Problem

Australian citizens and residents who are also taxable by the US are subject to double taxation that is not prevented by the Australia/US Tax treaty. In fact, the treaty guarantees unfair taxation by the US of some Australian source income, including superannuation. While the cause of this double taxation is the US practice of taxing based on citizenship rather than residence, the effect on Australian citizens and residents can be mitigated by updating the current tax treaty.

Double taxation stems from the mis-match between Australian tax law and the 74,000+ pages of US tax law and regulations. Those subject to both sets of tax law will pay the higher of the two tax rates on each type of income. To make things worse, US tax law treats many “foreign” investments as suspect and deserving of punitive taxation; for a US Person living in Australia, all of their local investments are “foreign” to the US.

The US has taxed based on citizenship rather than residence since the Civil War. However, until recently this was neither well communicated to US expatriates nor enforced. In 2014, Australia signed an inter-governmental agreement with the US, the FATCA IGA. Under this agreement, Australian banks must now hunt out US Persons and report their financial information to the ATO for transmission to the IRS.

The Australian government is one of two parties to both the Tax Treaty and the FATCA IGA. Those impacted by the inadequate coverage of these agreements are Australians living in Australia. The Australian government has an obligation to protect its citizens. In particular, the following areas need attention:

  • Superannuation: Australia legislated mandatory retirement savings for employees with the Superannuation Guarantee (Administration) Act (1992) and the Superannuation Industry (Supervision) Act (1993). Unfortunately, the US does not recognise superannuation as a qualified tax-deferred retirement plan. While the US tax rules in this area are complex, the US will generally tax contributions and either current income inside super or a portion of withdrawals from super. The 2016 US Model Tax Treaty includes provisions under which the US will respect the tax deferral in super for Australian residents as well as for US residents who previously accumulated superannuation in Australia.
  • Saving Clause: All US tax treaties include a “saving clause” that allows the US to tax US citizens as if the treaty did not exist (with the exception of a limited number of treaty provisions). The problems with this clause are discussed in this post by John Richardson at citizenshipsolutions.ca.
  • PFICs (Passive Foreign Investment Companies): Australian managed funds, listed investment companies (LICs), real estate investment companies (A-REITs), and exchange traded funds (ETFs) are all treated as PFICs for US taxpayers. PFIC treatment results in punitive taxation of these investment vehicles. Part of the rationale behind this punitive treatment is to prevent US taxpayers from using “foreign” investments to defer taxable income. But, any of these investments that is registered for sale to retail investors will be required by Australian law to distribute all income and realised gains currently, just like the American equivalent. The treaty should include a clause that states that Australian investment structures that are sold to retail investors are not to be considered “foreign corporations” under the PFIC rules.
  • NIIT (Net Investment Income Tax): Enacted as part of Obamacare, NIIT is a flat 3.8% tax on investment income for US taxpayers whose income exceeds a threshold determined by filing status. NIIT applies to all investment income, regardless of source, and cannot be offset by foreign tax credits. For those affected, this is a clear case of double taxation.

The end result of these deficiencies in the current treaty is that any Australian citizen or resident that is also taxed by the US (as a citizen or green-card holder) will end up paying tax to the US on their Australian superannuation, and will also find it difficult to effectively invest outside of super. These problems will affect middle class Australians more than high net worth Australians because a) the most effective investment vehicles for small savers are exactly those classified as PFICs and b) they are less able to afford the tax advice and compliance services needed to effectively plan for living under two very different tax regimes.

FATCA IGA: Under the IGA, the US agreed to provide reciprocal information. Article 10 of the IGA states that the parties will consult on the progress toward implementation of the IGA prior to 31 December 2016. This deadline in the IGA provides the Australian government a window of opportunity to re-examine the agreement to ascertain whether the US is actually providing the data promised in Article 6. Towards this end, the Australian government should disclose more information about the data sent TO the IRS in September 2015 and information about what NEW data has been received FROM the IRS under the FATCA IGA.

Citizenship Based Taxation: While the focus of this site is on actions the Australian government can take to protect its sovereignty and tax base, see the US Action page for updates on the fight against Citizenship Based Taxation in the US.

19 thoughts on “Problem”

  1. Great effort, Karen, on putting this site together and showing leadership to organise an effort to bring about positive change on behalf of the ~100,000 people of American origin that now live within Australia and are caught up in double taxation and numerous tax traps between the US and Australian systems.

