Why Americans in Australia File Taxes in Both Countries
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Are there any serious mistakes that Americans make when they initially move to Australia?
Most assume that they never have to file a U.S. tax return once they move offshore to work because they are also paying taxes in their new place of abode.
We find that by the time expats in Australia approach us, they have sometimes skipped quite a few years of tax filing in the U.S. After the initial shock, they worry about how much they will end up paying to the IRS. However, Australia has very high taxes, and they need to be aware that they probably won’t owe much or nothing at all.
Do some people ever have double taxation issues?
Not really. People are generally paying the higher of the two rates. It would not be affordable for them to leave the U.S. if that was not the case. In Australia, the tax rate is higher and it obvious that the income is subjected to tax at this higher rate. In Australia, an income of $AU180,000 is taxed at the highest rate of 45%. That number jumps to 47% for those subject to the Medicare levy. These figures alone ensure exclusion from double taxation and a minimal U.S. tax liability if any.
Americans must bear in mind the 3.8% surtax on net investment income in the U.S. This cannot be reduced no matter how much tax has been paid in Australia. The Australia approach on managed funds, superannuation plans, family trusts, and so on, is concessional.
What contributes to them either paying far less than expected or getting a nil tax liability from the IRS?
There are various reasons. These include foreign tax credits earned, there could be an exclusion on salary or a bit of both.
Do Americans living in Australia qualify for child tax refunds?
Yes, they do, and they shouldn’t neglect this. Children born to U.S. citizens, and those born to couples where one spouse may be Australian, qualify for the tax return. The refund is $1,400 per qualifying child. Before qualifying for the refund, parents must ensure that the children have a social security number. These numbers may take some time to be issued but expats qualify for an extended deadline for their U.S. tax filings.
It is recommended that when leaving the U.S. an open check account is left behind for child tax refunds, because checks take long to arrive in Australia. They are also expensive to cash and take ages to clear.
I want more information about Australian Superannuation
Let’s discuss superannuation accounts and why they are such an issue?
The IRS analyzes all retirement plans from abroad because the tax code is designed for the American 401K only. They work differently because they are only declared at distribution in the U.S. Superannuation needs to be accounted for beforehand because of the type of investments made by them.
How are they reported on the IRS return?
Annually their highest balance is reported on Foreign Bank Account Reporting (FBAR) and Form 8938. This is because they are financial accounts.
Are employer contributions into superannuation funds scrutinized?
Because superannuation funds are different from the 401K, employer contributions are considered as taxable salaries and wages by the IRS. They are also interested in the fund’s growth.
In employee benefit trusts, contributions are usually made by the employer. Employees may not add to these and the growth is acquired at distribution.
However, sometimes employees do make supplemental contributions to the fund. If these are more than the amount paid by the employer, that portion of the funds is considered as a grantor trust by the IRS and attributed to the U.S. taxpayer.
Superannuation funds that are set up by someone who has their own business, or even by partners in a business are called Self-Managed Super Funds (SMSF). These are also considered as grantor trusts in the U.S. Sometimes people rollover into SMSFs from a retail fund and their contributions are taxable in the U.S. Again, the higher Australian taxes may ensure that no tax is liable, and even if there is, there may be some carried-over foreign tax credit to deduct. Taxpayers need to provide the additional 3520 and 3520-A for these.
The IRS scrutinizes all underlying investments in grantor trusts, especially those with managed funds which are considered as passive foreign investment companies(PFICs) by the IRS code.
The most expensive part of the tax reporting is usually tax preparation. These forms need to be accurate to avoid expensive penalties and take time to complete.
Last year the IRS issued a lot of fines to expats, and not only are they hefty, but extremely difficult to cancel.
When must someone report a grantor trust?
Any extra money put into an employee fund by the employer must be reported annually. This extra money could include an amount from an early redundancy. In Australia, this money is taxed before going into the fund.
However, if the taxpayer has neglected to report these for a few years, the tax liability may not be huge, but the work needed to catch up is expensive.
When is the superannuation taxed in Australia and when in the U.S.?
In Australia the superannuation is tax-free at any time when funds are withdrawn. The same does not apply in the U.S. because any distributions are scrutinized. Any part of the money that has already been taxed in the U.S. won’t be taxed again when withdrawn. However, any growth will be taxed when removed. Of course, that amount will have deductions if there are any carry forward tax credits.
Family trusts are popular in Australia, but how are they taxed in the U.S.?
Yes, they are used as a tax planning tool by individuals to spread out their income. In the U.S. family trusts are regarded as grantor trusts and all their earnings are attributed to the funders. Any U.S. individual in the fund is taxed, regardless of who is liable for the tax on the family trust in Australia. Investments need to be carefully chosen otherwise trusts may be faced with double taxation.
What tax planning advice do you have for Americans moving to Australia?
What is the first move anyone should make when wanting to start looking at their U.S. tax?
Tax planning is best done sooner than later and should be done with global considerations rather than on the country of residence at the time. A chat with a tax expert will save them money in the long-term because they will know what their obligations to the IRS are.
In Australia, planning can also help lower taxes. If possible, they should avoid investing in managed funds unless they have discussed the tax impact of these with a tax expert.
For those who have been in Australia for a while and were either not aware of, or forgot to submit their annual forms, the streamlined amnesty is still ongoing and a great opportunity for them to catch up to avoid future penalties.
Contact us at Expat US Tax for more information.
