Priorities

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.

Tax treaty:

Superannuation

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.

Saving Clause

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:

Dual citizenship, the lack of definition of “citizen” in the “Savings Clause” of U.S. Tax Treaties and why these are important

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.

Government Benefits

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.

Grandfathering

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.

FATCA:

Transparency

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.

Reciprocity

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.

Priorities

Which two issues would be your highest priority?

View Results

Loading ... Loading ...

If there’s another goal that should be listed – or if you have any feedback – please don’t be shy. Use the comments!

12 thoughts on “Priorities”

  1. Those reading here please join us on our journey.

    In terms of a plan of what to do to instigate fixing the tax treaty, here is my contribution:

    1) Grow the community interested in fixing the tax treaty. Recruit more members to this group.
    2) Educate on the issues. Many are not aware of US tax obligations under the tax treaty or how the Australian government has left this Australian sovereign issue to the US.
    3) Engage this community to spread the word, contribute ideas, and to help convince others to assist.
    4) Develop the ask of members of Parliament/ government officials/others who may influence change.
    5) Make it happen. Karen has identified “low hanging fruit” that other nations have exemptions in their tax treaties for retirement funds. Why not Australia!

    It appears meetings with MPs may be our best bet. We have seen how JD met with his MP and this resulted in his letter being relayed to his Senator who obtained a reply from Treasurer Scott Morrison.

    Scott Morrison made clear the view of government that (US taxation of Australian residents) is all a matter for the US in the first instance.

    So let’s build on this past experience. I believe letters should address such response.

    We might prepare a few variants of letter templates for people to choose to request a visit with one’s MP, and what to ask for.

    My thinking has not changed much from this letter:

    http://isaacbrocksociety.ca/fatca-and-australia/comment-page-33/#comment-7561948

    That letter was after this one sent by JD:

    http://isaacbrocksociety.ca/fatca-and-australia/comment-page-20/#comment-6726208

    And the ask? I believe it best to ask for Parliamentary Inquiry. The tax treaty was enacted by the Australian Government as a believed “all good” agreement supposedly meeting its objective of preventing double taxation for Australian residents.

    There are significant treaty gaps and areas where the tax treaty guarantees US double taxation on Australian source income/investments/retirement accounts. It is apparent that there was a lack of due diligence by the Australian Parliament into treaty impacts. Therefore, such due diligence should now be conducted quantifying impacts on individuals considering a range of incomes, assets, and family situations.

    * Initiate a Parliamentary Inquiry
    * Request the ATO to report to Parliament on: Australia – US Tax Treaty Gaps impacting Australian tax residents (as part of Parliamentary Inquiry)
    * Request the ATO to amend their website, in regards to the Australian-US Tax Treaty, that states that tax treaties prevent double taxation.
    * Refer the matter to the Australian Human Rights Commission

    With further explanation in letters referenced above.

    1. Thanks for your comment, JC. It is important to get a discussion going on the directions we should be heading.

      Personally, I’m not sure a Parliamentary Inquiry is warranted at this time – but I would be happy to hear arguments in favour of such an exercise. What specific outcomes would you expect from an Inquiry? Will lobbying for a Parliamentary Inquiry waste political capital that could be better used lobbying selectively for actual changes? If we push for a Parliamentary Inquiry, how can we be sure we will like the result?

      Meeting with MPs is good – but we need to have a well considered list of what we want them to DO for us. That is the point of the current post. There are a couple of “quick wins” we could ask for: Competent Authority agreements on Superannuation and NIIT; and answers to the questions posed in http://fixthetaxtreaty.org/2016/09/26/questions-for-the-ato/ (including amendment of the ATO website). Australia can also legislate on FATCA transparency without any input from the US.

      I agree that when we do write to our MPs we need to address head on the notion that “(US taxation of Australian residents) is all a matter for the US in the first instance.” Being able to quantify the cost to Australia would be helpful – I’m working on that, but if anyone has any ideas, please contact me.

  2. re; “the notion that “(US taxation of Australian residents) is all a matter for the US in the first instance.”” .

    At least one crack in that facile rationalization is the fact that other countries ex. Canada have more favourable terms in their existing tax treaty with the US https://www.fin.gc.ca/treaties-conventions/pdf/FATCA-eng.pdf .

    So if Canada has gotten a better deal from the US for certain types of pension/retirement plans why should Australian MPs and tax and treaty authorities do less for Australian citizens and taxpayers and retirees and their families? That is not a US matter, that is a direct failure of Australian authorities.

    Just as the continued existence of the significant tax treaty gaps, and the lack of due process followed to foist a FATCA IGA on Canadians is and was a failure of Canadian authorities to uphold national sovereignty/autonomy and meet their fiduciary and other duty of care to their own citizens and taxpayers. As Prof. Allison Christians said; “…It perhaps goes without saying that the risks with treaties are particularly high. Domestic legislation, relatively speaking, can be easily amended. A poorly concluded agreement may take years to modify – especially if one side finds tremendous benefit in taking advantage of an unintended consequence of the instrument as worded.

