Speaking at an industry seminar in Sydney, Moodys Gartner director Roy Berg explained that it’s not just US citizens that are subject to US estate tax.
Australian residents can also be subject to this estate tax, he said, where their total net worth exceeds the exemption threshold, which is currently US$5.49 million, and they hold certain US investments.
“With respect to investments in US stocks, for example, those are subject to US estate tax when somebody dies. That’s not just for a US citizen, but also for an Australian resident who has no US connections at all,” said Mr Berg.
“If they have say a half a $1-million position in Microsoft and they die, then that’s going to be subject to the US estate tax. Just exactly the same exposure as though they had a half a $1-million condo in Hawaii.”
Mr Berg said this would also apply to US shares held in a super fund.
While the US estate tax only applies where an individual’s total worldwide net wealth is above a certain threshold, which is US $5.49 million, when it does apply, it applies at 40 per cent of the asset value.
“So a $1-million position in Microsoft can be subject to an estate tax of $400,000,” he said.
Moodys Gartner director Marsha-laine Dungog said one of the reasons for this tax is because US and Australia estate and gift tax treaties haven’t been amended for a long time.
“A treaty was in place in 1953 for the estate tax, and the gift tax treaty was in place in 1954,” she said.
“The question then becomes can you use that tax treaty? Well you should be able to, but Australia doesn’t have an estate tax anymore. At the time that treaty was entered into, Australia did have an estate tax.”
This is not entirely correct. The estate tax threshold in the USA for non resident aliens is $US 60,000. The problem is worse than described. It is critical to understand the territorial connections of all clients including fund members and trustees. See the following references:[i]https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-us-estate-and-gift-tax-rules-for-resident-and-nonresident-aliens.pdf [/i]and
[i]https://www.irs.gov/individuals/international-taxpayers/some-nonresidents-with-u-s-assets-must-file-estate-tax-returns [/i]
Michael,
While you’re correct about the threshold for non-US residents under US domestic law, Article V of the Australia – US Estate Tax Treaty (1954) overrides US domestic law and affords Australian residents a pro-rata portion of the Unified Credit (currently USD $5.49).
The result is that an Australian resident with a net worth < USD $5.49m will not be subject to the US estate tax... that is until Congress changes the law.
That’s all great information and very good to have our attention drawn too, but as the shares are owned by the SMSF which has more than one member in it, how does the estate tax work when the member is not the owner of the shares?
a Bit more information or an example would have been good.