Following on from Carl’s post, I think the main issues have been obvious since this site was started. What we need now is to set specific goals and objectives. We can divide these into two broad groups – Tax Treaty goals and FATCA goals. The purpose of this post is to list the goals so that we can prioritise action.
What we want here is for super to be taxable ONLY in Australia.
The current treatment of superannuation by the US tax compliance industry is very confusing (see the Superannuation page and my earlier post on Entrapment). Some tax preparers treat super as an employer trust, some as a grantor trust. Some claim that all contributions are taxable, but not income inside super. Others claim that both contributions and fund earnings are taxable. Allowing the US to tax the superannuation contributions and/or earnings of Australian residents is contrary to the interests of Australia and contrary to the stated purpose of superannuation to provide for the retirement income of Australians and reduce reliance on the Age Pension.
Several articles by Marsha-laine Dungog and Roy Berg make a case for treating super as equivalent to social security and therefore taxable only in Australia. For discussion see my earlier blog post. There is also a more recent article posted in the Facebook Group. How do we make this happen? The easiest option (and most feasible for the Australian government to implement) is for the Competent Authorities under the tax treaty to come to an understanding as to how the tax treaty and totalisation agreement interact and the implications of this for the taxation of superannuation by the IRS.
If we are unable to get resolution via the competent authorities, the pension/retirement savings provisions in the current US model treaty will probably give us the same result, so we would push for a renegotiation of the treaty.
The ideal goal is to remove the saving clause entirely. Failing that, dual citizens should be taxed as citizens only in the country they are resident in.
See the Saving Clause page for a discussion of what this clause is and how it works. The Saving Clause is considered a fundamental element of the US Model Treaty, and is included in all US tax treaties that I am aware of. If a Saving Clause must be included, one possible alternative is to have a tie-breaker clause for citizenship much as there is a tie-breaker provision for residence. Dual citizens would be taxable as citizens by only one country – the country where they are residents. See this post by John Richardson for an explanation of why this is needed:
Passive Foreign Investment Companies (PFICs)
Any investment (managed fund, ETF, REIT, etc.) available to retail investors in either country must be treated by the other country in a manner no more punitive than similar domestic investments.
The punitive US tax treatment of foreign managed funds in conjunction with securities laws that make it illegal for US fund managers to sell funds to Australian resident investors (even if they are US citizens) means that US citizens resident in Australia are finding it increasingly difficult to invest in managed investments of any type. These investors are limited to direct investment in shares, property, bonds, or bank term deposits. In the current macroeconomic environment, this means either accepting an extremely low return or taking undue risks. Most investment advisers recommend managed funds or index funds, especially for investors with smaller balances – precisely the types of investments that US taxpayers resident outside the US are frozen out of. The solution is to add a provision in the tax treaty that requires each country to tax any investment available to retail investors in the other country as if it were a domestic investment. Thus, US taxpayers investing in Australian managed funds, REITs or ETFs would pay tax on those investments using the same rules as apply to US mutual funds, REITs and ETFs. Current rules on foreign tax credits for portfolio income sourced in the non-resident country would not be changed.
Net Investment Income Tax (NIIT)
Clarify that NIIT assessed on Australian source investment income can be offset by a credit for Australian tax paid on that investment income. Similarly, NIIT paid on US source income is a tax that is creditable against Australian income tax if that US source income is also taxed in Australia.
NIIT is a 3.8% tax on investment income that was passed as part of Obamacare (see the NIIT page). The problem is that IRS forms and regulations do not allow NIIT to be offset by foreign tax credits. For most Australian-resident US taxpayers, investment income will be taxed in Australia as well and will often be Australian-source income. Therefore, NIIT is pure double taxation. John Richardson has written a blog post that argues that the US should allow FTC under the current Australia/US tax treaty. What we should do is get the Competent Authorities involved here to agree between themselves that the US must allow a credit for Australian tax paid against NIIT.
Benefits paid by one government (such as unemployment or disability benefits) should be taxable only by the government paying the benefit.
Essentially, all government benefit payments should be taxed in the same manner as Social Security and the Age Pension are currently taxed under the treaty. An Australian resident who qualifies for Newstart, for example, should not have to report or pay tax on this to the US government. Allowing the US to tax these payments negates Australian government policy in this arena.
All of the changes mentioned above are issues that should have been fixed long ago. Some are just re-interpretations of the existing treaty or law. Taxpayers who have paid tax to either country that should not have been allowed under these changes should be allowed to amend any returns filed within the last 5 years to claim a refund for amounts overpaid.
In particular, tax paid to the US on superannuation contributions and/or earnings should be refunded. Additionally, any currently held investments that have been reported on form 8621 as PFICs should lose that status immediately and any tax paid on excess PFIC distributions should be refunded. Going forward, these investments should be reported as if they were domestic investments, regardless of acquisition date. Those who have paid NIIT on Australian source income should be allowed to amend their FTC (form 1116) for all affected tax years to obtain a refund. Any US tax paid on Australian government benefits should be refunded. While it is not possible to go back forever, a 5 year window seems reasonable as this is the window of compliance required by the US to exit the US tax system without being a Covered Expatriate.
Australian financial institutions should be required to inform customers when their information is transmitted to the ATO for transfer to the IRS. Customers should be given the opportunity to correct any errors in this data.
US Persons in Australia are not informed when their information is transmitted to the IRS via the ATO. This has caused some anxiety among US Persons who also have a US reporting obligation with regard to their Australian financial accounts. The basis of reporting for FFIs and individuals is different, but there should be some rough correspondence between the two reports.
The ATO should inform the public when the US meets its obligation to provide information under the IGA. If this obligation is not met by 31 December 2016 as promised, then Australia should refuse to provide information on Australian resident taxpayers to the IRS under FATCA.
Australia has re-written privacy laws and allowed banks to collect US SSNs and report banking data to the IRS via the ATO. One of the main incentives for Australia to do this was the information the IRS is supposed to provide on US accounts of Australian resident taxpayers. It is not clear that the IRS is currently able to provide this information under US law (which has NOT been re-written to allow FATCA reporting by US banks). Furthermore, the information required under the IGA is not reciprocal. Australian banks provide far more information on reportable accounts. And, Australian reportable accounts include accounts maintained by Australian citizens and residents who are Australian resident taxpayers. US reportable accounts do not include US resident taxpayers who are also Australian citizens (and may have liabilities to the ATO in the form of HECS/ FEE-HELP loans). Australia should, at a minimum, insist on receiving the information promised in the IGA by the end of 2016.
If there’s another goal that should be listed – or if you have any feedback – please don’t be shy. Use the comments!