Many Aussies will obtain a green card or US citizenship to provide certainty that they can stay or return to the US at a later date. However, the United States is one of only two nations that impose taxes on their citizens regardless of where they permanently reside or hold their assets. So even if you return to Australia, you will be required to file US tax returns on income earned anywhere in the world.
Of course, there are many reasons to obtain and retain your citizenship, and the financial implications aren’t everything, but it is important to be aware of the potential impacts.
Although you will be required to file taxes in Australia and the US, there is a double tax agreement between the two countries. This means that income and capital gains taxes paid in Australia can often be used to offset US taxes. However, it’s important to be aware that this does not mean you won’t run into tax issues. Certain Australian assets can receive harsh treatment from US taxes, and it’s critical to understand how they are treated when making financial decisions.
Non-US indirect investments
Non-US domiciled managed funds held by an individual with a US tax obligation can have harsh consequences on your US tax returns. These will be deemed “Passive Foreign Investment Companies (PFICs)”, 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 must be taken to ensure that you fully understand PFICs before undertaking a direct share strategy.
Your primary residence
While the primary residence is a tax-free asset in Australia (so long as it is sold when you’re a tax resident of Australia), the US will potentially apply a capital gains tax on your primary residence for gains in excess of USD 250K for individuals or USD 500K for couples.
Paying down debt
Many people are not aware that there are potential US tax implications of paying down or refinancing your Australian debt. At the time of making a lump sum repayment or refinancing your loan, if the US Dollar value of your Australian loan is less than when you took it out, this will be perceived as a US Dollar “gain”, which may well be taxable on your US tax return.
For example, a US citizen living in Australia takes out an AUD 1 million loan to buy a property when USD and AUD are at parity. They keep the loan as interest-only. Five years later, they receive an inheritance and decide to pay off the loan in full. At this point, the loan remains at AUD 1 million, but purely due to currency movements, the USD value is $800k. There is a reduction of USD 200k between when the loan was taken out and when the lump sum repayment was made, and this difference will likely be taxable on their US tax return.
Superannuation is a very complex area as US authorities have not made a clear determination on how it is to be treated for US taxes. Most US accountants will agree that the earnings within the fund will either be taxed each year as part of your US income tax return or when you draw down from your superannuation account in retirement. Personal contributions to super that exceed what your employer has contributed to the fund can be problematic and can change the treatment of your super fund.
US taxpayers that have interests in an Australian-domiciled family trust or run a business through a company structure may face tax complications and additional filing requirements.
Returning with a US taxpaying partner
If you are not a US citizen or green card holder when you return to Australia, it’s likely you won’t be required to file US taxes for your Australian assets or income. However, if your spouse is a US citizen or green card holder, they will. This presents financial and tax planning opportunities, where assets that may cause US tax issues can be held in your name instead of your spouse’s. You can, for example, consider purchasing the primary residence in the non-US taxpayer’s name to avoid capital gains tax implications on eventual sale.
Advice from experts is critical
When it comes to planning your finances with US tax obligations, it pays to get expert advice from a financial planner who has an understanding of both jurisdictions to ensure you make the right moves.
If you or your spouse have US tax obligations, get in touch to discuss how the expat experts at Apt Wealth Partners can help you navigate these requirements and continue to protect and grow your finances here in Australia.
General Advice warning
The information provided in this blog 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 and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.