Investment Constraints 4: Structures

An entrepreneur starting a new business has a choice to make – how should she structure the business legally. In Australia, there are actually four alternatives to choose from: sole proprietorship, partnership, company or trust. The reasons for choosing a company or trust often include limiting legal liability, protecting personal assets, or ease of sharing or transferring ownership. And, in the wake of recent caps on superannuation contributions, more financial planners are recommending family trusts to hold savings that cannot be put into the superannuation system. What are these structures? How do they work in a purely Australian context? And what problems or challenges might arise when a US taxpayer tries to do exactly what her Australian neighbour would find optimal?

This is the fourth instalment in our series of posts discussing the ways US tax laws constrain the investment choices of US taxpayers living in Australia. These are the areas we will be covering:

  1. Superannuation
  2. Homeownership
  3. Real Estate
  4. Australian Managed Funds
  5. Australian Shares
  6. Business Ownership Structures
  7. Investing in the US
  8. Record keeping

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 “Investment Constraints 4: Structures”

How do US Tax Rules Constrain the Investment Choices of US Taxpayers Living in Australia?

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:

  1. Superannuation
  2. Homeownership
  3. Real Estate
  4. Australian Managed Funds
  5. Australian Shares
  6. Business Ownership Structures
  7. Investing in the US
  8. Record keeping

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?”

How can they do that?

Have you opened a bank or investment account lately? Were you asked about other citizenships? Place of birth? Since mid-2014 Australian financial institutions have been ferreting out US Persons. At most institutions, every new account holder is asked these questions. And, if you are found to be a US Person, you must complete a form W-9 (or equivalent) disclosing your US connection and Social Security Number. This data will be sent to the ATO, who will forward it on to the IRS.

Think about that.

Private Australian financial information of Australian citizens and permanent residents is being sent to a foreign government.

How can they do that? Do they really have the authority to send private financial data to the IRS?
Continue reading “How can they do that?”

FOI Take 2

Just over a week ago, I received a message through this website from someone who had submitted an FOI request to the ATO. “Sam” expected that one of his accounts had been reported because the bank had identified him as a US Person and the balance was above the bank’s reporting threshold. The response from the ATO puzzled Sam, and it puzzled me as well. The ATO response stated that they needed to consult with a “foreign government” about whether Sam’s FATCA records were exempt from FOI under Section 33 of the FOI Act: Continue reading “FOI Take 2”

Explaining the Saving Clause III

This is Part 3 of our series explaining the Saving Clause in the Australia / US tax treaty. In Part 1 we saw how international tax works for 90% of the world’s population: income sourced in the country where you live is taxed only by that country. Income from elsewhere is governed by the treaty and generally taxed by the source country – with a tax credit in the resident country if it is also taxed there. In Part 2 we saw how the Saving Clause works in US tax treaties[1]: US citizens are subject to US tax wherever they live due to the unique practice of Citizenship Based Taxation; the Saving Clause allows the US tax its citizens as if most of the treaty did not exist, allowing the US to tax foreign-source income of foreign residents.   Continue reading “Explaining the Saving Clause III”

Explaining the Saving Clause II

This is part 2 of a three part series explaining how the Saving Clause works in international tax treaties. In part 1, we saw how international transactions are taxed for almost 90% of the world’s population under Residence Based Taxation (RBT). We looked at the example of Maria, an Australian resident with rental income in Santiago Chile. Maria pays tax to Chile on the rental income, but is not required to report or pay tax in Chile on any of her Australian income. On her Australian tax return, Maria reports the Chilean rental income and is able to deduct the tax paid in Chile from her Australian tax. Essentially, Chile has the first right to tax Chilean source income.  Continue reading “Explaining the Saving Clause II”

Strategy Document Feedback

Just before Christmas, Karen released our initial Steering Committee work on the group strategy for your feedback through the blog comments, our Facebook Group or Private Message.   Perhaps the timing was not the best given how frenetic things get for most of us over the holiday season? Continue reading “Strategy Document Feedback”