    There is no question that tax treaty practice in Canada is complicated. The interaction of treaty implementation acts with the Income Tax Act and the Income Tax Conventions Interpretation Act has changed over the years as modifications are made to statutes and Courts make new determinations.68 While the subject matter might be technical, this does not absolve parliament and parliamentarians of their obligation to conduct due diligence on behalf of the Canadian people. It is especially troubling to this subject that merely declaring urgency provides a ready mechanism to bypass Parliament on controversial matters, forestalling the kind of discussion that might help clarify underlying policies and understanding their wisdom – or lack thereof “.
    http://isaacbrocksociety.ca/2016/06/08/while-parliament-sleeps-tax-treaty-practice-in-canada/

    If Australians find themselves lacking funds for retirement, for disability, education, etc. they will be applying for what recourse is available to the Australian social safety net, not that of the US. As mere birthplace or parentage does not make those living outside the US eligible for Social security or any other US benefits or supports, the majority of Australians and others outside the US will never qualify. Thus, the cost and the burden is all Australian, while the FATCA ‘benefit’ (as politically and ideologically defined by the US since no cost-benefit analysis has ever been done) is wholly derived by the US.

    This is not the most reputable source to cite, but others might be found to underscore that Australia has via government policy created a better social safety net than the US ex. http://www.foxbusiness.com/features/2016/10/11/what-u-s-retirees-can-learn-from-new-zealand-and-australia.html . This means that since the US effectively is farming out to Australia and the rest of the world ALL the responsibility for the wellbeing of those it deems ‘UStaxablepersons’ who are first and foremost citizens and resident taxpayers of other countries, while bearing none of the costs, and staking first taxing claim to their assets (savings clause and last in time rule in all US tax treaties), it demands all the benefit and none of the costs. I am sure that you can find on the record MPs touting the value and necessity of the Australian social safety net. and underscoring their party’s commitment to it (whether empty or not). Maybe even bragging on it vis a vis other nations like the US. Cite those and then underscore the US hypocrisy in reaping the rewards through its policy of extraterritorial CBT as applied to the entire world including Australian citizens, yet demanding that Australia respects the US tax system’s first claim to siphon off Australian pensions, savings, etc. – some of which may be in the form of Australian government tax revenue derived grants, benefits, matching funds, tax exemptions, etc. Canadian MPs have tried to cite their ‘respect’ for the US to create, maintain and impose its own system of taxation as an overarching rationale for why Canada should bow to the US and make our own sovereign systems and laws subordinate to that of a foreign country – the US – at the point of the extortionate FATCA gun.

    Some of the same arguments made here http://isaacbrocksociety.ca/presentations-and-submissions-on-fatcacbt/ may apply with some modification. It is true that we were not successful in preventing the FATCA IGA politically using moral or political suasion, and were up against the deep pockets of the banking and other lobbyists, but the only way in which Canadian RRSPs eventually (over many years) got more favourable US tax treaty, and IRS policy (and OVDI) treatment was with sustained public outcry, lobbying, and creating as big a public stink as possible – and also with the help of professional bodies (ex. http://hodgen.com/irs-meetings-today-about-rrsps/ http://www.thetaxadviser.com/issues/2016/aug/reporting-requirements-for-canadian-retirement-accounts.html , and current efforts for other registered savings http://www.aicpa.org/advocacy/cpaadvocate/2016/pages/us-canada-cross-border-accounts.aspx ).

    Apologies for the length. Hope it has some kernel of utility.

    1. Badger – thanks for all the links!

      One of the problems with relying on bilateral tax treaties to determine the US tax treatment of our local (to us) retirement savings is the fact that tax treaties are infrequently changed. Newer US treaties include much better provisions for “foreign” retirement accounts. The Australian Treasury is well aware of this. One possible solution is to include something like a “Most Favored Nation” clause in new treaties. This clause would provide for automatic adjustment when the US gives better terms to another country. While the devil is in the details (and the details of retirement savings plans are very complex), the concept of automatic adjustment might be worth exploring in this context.

      The point about Australia being left holding the bag with its social safety net is one that I have made to my MP before. Unfortunately, I think it will take a high profile case of someone losing their retirement savings to the IRS before anyone takes notice.

  3. Wouldn’t another strategy be to work with the superannuation industry to get them to assist in lobbying with us? I work for government, and I’ve had the experience of reading public submissions. In my experience governments unfortunately tend to pay a bit more attention to submissions from industry groups, companies etc, then individual citizens.

  4. A minor point, but you might find out whether the U.S.-Australia tax treaty has a statement to the effect that whenever U.S. Congress passes a law that “overrides” the treaty (and results in double taxation etc. which the treaty tries to prevent) the U.S. is obliged to inform Australia. Canada and UK have such a clause with the U.S. My understanding is that the U.S. never bothers to inform these countries — an example being the imposition of the new Obamacare NIIT surtax which certainly will cause double taxation. If U.S. does not inform, technically, I think, U.S. is in violation of the treaty.

    When I tried, unsuccessfully, to change the U.S.-Canada tax treaty, I was told by the civil servants that any attempt to change the treaty would have to wait until some uncertain date in the future when the next U.S.-Canada get-together would take place. Perhaps you can find out this date for Australia and focus part of your efforts to shaming Government with a PR campaign to move that date up to say, six months from now, given the extreme urgency to its own citizens etc. — I would not limit the treaty discussions to superannuation…..

