The US has always been a popular destination for Australian expats. Whether it be for career opportunities, following a loved one, or in search of a change in lifestyle, thousands of Aussies have been packing up their belongings and moving to the land of opportunity. In fact, the latest US census figures indicate that over 93,000 Australian-born individuals now call America home.
If you’re an Aussie living in the US, navigating the US and Australian tax systems can be complex. Failure to adequately plan your finances can create a painful and unnecessary tax burden that can severely impact your ability to meet your financial goals.
When it comes to finances, there are a few key issues Australian expats in the US should be considering:
Your tax residency
This is the first thing you need to consider. Your tax residency can determine the country in which you need to file your tax return and can change the tax treatment of certain assets depending where they are held. Determining your tax residency can be complex, and you should seek advice from a specialised US and Australian accountant. Depending on the length of your stay, your residency intentions, your visa type, and many other factors, you may be deemed an Australian tax-resident, a US tax-resident, or even both.
The types of investments you hold and where you hold them
For Australian property investors, any capital gains accrued after 8 May 2012, whilst you are a non-Australian tax resident, will be fully assessable at your Australian marginal tax rate. This is in contrast to Australian tax residents, who receive a 50% discount on realised capital gains once the investment is held for more than 12 months. There has been a lot of discussion about eliminating tax concessions for the former Australian family home of non-Australian tax residents, and, whilst the bill to pass this legislation lapsed in early 2019, the Australian government has indicated that they still could make changes soon.
Managed investments (or mutual funds) can provide the benefits of diversification, professional investment management and access to investments not easily accessible. However, non-US managed funds held by an individual with a US tax obligation can have harsh consequences on US tax returns. These will be deemed “Passive Foreign Investment Companies (PFIC)”, potentially incurring penalty tax rates and onerous reporting requirements. The same treatment will likely apply to the following investments domiciled outside the US:
- Exchange Traded Funds (ETFs),
- Retail Property Trusts (such as AREITS),
- Listed Investment Companies (LICs)
- Stapled Securities
Certain direct share investments held outside the US can avoid PFIC treatment, however, care needs to be taken to ensure that you fully understand PFICs before undertaking a direct share strategy.
Another important consideration when building investment assets is determining where you expect to reside long-term. Apart from the important tax issues already mentioned, currency fluctuations can severely erode the value of the investment asset when you realise the asset later in life.
Your retirement planning
One of the most common questions we get asked is about retirement savings. Retirement savings vehicles, whether they be 401Ks or IRAs in the US or superannuation in Australia, can provide a great low-tax investment environment to save for your retirement. However, retirement savings can be complicated due to cross-border tax treatment. If you’re an Australian tax resident when you draw upon your US retirement accounts, the accumulated earnings may be assessable on your Australian return.
While it can be tempting to contribute to your Australian superannuation fund due to the tax benefits, this too can become complex. As super is not covered under the Australian/US tax treaty, it is a grey area for US tax purposes, however, issues can arise when your personal contributions exceed your employer contributions.
This may lead to your fund being deemed a “Foreign Grantor Trust” on your US return. This treatment leads to earnings within the fund being taxable on your US tax return at your personal tax rate and open you up to the PFIC treatment discussed earlier. There are also some onerous tax reporting obligations that come with this treatment, which can further complicate your US return.
Self-Managed Super Funds (SMSF) are popular in Australia, however, expats need to be extremely careful. SMSF laws require ‘central management and control’ to be in Australia, and at least 50% of ‘active members’ (those contributing) need to be Australian residents. Failure to comply with either of these two tests can lead to the fund being deemed ‘non-complying’, which would alter the tax rate from 15% to 45%.
The impact of some common Australian financial structures on your US tax return
Family trusts and self-managed superannuation fund (SMSF) structures will be considered “Foreign Grantor Trusts” if you are liable for US taxes. This means that income will be taxed in the hands of the person who created the trust, completely unwinding the tax benefits these structures typically offer. Where a US taxpayer owns 10% or more of a foreign company where greater than 50% of the voting power or value of the company lies with US taxpayers, they will be subject to US “Controlled Foreign Corporation” (CFC) rules. This triggers some complex reporting and tax obligations which require specialised assistance from a US accountant.
Your currency strategy
If, at some point, you need to transfer assets across borders then the exchange rate will become extremely important. If you need to convert large lump sums, have a strategy around this and plan it early as transferring a large sum at the wrong time can severely erode your capital.
Foreign currency conversion can also have an impact on capital gains tax. Remember, if you’re a US taxpayer, you will be assessed on your worldwide assets. US capital gains tax is calculated based on your purchase and sale price in US dollars, regardless of the currency used to purchase the asset. Therefore, currency movement can significantly impact your gain or loss for US tax purposes. Timing and planning can be critical.
Partner with experts who understand both locations
Always choose an accountant to look after your tax filing and provide taxation advice who understands both jurisdictions. To put yourself in the best position to achieve your financial goals, it is also beneficial to partner with a financial planner. An expert planner who has a good understanding of financial issues for Aussies in the US can help you to reach your financial goals, ensuring you can live for today and plan for tomorrow, wherever life may take you.
General Advice Disclaimer
The information in this blog is provided by Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) and is of a general nature only. It may not be relevant to your personal needs, objectives or financial circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if the strategies and products are right for you.