Explaining the Saving Clause I

When it comes to fixing the tax treaty, the “Saving Clause” is a key piece of the puzzle. From the discussion that followed the Strategy Roadmap, it is clear that many find the saving clause very confusing. So, in a series of three posts, I’m going to attempt to explain how the saving clause works and why it is important. In this first post we’ll look at how international tax works under the Residence Based Taxation model used by three quarters of the taxing jurisdictions in the world and covering almost 90% of world population, without the saving clause. The second post will look at how the saving clause, coupled with Citizenship Based Taxation changes the result. In a nutshell, we’ll see that the saving clause allows the US to tax US citizens living in Australia on their Australian source income. The final post will explore ways to fix the problem. Continue reading “Explaining the Saving Clause I”

One Step at a Time

journey

It’s crystal clear by now that the US and Australian governments are not going to wake up tomorrow and realise that FATCA and CBT are unjust and discriminatory. It will take quite some time to get rid of CBT and move to RBT. The other night I was catching up on my long list of podcasts, and stumbled upon the latest edition of the Freakonomics Podcast – In Praise of Incrementalism.  The podcast explores how an incremental approach worked for gay marriage, and the civil rights movement as well as how an incremental approach might be used for current issues such as #BlackLivesMatter. Listening to the podcast soon after reading a discussion about the civil rights movement in the American Expatriates Facebook group, started me thinking about our struggle to get our elected representatives to understand the injustice of FATCA and CBT. When it comes to fixing FATCA and CBT, a home run is unlikely. But each hit makes a run more likely. So while we have our eyes on the prize, we need to also aim for small victories that will eventually make a shift to RBT seem inevitable.

What does incremental look like?

Incremental is SLOW. It’s not exciting. But eventually it gets you there.

The incremental approach is most effective when the obvious, low-hanging fruit, is tackled first. I’ll suggest three potential baby steps that could get us on the road to victory – please add more in the comments.

Accidental Americans
Many of those claimed as US persons don’t identify as Americans at all. Perhaps they were born in the US, but their non-American parents took them home while they were still children. Or maybe they were born outside of the US with at least one US citizen parent. They may not even speak English. And now, if they admit their place of birth or parentage to their local bank, they are asked to fill out a W-9 so their account information can be sent to the IRS. What right does the US have to tax these people? The injustice is so obvious that President Obama has proposed an inadequate remedy in the 2016 and 2017 budget proposals. And recently there has been some push back against the US taxation of Accidental Americans in France.

Privacy/Transparency
Last week’s post argued that US Persons should be automatically notified when their account information was reported to the IRS via the ATO. Implementing this type of reporting would be an acknowledgement that affected US Persons have a right to know who has their financial information. Again, this is a baby step towards overturning the massive privacy violations of FATCA. A comment in the Facebook group argues that privacy is just a distraction, and that we should, instead focus on more substantive problems with FATCA. However, once our governments admit that there are some privacy concerns with FATCA, it may be easier to get them to understand some of the bigger problems.

Same Country Exemption (the right way)
This excellent video by Professor Allison Christians (McGill University) from 2014 was recently linked in the Citizenship Taxation Facebook group.

Starting about 6 minutes into the video Professor Christians advocates a “Same Country Exemption (SCE)” as an incremental approach to dismantling FATCA. SCE has a bad name among some groups of US expats because of a specific proposal that links SCE with IRS compliance. However, I think Professor Christians is advocating a simple SCE without any need for the FFI to check anything other than proof of residence: if you bank where you live, the bank is absolved of all FATCA reporting requirements. Plus, you’re being taxed where you live, so the chances of your “foreign” bank account being used to evade a significant amount of US tax is fairly small. SCE would be a small incremental step that would bring relief to many (not all) of those adversely affected by FATCA. Does it go far enough? No. But, implementing this type of SCE would alleviate at least some of the injustice of FATCA – it would be a small wedge that might allow us to push the door open wider.

 

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. Continue reading “Priorities”