    1. Stephen, I think you’re right with respect to NIIT. Article 2 paragraph 2 of the Australian treaty states:

      This Convention shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of this Convention in addition to, or in place of, the existing taxes. At the end of each calendar year, the competent authority of each Contracting State shall notify the competent authority of the other Contracting State of any substantial changes which have been made during that year in the laws of his State relating to the taxes to which this Convention applies or in the official interpretation of those laws or of this Convention

      I raised this issue with my MP when we met earlier this year and I believe he has included it in his letter to the Treasurer on our behalf.

      It is frustrating that Australia (and Canada) seem to just be waiting until the US is ready to negotiate a new treaty. While I know that neither country can negotiate a treaty unilaterally, what I want to hear is that they have informed the US Treasury that negotiating a new treaty (or specific amendments) is a priority for the Australian government. Once it is announced that treaty negotiation has been scheduled, there will be a call for comments on the Australian Treasury website. You can be sure we will not limit our comments to Superannuation. Until that time, however, it may be possible to get some (at least partial) resolution through the Mutual Agreement Procedure in the current treaty.

  5. Hello Karen, I very much like your list of requests including the level of technicality in the presentation.

    The approach appears to strive to work within the system as if generally CBT is ok and we just want a few modifications. No doubt such modifications will be welcome. Yet these treaties seem only to get revisited every decade or more so I would hope that we go for a complete exemption.

    Ok get rid of the savings clause, I still think most of the double taxation and double compliance still applies.

    May I suggest that one of the arts of persuasion is to alter the very ground that underpins an opposing position. I may characterise the status quo as ‘there is no double taxation as the tax treaty prevents it.’ Even the ATO says so on their website. Also the current information we are getting is a tendency to deflect to the US in the first instance as if the Australian Government does not have the central role in the remedy.

    That is why I believe an excellent strategy is to come at it from the position that the tax treaty represents Australian Government malpractice — as evidenced by the list of items you present that the treaty falls substantially short of its goal of eliminating double taxation for Australian residents. And, evidently there has been a failure of the parliamentary review mechanism normally conducted of Australian law by The Senate.

    The result is Australian law penalising a subset of Australians with no Australian policy objective for it. Example there is no Australian policy objective to require US double taxation of Australian resident superannuation.

    Substantial treaty gaps stemmed from a lack of proper due diligence into potential double taxation and double compliance impacts on Australian residents. As a step forward to remedying this situation http://www.fixthetaxtreaty.org now proposes proper due diligence be conducted as part of a Senate Inquiry, with particular attention to items listed. These Australian residents should have equal protection and opportunities under Australian law, and not be disadvantaged by Australian law because of their national origin.

    Unstated aims of the treaty is to facilitate commerce, investment, and mobility of nationals between the two countries. Prevention of double taxation helps these aims. Also clarity as to tax rules helps. This last point is a major failing in regards to Australian resident US persons.

    Also very important is to point out that Australian law (tax treaty) allowing extraterritorial double taxation and compliance of Australian tax residents represents codification of US intervention into the internal affairs of Australia. This is wrong and should be remedied. Even the US will respect Australia’s right to resist intervention into the internal affairs of Australia by outside countries.

    I think the approach should be the full ask and not one of compromise. A Senate Inquiry will highlight the facts and tax treaty gaps. That is what we would want.

    Additionally as you say Accidentals have not been mentioned here. These are Australians with very tenuous ties to the US. They may have lived in the US only their first few years or never. They may not have a US passport or US social security number. I believe these Australian residents highlight to the greatest degree the unjustness of Australian law represented by the tax treaty and FATCA IGA when combined with the overlay of the US tax code.

    “What specific outcomes would you expect from an Inquiry?”

    The highlight and quantification of areas of double taxation and double compliance. Outcomes of a Senate Inquiry will form a basis for perhaps a relatively more robust ask from the Australian Government to the US government. How else do you get the Australian Government to conduct proper due diligence and get a bit of “backbone” about it all?

    Let’s try this angle with MP’s. Senate Inquiry.

    The letter from JD to his MP included the ask for a Senate Inquiry. Perhaps that is why it was relayed to a state senator. That effort got deflected by Morrison. My second letter is a bit more direct. Persistence. Tenacity.

    I am no expert on getting a Senate Inquiry off the ground. I saw something the other day hinting that getting a few Senators in agreement helps. This could be a question in meetings/letters with MPs of how best to initiate such an Inquiry.

    Perhaps we may encourage Carl to start thinking of how we may MakeMayoMatter in the home state (SA) of that party of a few Senators.

    One party touts a brand image voicing issues ignored by the other major parties. Perfect. JD may have some ideas in Queensland.

    I think there was a person willing to help in WA with Andrew Hastie. He tends to be outspoken.

    1. Queensland Senator Malcolm Roberts did an MBA at the University of Chicago, where he met his US-born wife, Christine, who was enrolled in the same program.

Leave a Reply

Your email address will not be published. Required fields are marked *