In just the past decade, American migration to Australia has increased exponentially, making Australia now home to the sixth largest American population in the world. .1 Indeed, Australia is the only country in the world that has more Americans than the US has Australians.2 Regardless of the reasons US citizens immigrate to Australia, they all share one thing in common with all other Americans living outside the United States: the requirement to file US tax returns. The unfortunate news is that US tax law is agonizingly complex, and the worse news is that this complexity increases exponentially when applied to an individual who is subject to both US and Australian tax laws.
The United States is one of the few countries on Earth that taxes the worldwide income and estate of its residents, citizens, and foreign persons admitted as permanent residents.3 Thus, US citizens across the world (“US expats”) are taxed by Uncle Sam on all the income they make, regardless of its currency, location earned, or if the US citizen has ever set foot on US soil. The consequence of this to the US citizen living abroad is the burden, cost, and headache of meeting annual IRS tax filing and reporting obligations.
For US expats in Australia, the burden of filing and paying US tax on worldwide income is more acute because of the uncertain U.S. tax classification and treatment of Australian Superannuation Funds (the “Super”). In Australia, Supers enjoy tax-favoured concessions: investment earnings are taxed at preferentially low rates and distributions are tax-free.4 However, Supers are not exempt from US tax. This is because the concept of privatized social security and hybrid pensions do not exist in the United States. As a result, the Super is treated as a fully taxable asset of the US expat for US tax purposes: all contributions and earnings accrued in the Super, as well as distributions from the Super to the US citizen may be subject to current US taxation, notwithstanding that access to Super is restricted prior to the US expat reaching retirement age.5 The mere idea that the US would attempt to tax the Super strikes a raw nerve for the US expat - and it should. For a deeper dive into US tax treatment of a Super, take a look at Marsha Dungog’s article: US taxation of Australian superannuation funds: when the Super is NOT so super after all.
The Super is just one of several US tax burdens and reporting obligations which continue throughout the US expat’s life. US expats must also deal with the consequences of the US estate and gift tax regime during life and at death. For a more detailed account of IRS reporting and filing obligations for US citizens resident in Australia, read Roy Berg’s article: US citizens living in Australia – US tax filing obligations. To complicate things even further, the implementation of the Foreign Account Tax Compliance Act (“FATCA”)6 went into full effect on July 1, 2014. This dragnet, enacted to catch non-compliant US taxpayers with funds located abroad, is causing many US expats in Australia sleepless nights in anticipation of a notice from the IRS.
The only way to end the burden of US worldwide taxation is to renounce US citizenship, which comes with its own set of filings and traps for the unwary.7 Not properly renouncing one’s US citizenship can result in highly negative consequences such as the imposition of the US exit tax8 or permanent disbarment from United States.9 Advice and planning that take into account all areas of US law associated with renunciation is critical to obtaining the desired results. For a detailed article on the renounciation process and the many associated pitfalls, please reference Alex Marino’s article: Renouncing Your US Citizenship: Is Divorcing Uncle Sam Right For Me?
A decade ago, the idea of renouncing one’s US citizenship was, for most, unthinkable. Fast-forward 10 years and wait times to book renunciation appointments at US consulates and embassies worldwide have exploded, with record numbers of quarterly and annual departures documented.10 The Super dilemma for US citizens in Australia is fueling a heighted desire to give up US citizenship.
2 Comment by economist Lyman Stone in http://www.smh.com.au/national/why-australia-is-now-home-to-the-sixth-largest-american-population-in-the-world-20150512-ggznm3.html (July 4 2015).
3 IRC § 7701(b)(6). Lawful permanent resident, otherwise known as a “U.S. Green Card” holder.
4 Indeed, Supers are a trillion dollar industry in Australia. As of June 2017, Supers have amassed total aggregate assets of $2,324 billion or rounded, $2 Trillion See, Superannuation Statistics, June 2017 edition published August 2017 by the Australian Prudential Regulatory Authority (APRA) available at http://www.apra.gov.au/Super/Publications/Documents/2017QSP201706.pdf (site visited September 19, 2017).
5 See Roy Berg and Marsha Dungog, “What U.S. Workers Need to Know About Australian Superannuation Plans”, Vol. 46 Tax Mgmt. Intl J. No. 8 (Aug. 11, 2017).
6 The Foreign Account Tax Compliance Act enacted as revenue offset provisions of the Hiring Incentives to Restore Employment Act of 2010.
7 Names of all renouncers are published quarterly in the Federal Register. See http://intltax.typepad.com/intltax_blog/2016/07/2016-second-quarter-published-expatriates.html (2009, 1534 in 2010, 1781 in 2011, 932 in 2012, 2999 in 2013, 3415 in 2014, and 4279 in 2015).
8 IRC § 877A.
9 8 U.S.C. § 1182(a)(10)(E)(2011). (Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States Citizenship for the purpose of avoiding taxation by the United States is inadmissible.)
10 Names of all renouncers are published quarterly in the Federal Register. See http://intltax.typepad.com/intltax_blog/2016/07/2016-second-quarter-published-expatriates.html (2009, 1534 in 2010, 1781 in 2011, 932 in 2012, 2999 in 2013, 3415 in 2014, and 4279 in 2015).