Key Considerations for Australians Relocating to the US
Published on April 09, 2024
by Nick Wee
Nick Wee, an IRS Enrolled Agent with 17 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia.
Table of Contents
When Australians decide to move to the US, one of the first considerations is what to do with their property back home. The decision to sell or rent out property in Australia can have significant tax implications in both countries.
For instance, the timing of a property sale is critical due to the differing tax event recognition dates between Australia and the US. Australians must be mindful of capital gains tax rules and the potential for tax mismatches, which could lead to unexpected tax liabilities.
Moreover, the Australian Taxation Office’s rules disallow the main residence exemption for non-residents, potentially subjecting the sale of a primary residence to capital gains tax. For those opting to rent out their property, it’s generally more straightforward, with the possibility of aligning tax treatments in both countries to avoid double taxation.
Note: The main residence exemption in Australia allows homeowners to exclude capital gains from taxation when they sell their primary residence. This exemption can significantly reduce or eliminate capital gains tax (CGT) liabilities.
How do Australian expats manage property when moving to the US?
Australian expats often need to decide whether to sell or rent out their Australian property while considering tax implications in both countries.
Selling property can lead to tax events recognized differently by Australian and US tax laws, potentially resulting in unexpected tax liabilities. However, renting out Australian property while living in the US generally aligns well with both countries’ tax systems, allowing for tax credits in the US to mitigate double taxation.
What happens to my Australian superannuation when moving to the US?
Upon moving to the US, Australian superannuation may be subject to US taxation, especially for highly compensated individuals. The IRS may tax the unrealized gains within the fund, potentially leading to tax liabilities without immediate liquidity.
Here are some strategies to mitigate these effects:
- Consider the Timing of Your Move: Align your move with the Australian tax year or US tax year to potentially minimize the tax impact on your superannuation.
- Review Your Investment Strategy: Adjusting the investment strategy of your superannuation to more conservative options may reduce the fund’s growth and, consequently, the taxable amount in the US.
- Utilize Tax Treaties: Understand the details of the Australia-US tax treaty to see if there are provisions that can reduce or eliminate double taxation on your superannuation.
- Highly Compensated Individual Strategy: If you’re considered a highly compensated individual, explore strategies to reduce your taxable income below the threshold, if possible, to avoid stringent tax rules on your superannuation.
- Convert to a More Tax-Efficient Fund: Before becoming a US tax resident, consider transferring your superannuation to a fund that may be viewed more favorably under US tax laws.
- Seek Professional Advice: Engage with tax professionals who specialize in Australian and US tax law to develop a personalized strategy that considers your entire financial picture.
I want to know more about US taxes abroad
Is it advisable for Australians to manage a Self-Managed Superannuation Fund (SMSF) from the US?
It depends. Managing a Self-Managed Superannuation Fund (SMSF) from the US adds complexity to an already challenging tax situation for Australian expats. The need for compliance with both Australian and US tax laws makes it a less favorable option for most expats.
How do investments in Australia affect my US tax obligations?
Australian investments, including stocks, ETFs, and managed funds, can affect US tax obligations due to the US’s global taxation policy. Investments may be subject to US taxation, with specific rules like PFIC regulations potentially increasing tax burdens.
Australians may need to reconsider their investment strategies, possibly divesting from certain funds or switching to US-based investments to mitigate tax complications.
What should Australian expats know about investing in stocks and ETFs?
Investments in standard stocks, like major Australian companies, are straightforward when moving to the US, with foreign tax credits available to offset US tax liabilities.
However, investments in ETFs, managed funds, and other securities can become complex due to their classification as Passive Foreign Investment Companies (PFICs) under US tax law. PFICs face aggressive taxation, making it crucial for expats to understand the implications or consider restructuring their investments before moving.
How do PFIC regulations affect Australian expats’ investments?
Investments in ETFs and managed funds, common in Australian portfolios, are taxed under stringent PFIC rules when the investor becomes a US tax resident. These rules can lead to double taxation on the same income and impose additional interest charges, complicating the tax filing process.
How can Australian expats with PFIC investments mitigate tax challenges?
To manage the tax challenges posed by PFIC investments, Australian expats can opt for several strategies:
- Pre-Emptive Portfolio Review and Adjustment: Before moving to the US, review your investment portfolio to identify any PFICs (e.g., certain Australian-managed funds, ETFs, and investment companies). Consider reallocating investments to non-PFIC options or US-based investments to avoid the complex and punitive PFIC tax regime.
- Making Qualified Electing Fund (QEF) Elections: If holding PFICs, consider making a QEF election on your US tax return. This allows you to treat the PFIC income as capital gains and ordinary income, potentially at lower tax rates, and avoid the default punitive tax treatment.
- Mark-to-Market (MTM) Election: For PFICs not eligible for QEF elections, the MTM election allows you to recognize unrealized gains and losses annually as ordinary income or loss.
- Strategic Tax Planning for Distributions: Plan for and time the receipt of distributions from PFICs to minimize higher tax rates and interest charges associated with excess distributions.
- Exploring Alternative Investment Structures: Investigate alternative investment vehicles that are not considered PFICs under US tax law, such as US-based mutual funds or ETFs, which may offer similar exposure to desired asset classes. Direct investment in individual stocks, both in Australia and internationally, can also avoid PFIC status and its associated complexities.
- Seeking Professional Advice: Engage with tax professionals experienced in both Australian and US tax law to navigate the PFIC rules, make informed elections, and integrate your PFIC strategy into your broader financial and tax planning.
Should Australian expats liquidate their investments before moving to the US?
It depends. When Australian expats are preparing to move to the US, the decision to liquidate investments in Australia is not always black and white.
While direct investments in stocks may not pose significant issues due to the availability of foreign tax credits, investments in ETFs, managed funds, and other securities classified as Passive Foreign Investment Companies (PFICs) under US tax law can lead to complex tax situations. These investments are subject to aggressive taxation, making it crucial for expats to review their portfolios.
In some cases, transitioning investments into more straightforward financial vehicles or repurchasing through US-based funds may simplify tax obligations and financial management while abroad.
Why is pre-migration financial planning crucial for Australian expats?
Pre-migration financial planning will help Australians understand the tax implications of moving to the US, ensure compliance with both Australian and US tax laws, and make informed decisions about property, investments, and superannuation to avoid potential tax pitfalls.
It’s highly recommended to do this by consulting with tax professionals who understand both Australian and US tax systems, as they can provide strategies to minimize tax liabilities and avoid compliance issues, ensuring a smoother transition to life in the US.
