US Residents (Expats)

[Paul@PFI]

Post is for those who may reside in USA and have IP in Australia. Or other investmnets and assets incl financial assets in Australia.

First FACTA aplies to US citizens and some non-citizen residents. Its a data gathering exercise for the IRS. Kinda like our post-Wickenby but far tougher. In USA a reporting system is used for US cits who have investmnets overseas. Its called FBar. Fbar and FACTA are going to be data matched. Starts 1 July 2014 but full data by 2016.

FACTA rules are finally going through to Parliament in next few weeks after bi-partisan govt agreements between Aus and USA Treasury and tax reps. Australia has negotiated far more favourable FACTA reporting requirements that other countries. The agreement means:
1. Financial institutions will NOT report to the IRS
2. Financial institutions might be found to be in breach of our discrimination laws if they flagged "US citizenship" in their records. Institutions will need to identify potential US residents. ATO will also assist using its data. (eg US address on tax return and a non-resident taxpayer may trigger reporting)
3. ATO will collect FACTA data from institutions and pass this each calendar year to the IRS
4. IP details wont be captured BUT if IP is sold the deposit likely to be flagged to IRS. The highest daily balance is part of the data sharing.
5. Banks, CU, Bld Soc (some?), shares, brokers, managed funds, ETF etc all caught.
6. Superannaution Funds in Australia are excluded (accum and pension) FINALLY the IRS agrees that super is not an IRS target asset !!!
7. Reporting has $50kUSD threshold. Australia has issues with how to value a USD and may report a lower threshold (eg $25K). ATO havent disclosed and I dont expect they will.
8. Taxpayers will not know what is reported.

IRS will use F-Bar reports and compare the two. Its not intended to be a perfect data match but intends to identify:
1. Financial assets and income not taxed by IRS
2. Sudden appearance of financial assets the IRS doesnt know about in returns or FBar reports
3. Counter terrorism and laundering issues
4. Trabsfers from an AUS account to a non-FACTA intitution / country will also be flagged.

So message is make sure FBar reporting and AUS affairs are aligned. If so no issues should occur. Private issues may trigger expecptions (eg deceased estate $$)

Happy to address any questions.

 

[alexlee]

Paul, is there a distinction between 'US residents' and 'US citizens'? My understanding is that US citizens (i.e. holding a US passport) need to pay US taxes on worldwide income.

Would a non-US-citizen US resident (e.g. Australian passport holder only, lives in the US) be liable for worldwide tax to the IRS? In that example, an Australian tax return would have to be lodged for Australian sourced income. Australian tax residency determines what needs to go into the Australian tax return, but does not affect the US tax return.

 

[Paul@PFI]

Paul, is there a distinction between 'US residents' and 'US citizens'? My understanding is that US citizens (i.e. holding a US passport) need to pay US taxes on worldwide income.

Would a non-US-citizen US residents (e.g. Australian passport holder only, lives in the US) be liable for worldwide tax to the IRS? In that example, an Australian tax return would have to be lodged for Australian sourced income. Australian tax residency determines what needs to go into the Australian tax return, but does not affect the US tax return.

I'm not "expert" on US taxes and not qualified for that side of the pond. But...
- Yes US taxes on a citizenship basis which is very different from most countries (Fun fact - Eritrea is only other country that also does in such a way !). You are "born" to pay US taxes I'm afraid. You can end that but it involves a borat like moment where you renounce citizenship and adopt a new country such as Australia and become a citz here. You do it at any US embassy. You can restore it too. This one of the first tax strategies used here. It can avoid double tax concerns in some cases.

Citizenship under US law is a "right to certain rights"..eg "right to a passport". Others can get a passport based on residency but its not automatic. Greencards etc....So a former cit can keep their passport but can lose it.

- US also taxes resident aliens (not area 51 although they may well do so if they earned income) and a resident can be taxed. Local advice needed on that one.

In the question you ask USA generally taxes on a citizenship basis first then on a source basis. So if an aussie expat lives in CA and works there IRS taxes it. If he has a bank account they tax it. If he has a $A bank account they "might" tax it. They might not. My advice is to get local tax advice on complying with IRS and follow it. US taxpayers may need to complete a FBar form and report non-US assets and income.

A Double tax agreement applies. The DTA is a bit wierd. While US taxes citizens it also allows other jurisdictions rights to tax. So full and final taxes can also apply in Australia that dont affect USA. Vice versa. Confused ?? For example a US cit can come to Australia and do business. It might be seen as a perm establishmnet and be taxed here not in USA. Or maybe both !!

Generally, individuals need two agents to do two tax returns. We share info. We each advise on our respective areas. The timing difference for returns is a pain.

 

[alexlee]

My point being, doesn't your first post presume that US residents (regardless of citizenship) are liable for US tax on Australian sourced income?

 

[Paul@PFI]

This thread deals with US taxpayers who have investments and accounts in Australia and IRS reporting and datamatching. A large number of my expat clients are worried and this post updates others who may also have interest in this issue. The IRS are beating this issue up and its worrying some. They are concerned as US rules will force 30% withholding and also escalate IRS attention. As they learn that an agreement has been reached it is reassuring.

Generally speaking $A source income may be taxed in Australia (but not always eg FF divs, CGT on shares etc) and whether or not US taxes occur is a separate matter for a US tax preparer.

 

[Rob G.]

My point being, doesn't your first post presume that US residents (regardless of citizenship) are liable for US tax on Australian sourced income?

Your understanding is correct.

The US taxes residents on Australian source income and provides a credit for Australian income tax paid on those earnings.

A resident may be an individual who is a resident as a question of fact, possesses a right to permanent entry (green card) or else physically present for 183 days during the tax year.

As to how much tax is shared between Australia and the US on each type of income, reference is required to the relevant double tax agreement.

 

[truong]

Thanks Paul and Rob. Can an Australian expat paying tax in the US deduct losses caused by an Australian negatively geared property?

 

[Paul@PFI]

That is a question for a US tax practitioner to determine how neg gearing aplies to US income.

If they lodge an AUS return its common to accumulate AUS tax losses in such a case. If and when the prop is sold and CGT gain occurs the issue of a 8May12 valuation may be relevant. The resulting taxable gain is reduced by carried fwd accum income losses. If losses exceed profit then no AUS tax is payable.

This issue highlights a key reason for a expat to lodge returns when losses occur. They arent lost. If they return home the losses can also offset ordinary salary income too.