    I’m a naturalised Australian citizen. I’ve worked and saved toward a self funded retirement in Australia for approaching three decades yet my journey towards being self funded (as opposed to taking a taxpayer supported government pension) is continually frustrated. Some examples:

    • my Superannuation does not enjoy the same tax advantages as other Australians;

    • I’m prohibited from investing in legitimate investment funds within Australia under threat of confiscatory tax by the US (PFICs) and now recently, through Australia’s enabling of FATCA through the inter-government agreement (IGA) have been denied financial services offered to other Australians;

    • I will not receive the full Australian tax concessions on a recent redundancy payment I received from a company that I had worked for the past 20 years as the US does not recognise the Australian tax policy and treats the redundancy as general income to be taxed as my marginal rate basically allowing the US to siphon off this much needed tax savings;

    • I’m effectively denied the use of many legitimate legal instruments such as trusts, SMSFs, corporations, etc. through excessive, complex and costly US tax rules and compliance reporting;

    • I’m double taxed in numerous ways despit the current tax treaty which one would think has the purpose to prevent this injustice; this is a major irony given Australia is a higher tax country, yet all the tax I pay within my country of residence is not fully recognised by the US;

    • I face ongoing complex and costly compliance requirements to a country that I have not lived in for decades.

    • I cannot afford to renounce my US citizenship due to the imposition of a financially material exit tax that keeps me hostage to another country’s tax policy.

    This leads to the unfair situation where all Australian citizens are not treated equally and Australian domestic policies are undermined through actions of foreign governments. Why should my citizenship be second class to other Australians? Australians should be outraged at this discrimination and that funds which legitimately should remain within the Australian economy are being extracted by a foreign government.

    Many, including some Australian politicians, say US law taxes their citizens on a worldwide basis so this issue is something to be taken up by the dual citizen with the US government. I disagree. The impact of foreign laws within Australia violates Australia sovereignty and undermines Australian domestic policy. By analogy, do US gun laws allow me to arm myself within Australia?

    This clear discrimination between Australians is something that needs to be addressed here in Australia through democratic processes and our elected government representatives. Australia is my home; it is right that we work to bring about change within the country we work, pay taxes and live.

    So I commend Karen for taking the first step to organise Australians to bring about much needed change. This effort will only be successful if affected stakeholders work together to bring about much needed change.

    Don’t forget we also have a Facebook group. Please join and get involved!! https://www.facebook.com/groups/FixTheTaxTreaty/

    1. Thanks for sharing your story, Carl.

      I was in a similar situation, but was fortunate to learn of the exit tax before I had saved enough to be subject to it. I renounced in June 2016 so that I could enjoy the same savings vehicles and tax benefits as other Australians.

      Dual Australian/US citizens are truly second-class Australians.

    2. My Australian-born, Australian-resident, Australian citizen daughter received a Christmas letter from her Australian bank to say she would now have to pay American tax. She is still a student, working part-time to support her studies and still hoping to get a job paying enough to start repaying her Australian HECS debt. Unfortunately for her, I registered her to have duel citizenship when she was born. What a horrible nightmare. Any wonder she is sobbing, and sees her life as completely changed.
      I, on the other hand, am still working in my own small business (after 45 years working in Australia, as a duel citizen) at age 68. I have resisted going onto the Australian pension, even though my taxable income this year was only $14,000. I can live on that, UNLESS the American government makes me pay them tax, or even if they force me to spend valuable work time filling out lengthy forms. What an astonishing situation, unfair to all.

      1. Hi Joyce. Take a deep breath. Take some time to do your research before rushing in to file US taxes. There’s a list of resources on this page: http://fixthetaxtreaty.org/omg-am-i-a-us-taxpayer/. Before you even contact a tax professional, make sure that filing US taxes is really what you want to do. Once you enter the IRS system, the only way out is by renouncing.

        A bit of good news – under the current treaty the Age Pension can only be taxed by Australia. If you’re eligible for US Social Security, that can only be taxed by the US.

        And, yes, the situation is totally unfair.

      2. Joyce Sanders… there may be no need for your daughter’s sobbing. Sounds to me as if she may be able to possibly expatriate w/o undue US tax problems if she can attain 5 yrs of US tax compliance. As a student and w the possible Streamlined option she may be able to do this w/o tears. Read my US tax blog post here http://www.angloinfo.com/blogs/global/us-tax/new-record-over-5400-renounce-us-including-boris-johnson/ let me know if my firm can assist you. We have successfully handled many expatriation cases. Good luck.

  2. Am very glad to have found this site. Was put in touch with Karen by Julie Power after reading her article. I am a dual citizen that has been here for 25 years and recently had the experience of having the IRS tax Centrelink benefits I had received, which I found outrageous and made me concerned whether that would happen when I started drawing on my Superannuation. That’s when I read Julie’s article which lead me here.

    1. I’m glad you found us, Brian. The US taxation of Centrelink benefits (other than the Age Pension) is absolutely outrageous! I will add that to our list of changes that need to be made to the treaty.

