Speaking to SMSF Adviser, H&R Block director of tax communications Mark Chapman explained that because the US taxes individuals based on their citizenship status, rather than their residence, this means US expats remain in the US tax net no matter where they are in world.
In addition, Mr Chapman said because superannuation funds are not recognised in the US as a retirement product, US citizens potentially have to pay US taxes on all of their contributions into super, pay taxes on any growth within their super fund and thirdly, pay tax on any distributions out of the super fund once it’s paid out.
“That’s in addition to the tax that you have to pay in Australia [in relation to superannuation]. So basically, you get walloped if you’re a US citizen, it’s painful financially, and it’s also painful in terms of the compliance that you have to go through in terms of filling in not just your Australian tax return, but also US tax returns and potentially other forms as well,” he said.
US expats who don’t disclose their US citizenship and fail to follow their mandatory reporting obligations in order to avoid these additional taxes could face significant “fines and penalties”, he warned.
Under the Foreign Account Tax Compliance Act (FATCA) which was introduced in 2010, financial institutions are required to disclose to the US authorities via the ATO, if a US citizen has a financial product with them and what the balance is.
“So potentially, if you don’t disclose, your financial services provider will do it for you,” he warned.
Moodys Gartner director Roy Berg explained that where SMSF practitioners are setting up an SMSF for a client who is a US expat, that client needs to identify their US citizenship status.
“For an SMSF, they’re obligated to say whether they’re a US citizen, and if they are and they tell the truth, then they get turned in, under FATCA,” said Mr Berg.
“If they decide to just not answer the question and just blow it off, then they get turned in, and if they’ve lied, that’s an offence in Australia. So you’re really put in a difficult position to either tell the truth and get turned in, or if you lie then you’ve just compounded your problems.”
For US citizens looking to up SMSFs, there are big disclosure issues, said Mr Berg, and they need to be prepared for how they’re going to deal with that.
“The answer is always to be truthful, and answer the questions truthfully because the last thing you want to do compound your problems by lying, because then you’ve got another problem too,” he warned.
Mr Chapman said SMSF practitioners also need to manage their own risks by ensuring the individual is at least aware of their US reporting obligations.
“I think there’s a bit of a risk if you’re dealing with a US expat, I appreciate that as an Australian adviser you’re there to primarily advise them around their Australian tax and superannuation obligations but I think if someone is a US citizen you need to at least make them aware that they will have US reporting obligations,” he said.
While most Australian practitioners won’t be able to provide advice on US tax obligations, they can encourage the client to go and seek US tax advice.
“I think that’s just common sense when it comes to dealing with a US citizen, so that you cover off on your own risk management.”
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There is an organisation called FixTheTaxTreaty dot org that aims to highlight such double taxation and to instigate tax treaty revision.
Some tax treaties with the U.S. (such as Canada) have exemption for similar retirement funds to superannuation. Superannuation has been around 20+ years without implementation of an exemption from double taxation in the tax treaty and this shows an inflexible tax treaty with inflexible revision mechanism. Broke, IMO, and needs fixing.