As we become more global in our approach to investment, so too does our exposure to international tax regimes. The United States (US) is one of the world’s most complex tax systems. It taxes its citizens on their worldwide income regardless of their county of residence. Non US citizens are also exposed to the US tax system. Currently, the US also seeks to impose gift and estate tax on US assets regardless of the citizenship or residence of the owner. Australian residents that hold US shares and other assets maybe subject to US gift and estate tax of up to 40% of the gross value of asset bequeathed under an estate.
This exposure to the US tax system for citizens and non-US citizens will increase. As of the 1st July 2015 the US Foreign Account Tax Compliance Act (FATCA) imposed reporting obligations on non-US financial institution to report beneficial ownership of US assets to the US Internal Revenue Service (IRS). Australia and the US have signed an intergovernmental agreement to implement this law that will require Australian financial institutions including banks, managed funds and some brokers to report beneficial ownership of US assets to the Australian Taxation Office. This information will be made available to the IRS.
Impact to US Citizens
The implementation of the FATCA increased the identification by the IRS of non US source income received by US citizens living abroad. With penalties averaging US$10,000 per unfiled return and additional fines of up to US$50,000, many US expats are unaware of their obligation to file annual US tax returns disclosing their worldwide income and the consequences can be particularly severe.
Even though there is tax relief from double taxation under the Australia-US tax treaty, there is increased exposure for US expats with self-managed superannuation funds (SMSF) in Australia. SMSF are concessionally taxed in Australia. The US treats income earned in SMSF as individual income taxed at US individual marginal tax rates.
Family homes are also another concern for US expats, where there is no taxation exemption in the US for gains earned on disposal of the family home unlike Australia’s main residence exemption.
Many US citizens are also unaware of their obligation under US tax law to report to the IRS the value of assets gifted during the US tax year. Where assets gifted exceeded the annual or lifetime gift exemption there may be exposure to US gift and estate tax. This is of particular concern where a US citizen gifts assets to their spouse for assets protection purposes.
We encourage all our US citizen and Australian clients who believe that they might have exposure to the US tax system to contact Mutual Trust or their US tax advisor.
Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.