Australia has always been a popular place for US citizens to call home. Whether it be for career opportunities, following loved ones, or a change in lifestyle, thousands of US citizens have been packing up their belongings and moving to the land Downunder. According to the 2016 census, almost 90,000 US-born individuals now call Australia home.
Unfortunately for US citizens living abroad, they face one of the most complex tax and financial systems of any expat community in the world. This is because the US is one of only two nations to impose taxes on their citizens (along with the tiny African nation of Eritrea), regardless of where they permanently reside. Unfortunately, this means the options for US citizens living in Australia to minimise taxes or grow wealth are reduced. However, there are still ample opportunities to build financial resources and achieve your financial goals, if you navigate the system correctly. Some considerations include:
Typically, superannuation provides a great low-tax investment environment to help save for your retirement. Unfortunately, superannuation is not covered under the Australian/US tax treaty. Therefore, this is a grey area for US expats in Australia. However, issues can arise when your personal contributions exceed your employer contributions, where your fund may be 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. This may unwind the tax advantages the Australian superannuation system sets out to achieve. Also, as superannuation rollovers may carry harsh tax consequences on your US return, make sure you spend some time selecting the right fund from the outset. It may be costly to change funds later.
- The types of investments you hold
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 US citizens are treated harshly on US tax returns. These will be deemed “Passive Foreign Investment Companies” (PFIC), potentially incurring penalty tax rates and having onerous reporting requirements on US tax returns. The same treatment will apply to Exchange Traded Funds, Australian Retail Property Trusts, Listed Investment Companies or any direct share where the underlying business receives mostly passive income. It’s important to make sure you consider the US tax treatment before you purchase any investment.
- Understand the US Dollar value of investment assets when making investment decisions
Remember that US capital gains tax is calculated in US dollars, regardless of the currency in which you purchased the asset. Therefore, currency movement can significantly impact the taxes applicable on eventual sale and, therefore, the ultimate return on your investment.
- Some common Australian financial structures have unwanted tax treatment For US citizens
Family trusts and self-managed superannuation fund structures will be considered “Foreign Grantor Trusts” for US citizens on their US tax returns. 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. Similar “look through” provisions will likely apply for company structures, meaning income from the business may not be taxed in an advantageous way. On top of this, these structures carry additional reporting requirements, which will likely lead to costly accounting fees.
- Credits and deductions
There are two main options available for US expats to reduce their US tax liability, either Foreign Earned Income Exclusion (FEIE) or Foreign Tax Credit (FTC). Your choice here is important, as it can lead to a reduction on your taxes applicable to superannuation contributions or sale of certain assets. This is why it is so important to carefully plan for any future asset sale.
- Partner with experts who understand both locations
Always choose an accountant who understands both jurisdictions to look after your tax filing and provide taxation advice. To put yourself in the best position to achieve your financial goals, it will also be beneficial to partner with a financial planner who understands tax issues for US expats.
General Advice warning
The information provided on this document does not constitute ﬁnancial product advice. The information is of a general nature only and does not take into account your individual objectives, ﬁnancial situation or needs. It should not be used, relied upon, or treated as a substitute for speciﬁc professional advice. Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.