      1. Hi Karen, I just discovered your site Thank you! The US tax system is a nightmare for our expat family to negotiate.

        I am a bit concerned about the above comments re US taxation of Centrelink benefits and was wondering if you can clarify further?

        I am in receipt of Family Tax Benefits and having checked with the IRS plus two tax agents in Australia with extensive US specific experience (recommended by the US Consulate), I was advised that Family Tax Benefits were definitely not taxable in the US. One of these tax agents actually has an ad on their website specifically referencing FTB as not taxable in the US! Perhaps unsurprisingly, the IRS and the two tax agents gave me a total of 3 separate reasons for this, one of which was actually based on the current treaty, so I am a somewhat confused now given your statement about US taxation of Centrelink benefits.

        I look forward to reading your response. Thanks again for the great work you are doing on behalf of us expats!

        Bill

        1. Hi Bill,
          Thanks for your comments. I’m not familiar with Family Tax Benefit A or B, as they never applied to us (kids are long gone now). If your tax agent says they’re not taxable in the US, then that’s probably correct. Unemployment/NewStart benefits are, I believe, taxable by the US. Plus, the fact that this is not clearly spelled out anywhere is a real problem – the uncertainty drives people to pay exorbitant costs for tax preparation.

          1. Thanks for the reply, Karen. As you suggested, I will stick with the existing advice re this from the tax agents (and IRS). I agree that the lack of certainty is a major issue! All the best with your endeavours and I will keep an eye on your site to see how we can stay involved.

  3. If I try to renounce my U.S. citizenship, but don’t have the money to pay to do it, I suppose either I can’t do it, or……….will they put me in prison, extradited from Australia, for not paying American tax? Would the U.S./Australian Tax Treaty allow for extradition from Australia for non-payment of tax? And if they didn’t extradite me, would they just ban me from ever coming to the U.S. to see my first grandchild due to be born in the U.S. in April of my dual citizenship daughter currently working in America? What an amazing evil they have set up in this tax law.

    1. If all of your income and assets are in Australia, the IRS will have a very hard time collecting any tax from you. And, you will not be extradited simply for failure to pay US tax. Every case I’ve seen of someone being extradited from Australia to the US has involved fraud or some other serious crime. If you’re tax compliant in Australia and all of your income is from Australia, then the ATO will not assist the IRS in collecting US tax from you.

      The IRS is not able to share information with other US agencies unless there’s a specific law requiring it. The IRS will tell the Department of State if you have a tax debt of more than USD50,000, and your US passport will be cancelled. Before it gets to that point, however, the IRS will have gone through it’s procedures to assess the tax, finalise the amount, and attempt collection. You would receive a letter from the IRS at each step of the way. If you haven’t been contacted by the IRS, then you almost certainly don’t have a finalised tax debt that the IRS would report. So, if the IRS has not contacted you, then you shouldn’t be denied entry into the US.

      As for renouncing your US citizenship – the cost of a certificate of loss of nationality is US$2,350. The consulate will not process a renunciation until you pay this fee. Take a look at these pages on the Isaac Brock website:
      http://isaacbrocksociety.ca/introductory-material-on-fatca-info-session-synopsis-history-of-isaac-brock-society/
      http://isaacbrocksociety.ca/just-say-no-not-renouncingrelinquishing-nor-complying/

      and read through the information at http://www.citizenshipsolutions.ca/

      Feel free to post questions here or on the Isaac Brock website (more people will answer your questions on Isaac Brock as their audience is worldwide).

  4. Thank you for creating this website – this is a cause which I strongly support. I’m an Australian citizen living in the US and am dismayed at the abusive treatment of Australian superannuation funds under US tax policy in comparison to other foreign retirement funds. I’m not particularly knowledgeable on taxation laws or international treaties but am more than willing to help push this forward in any way possible.

  5. i have no idea if the issues listed herein are relevant to me, but i found this searching online for a IRS problem. I’m an Australian Citizen with an investment in the US (LLC – pass-through entity – currently taking no income) I have filed form 8843 twice – both times citing tax treaty article 21 as reason for no tax liability in the US. I just got a letter from the IRS demanding $20,000! Reason given was ‘we can’t allow your tax treaty exemption’ I’m so confused – what has changed between 2015 and 2016 tax years!?

    1. Hi eoin,
      Glad you found us. It sounds like you need professional advice. I’m not aware of any changes to the treaty or its interpretation between 2015 and 2016. You’re an Australian citizen, but are you also a US tax-resident (resident, citizen or green card holder)? I’m not sure how Article 21 applies in the circumstances you’ve outlined, but Article 21 cannot be used by US tax-residents due to the Saving Clause.

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