Selecting the right investments is one of the most important components of any financial strategy. Ensuring you have an appropriate investment mix can go a long way towards determining whether you will be able to achieve your lifestyle and financial goals. With an increasing number of investment options available, selecting the best investments for your personal circumstances is difficult. For US citizens living in Australia, this task is made all the more challenging given the additional US tax consequences you will need to navigate.
Some considerations include:
- Consider what 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 onerous reporting requirements on US tax returns.
- Some Investments purchased on the Australian Stock Exchange can still be classified as a PFIC
Many US investors purchase their investments directly on the Australian Stock Exchange (ASX) to avoid PFIC treatment. However, it is important to keep in mind that some investments that trade on the ASX may be classified as PFICs. This may include 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.
- Consider 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.
- Consider who should hold any assets
If you have a partner who does not fall within the US tax system, there may be the ability to plan who should hold the asset to reduce any potential tax liability on eventual sale of the asset. For example, sale of your Australian primary residence (assuming you’re in Australia at the time of sale) is exempt from capital gains tax liability under Australian tax law, however, there may be capital gains tax applied on your US tax return. Planning who should own your assets may reduce or prevent future tax liability. You should also consider the consequences for your estate as well as family law implications.
- 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 the sale of certain assets. This is why it is so important to plan ahead for any future asset sale carefully.
- 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 has an understanding of 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.
