of the US – IRS information is here: https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-outside-the-united-states

      However, before you run to find a tax accountant, it’s often a good idea to a) make sure you’re really subject to US tax (maybe you relinquished your US citizenship at some point in the past) — see http://www.citizenshipsolutions.ca/2015/03/03/renunciation-is-one-form-of-relinquishment-its-not-the-form-of-relinquishment-but-the-time-of-relinquishment/ and b) make sure you have some idea of the consequences of both compliance and non-compliance — see http://isaacbrocksociety.ca/just-say-no-not-renouncingrelinquishing-nor-complying/

      And remember – to a hammer, everything looks like a nail. If you consult a tax accountant, you will end up filing a tax return. Read up and make sure that’s where you want to go before you make an appointment.

    2. No compliance person will tell you this: “soft compliance” is you just start filing & don’t forget FBAR and 8938, if applicable. You might read up at Isaac Brock about streamlined, as an alternative.

  7. I think that it is important to appreciate that IRS compliance enables the United States to confiscate part of your Australian-made assets (including a tax on the gain of your house in Sydney when sold) each year that you are IRS compliant — until you renounce U.S. tax citizenship according to U.S. rules. These are Australian assets that you could have used for your retirement. Yes, the tax treaties worldwide need to be changed (I tried this in Canada without success with respect to the double taxing Obamacare surtax) but I also think that a complementary long-term approach which can be considered is to kill U.S. citizenship-based taxation itself. We hope to make this happen by litigation — which I know moves very slowly:

    http://citizenshiptaxation.ca/
    https://www.facebook.com/groups/citizenshiptaxation/

    We also believe that the rationale of our own Canadian Government (like the Australian Government, Canada is terrified of U.S. punishment if it resists) to assist the United States in hunting down and turning over Canadians to the U.S. IRS as part of the FATCA law — violates our Charter of Rights and Freedoms. Maybe you feel that the FATCA “agreement” between Australia and U.S. violates your Constitution as well. We are pursuing this also by litigation (within Canada) and perhaps you might want to do the same in Australia. It takes money and a sympathetic attorney:

    http://www.adcs-adsc.ca

    1. Thanks for your comment, Stephen. I meant to reply yesterday, but work got in the way.

      I agree that the US is attempting to tax Australian source income from Australian assets that it really has no moral right to tax (especially superannuation); US tax on non-resident citizens is contrary to international norms. Changing the tax treaty isn’t going to change US law – though it will ameliorate the situation for Australian residents. And more favourable terms in one US tax treaty may prompt other nations to ask for the same.

      This is a battle that must be fought on multiple fronts. The Australia/US tax treaty is the front that we have chosen to focus on – this doesn’t mean we will be ignoring the other fronts in this battle. I have supported both of the lawsuits you mention (and will continue to support them if additional donations are required). If the opportunity arose for litigation in Australia, I would certainly consider it. However, litigation is expensive and time-consuming(as you well know), so we would need to be careful not to over-extend our resources.

  8. I support the complementary long term approach (contributed to the fund) and encourage others to consider the importance of this initiative. It is a worldwide approach to the put pressure on the corrupt U.S.overreach to the governance and administrative functions of sovereign, independent nation/states. It strikes at the heart of promoting true democracy, of which the U.S. has lost its way in this matter.

    I fully understand and appreciate the position of those who wish to fix the tax treaty. No one is a clear winner in this dilemma.

    The Australian constitution is silent on human rights. It basically sets out how powers are devolved to the state jurisdictions in certain areas, with federal law overriding state law of conflicting nature or difference and often argued at the High Court level.
    In all matters of law the Australian Federal Parliament reflects supremacy as was with the Crown in the times of monarchy, and again it is balanced by action in the courts as to the validity in regards to the constitution. Hence Crown law.

    The Australian constitution forbids dual citizens from becoming a Member of Parliament. This demonstrates that dual citizens do not have the full privileges of Australian citizenship. One has to renounce and in FATCA related cases deal with the punitive U.S. tax regime and the exit tax. There is a Human Rights Commissioner who has certain limited powers to act in cases where there is perceived injustice, discrimination, etc., but based on law, not on a Bill or Charter of Rights. The fact of an individual being perceived to be of American background and/or U.S. citizenship is not seen as discriminatory. Most privileged (non-dual citizen) Australians can’t understand why anyone in their right mind would want to forgo U.S citizenship. They have no idea of the costs one must bear.

    Australian politicians and policy makers resist the concept of a Bill of Rights and argue that the evolvement of rights and protections thereof are inherent through the living dynamics of the political process. As to finding a sympathetic attorney it would have to be one who is affected by FATCA and have an understanding of U.S. law or support from colleagues that do. I along with others have engaged three Australian attorneys on separate occasions to come to grips with this matter. All have been sympathetic but lack the capability to advise on U.S. law and confirm that since FATCA is Australian law any change lays at the hands of the politicians. Just like seeking to fix the tax treaty. In so many ways Americans abroad are no different to the undocumented illegal immigrants to the U.S.–certainly the parallel of the hunting down and turning in that stokes a similar terrified and fearful life–just because one is an emigrant. So with FATCA one becomes an illegal, undocumented emigrant. There is no free lunch and the U.S. has an obsessive, unhealthy appetite to dominate and control way beyond its borders.

    I find that when discussing matters personally with Members of Parliament that if I talk as a American to issues they treat me as an American. However when I discuss matters as an Australian citizen seeking to distance from the U.S. system I am treated with an open ear and sense of belonging to the to the Australian community. Especially when it comes to upholding the responsibilities of Australian citizenship and how more needs to be done in terms of equality and equity to protect dual citizens who have migrated legally and by choice. And the advice I have received on how to act as regards FATCA is most surprising and encouraging. Rights and freedoms are often forthcoming on how one prepares to react and/or act than just words on paper.

    ‘It’s a chancy job, makes a man watchful, and a little lonely” Matt Dillon ‘Gunsmoke’ radio show 1950’s era

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