One of the terrific things about living in a parliamentary democracy like Australia is that there are safeguards in place to facilitate transparency of the Australian Government and public services. One powerful tool is the Freedom of Information Act, or FOI, which provides individuals or organisations with the right of access to documents held by many government agencies. By law, most public authorities have to respond to an FOI request within 30 days. Their response will either contain the information requested, or give a valid legal reason why it must be kept confidential. Note that the government agencies may levy charges for locating and making the information available, based on prescribed rates.
Here at Fix the Tax Treaty!, we’ve often wondered whether the Australian Government adequately considered the impacts on Individuals (vs businesses) when negotiating and entering into the Australia – US tax treaty agreements and the FATCA Intergovernmental Agreement (IGA).
In the Facebook group last week, someone claimed that only the very wealthy are disadvantaged by the dual tax obligations imposed on US citizens and green card holders living in Australia. Certainly, for an Australian resident with only salary income, it is likely that foreign tax credits (FTC) or the Foreign Earned Income Exclusion (FEIE) will completely eliminate any US tax liability. However, for anyone who is considering investing for the future or running their own business, there are many pitfalls and traps in US tax law that need to be carefully considered. It seems like almost anything “foreign” is treated punitively by US tax law, and these xenophobic rules make it difficult for middle class US taxpayers to save effectively while living outside the US.
Over the next few weeks, I will be covering the following areas where US taxpayers living in Australia need to be particularly careful:
This series (and everything on this website) is general information only. I am not a lawyer, tax professional, or financial planner, just someone who has learned about US tax and wants to pass on general knowledge. Many areas of tax law are interdependent, so changes in one area may have unintended consequences in another. You should consult a professional who can consider your own personal circumstances before taking any action. Continue reading “How do US Tax Rules Constrain the Investment Choices of US Taxpayers Living in Australia?”
The US Study Centre at the University of Sydney, with assistance from AmCham Australia, is producing a study on Australian investment in the US (and vice versa). While there are many factors that determine whether an Australian company will locate operations or marketing efforts in the US, the tax treatment of any Australian managers sent over to the US must be part of the equation. Unfortunately, I think most Aussies moving to the US for business are completely unaware of how the US tax system will see their existing Australian financial assets — until they’re already in the US tax system and it’s too late.
It would be great if USSC would include even just a page or paragraph on the way both the tax treaty and the xenophobic US tax code discourage movement of managers between the two countries.
AmCham has a blog post that reproduces the article from the Australian (and is not behind a paywall). At the bottom of the blog post (just above the comment box) is an email link. If you’re an Aussie who has relocated to the US for business and had to deal with these issues, please email AmCham and encourage them to include individual tax issues in their study.
Walter B. Wriston (former CEO of Citicorp): “All the Congress, all the accountants and tax lawyers, all the judges, and a convention of wizards all cannot tell for sure what the income tax law says.”
Applying US tax law to “foreign” legal structures is problematic.1 This is one of the great frustrations of trying to comply with the US system of citizenship based taxation (and one of the reasons why this extraterritorial application of US law should be carefully considered by all countries who negotiate tax treaties with the US). Inevitably there will be differences of opinion as to how US law applies to particular foreign income or taxes – and these differences will lead to different US tax treatment of the same or similar items. There may be no single “right” answer, and we (or the tax professional we have hired) will have to choose how to interpret US tax law to determine our US tax liability on our foreign (home) income. Understanding how our local law meshes with the structures defined in the US tax code is the first step.
In Australia, we have two advantages relative to much of the rest of the world (especially those which are not part of the Commonwealth). First, our laws are written in English. While there are several Aussie colloquialisms that differ in meaning from American English, our laws and other formal writing are written in language that is mostly the same as US English (with a few extra vowels here and there, and the occasional “zed” that has been replaced by an “s”). Second, our legal system is derived from the British system, so many of the underlying principles are at least similar between the two countries. Even so, there are differences.
This post is inspired by a paragraph near the end of this blog post by Marsha-laine Dungog:
We would encourage U.S. expats to seize the current momentum and push for legislation that will “enshrine” the Super’s objectives as one that will “provide income in retirement to substitute or supplement the Age Pension.”This would conclusively lay all doubts to rest that the Super should be analyzed in a manner that is consistent with (and therefore taxed similarly to) U.S. Social Security. The treatment of SG Contributions as foreign social security is consistent with the statutory mandate under Australian Superannuation law requiring employer contributions to be made pursuant to the taxing authority of the Commonwealth of Australia (Commonwealth) and not on account of a contractual relationship between employer and employee. Consequently, earnings accrued on SG contributions and distributions therefrom should also be classified as foreign social security benefits which are already excluded from U.S. taxation under Article 18(2) of the Tax Treaty.
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.
Back in 2014, we met with our federal MP who sent a letter on our behalf to the Assistant Treasurer asking about taxation of our superannuation accounts by the US. This is an extract of the response we received from then Acting Assistant Treasurer, Matthias Cormann: