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Five tips for Aussies who live in the US

Whenever baby boomers get together socially two topics will almost certainly come up in the conversation.

The first will be about their ageing parents, and the increasing challenges that come when parents get older, and contemplate a move from the family home to some form of aged care facility.

The second will be about their children, and thanks to the global village that is now our world, you can bet that at least one of those children will be living overseas, possibly in the USA or the UK. A major issue that often arises will be how to handle the tax treatment of a change in residency.

Not born in the USA

I have had experience in both these issues, as I am a co-author with Rachel Lane in the book Age Care Who Cares, and my second son James is now a resident of the USA. Take it from me, if you think aged care is complicated, it’s a breeze compared to American tax law.

For what follows I’m indebted to Daniel Sparks of Pitcher Partners Sydney who took the time to explain the intricacies that face an Australian who becomes a resident of the USA, based on these five tips.

1. Residency

Generally speaking, you become an American resident for tax purposes the first time you enter the country after receiving your green card. Any child born in America is automatically an American citizen.

But, it isn’t necessarily the case that your Australian resident status ends at that time. You would still need to look at Australian principles of tax residency, which can be vague, to work out whether you have become a non-resident for Australian tax purposes.

It is possible you may be resident for tax purposes in both Australia and the US. In that case, you would have to look at the tax treaty to determine whether a tie-breaker test applies to treat you as non-resident from an Australian perspective. This is first based on where your ‘permanent home’ is but can become complicated if a person has a home in both countries, as is sometimes the case.

It is also possible you became a US resident at an earlier point in time due to the ‘substantial presence’ test if you were spending significant time there before getting the green card. Often, people move to the US on working visas initially and the green card comes later after they have already lived there a few years.

2. Superannuation

Daniel tells me that you will be required to advise the IRS every year the balance of your superannuation fund in Australia, and potentially pay America income tax on any gain in value, even if that value is unrealised. If the value has fallen because of market fluctuations, there is no deduction for the reduction in that value. This is particularly onerous because you will be paying income tax at American marginal rates, on earnings in your super fund which have already been taxed at 15% per annum.

3. Investments such as property and managed funds

When you become a non-resident for Australian tax purposes, you have two choices with your investments. The first option is to let a notional realisation happen for capital gains tax purposes and pay capital gains tax in Australia on that gain to date.

The assets then become part of your American tax affairs, and all income and capital gains need to be declared on your American tax return. If you keep assets such as Australian shares, you will need to advise the share registry you are now a non-resident - they will deduct tax from your Australian distributions at the normal non-resident rate.

Alternatively, you can keep the assets and pay capital gains tax when you dispose of them, while still including the income in your American tax return. The problem with doing this is that the capital gains tax discount of 50% slowly erodes, because no discount is allowed for non-residents.

I understand that there is a specific US/Australia tax treaty clause that might solve the ‘deferred CGT’ issue. It essentially says that if you defer CGT for Australian purposes, then US will tax the whole capital gain and Australia will not tax any of it. However, this only works if you are a US resident at the time of the sale. It wouldn’t work if you moved to a third country before selling the assets, or moved back to Australia, in which case Australia taxes the gain but you lose some of the CGT discount.

4. Gifts to the American resident

It is common for parents to give money to their children for help with living expenses, and possibly to help in buying a house. If these gifts exceed $US100,000 in a year the child is required to fill in Form 3520. In normal circumstances this would have no tax consequences, except that failure to report a foreign gift may result in a penalty of up to 25% of the unreported amount.

5. Inheritances

A bequest is similar to a gift and once again Form 3520 has to be completed. There may be Australian capital gains tax payable in the estate of the deceased, but if the beneficiary is a non-resident the capital gain cannot be rolled forward as it can be if you are a resident. In some circumstances a capital gain might be rolled forward if the asset is ‘taxable Australian property’ (eg. Real estate situated in Australia). Obviously it is critical when making a will to distinguish between non-resident beneficiaries and resident beneficiaries.

It can become complicated

What I have written is just a short summary of the complexity faced by Australians who become American residents. It also highlights the importance of getting expert advice sooner rather than later. It’s much easier to keep the car out of a bog than try to dig it out when the wheels are deep in mud.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. Email noel@noelwhittaker.com.au or visit the website. This article is for general information purposes only and does not consider the circumstances of any investor.

OFFER: Newly revised and updated, Making Money Made Simple will be available from October 2019. Any two books for only $49.99 with free shipping within Australia. View two-book bundles.

 

7 Comments
SMSF Trustee
October 30, 2019

Give me your huddled masses yearning to breathe free
And I will tax them to the nth degree
Send these the homeless tempest-tossed to me
From them I'll raise revenue to fund my golden door

Karen Alpert
October 25, 2019

For the past 3 years I’ve been running an educational website on the problems with US taxation of Australians (http://fixthetaxtreaty.org/). The associated Facebook group now has 950 members (about 2/3 US expats in Australia and 1/3 Aussie expats in the US). The fact that superannuation wasn’t addressed when the tax treaty was amended in 2001 is unbelievable. Moving between the US and Australia is particularly difficult for those with established investments and retirement savings, as Alan Dixon has found (https://www.ustaxcourt.gov/UstcDockInq/DocketDisplay.aspx?DocketNo=19013874).

Lakshmi Krishnan
October 24, 2019

Can you please also discuss the tax implications for a child living in UK receiving part of a family home in Australia and other assets?

DougC
October 24, 2019

While not part of Noel's article, there are also complications for the status of children born to US citizens and US residents (who might marry a US citizen) depending on whether the child is born within the US or elsewhere and while a citizen-parent was or was not continuously resident in the US at the time, The rules have apparently changed again in this respect in the last week or two and the consequences can affect the child's right to enter the US, receive education in the US etc. I have previously had 2 friends (in each case with one parent a US citizen) who found themselves in complicated difficulties over these regulations.

Karen Alpert
October 24, 2019

You've only touched the tip of the iceberg here. If your Australian investments are in managed funds, the US will call them "Passive Foreign Investment Companies"(PFICs) and tax the gain and "excess distributions" at punitive rates.

For those who get a green card, US taxation doesn't stop until you officially surrender the green card (using form I-407) - though there is the possibility of using the treaty to get around this. However, surrendering a green card may trigger the US exit tax if one has been a US tax resident in 8 of the past 15 calendar years.

Many of these issues also affect dual citizens living in Australia, as US citizens are always considered US tax residents and cannot use most of the provisions in the tax treaty.

I've written about the issues that affect US/Australia dual tax residents here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3097931.

Noel Whittaker
October 24, 2019

Well done Karen - you have done a great job. Just downloaded your paper.

Simon Taylor
October 29, 2019

Wow. Fabulous piece of work Karen. Even more complicated than I understood.

I thought having to do State as well as Federal taxes was the main problem but that with lower corporate and personal rates things were a little better than in Australia.

Lots more to contemplate and some of it subject to interpretation. Thank you for the link to the pdf.


 

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