According to recent population studies, the number of US citizens living in Australia has increased to more than 100,000. For US citizens working in Australia, US taxes are clearly an important implication of income generation, even if such income is earned in Australia.
In this blog, we offer 5 basic tips for US citizens working in Australia, which elaborate on the obligation to file annually with the IRS, as well as other key insights.
TIP #1 – THE TAX OBLIGATIONS OF US CITIZENS WORKING IN AUSTRALIA ENDURE
Often, expats mistakenly believe that moving abroad means that their US tax obligations end. This is a fundamental error in understanding the US tax system.
US citizens, even those residing outside the United States, are considered to be US residents for tax purposes and are therefore subject to US tax reporting on their worldwide income. As such, US citizens working in Australia must annually report all of their income to the IRS, whether the income is US sourced or Australia sourced, or sourced to any other country.
TIP #2 – INFORMATION REPORTING TO THE IRS
US citizens working in Australia who hold accounts or other assets overseas are subject to a number of specific filing requirements in the form of informational forms. Some of these forms are submitted to the IRS as attachments to the personal income tax return (Form 1040), while others are submitted to other governmental departments, including the US Treasury Department. The failure to file any of these forms can result in large penalties, such as a $10,000 penalty per form per year, or even have criminal consequences, if fraud is involved.
Some of the more common forms include:
- Foreign Bank and Financial Account Report (FBAR)
- Form 8938, Statement of Specified Foreign Financial Assets (FATCA Reporting)
- Form 3520, Foreign Trust/Pension and Gifts
- Form 5471, Foreign Corporation Ownership Reporting
TIP #3 – ACTIVITIES IN AUSTRALIA WITH US TAX IMPLICATIONS
With each item of income that an expat earns and with each foreign asset that is owned or acquired, special considerations need to be addressed. This is especially true for US citizens working in Australia.
Utilizing an Australian trust entity is a good example. For all the advantages that the trust entity offers under Australian law, the US expat should be aware that utilization of this type of entity may not necessarily be sound planning from a US tax perspective. For instance, an entity that is characterized as a trust for Australian tax purposes can be classified as a business entity for US tax purposes that is akin to a corporation if the trust operates a business.
Such characterization under US tax law may trigger the US anti-deferral regimes, such as the controlled foreign corporations (“CFC”) regime. CFC classification that can potentially have significant US tax implications. For instance, a 10% or more US shareholder of a CFC must include currently in his or her gross income the CFC’s so-called “subpart F income,” which generally includes passive-type income, such as interest, dividends and rental income (meaning, for tax purposes, a CFC’s subpart F income is considered to be earned directly by the shareholder prior to an actual distribution to the shareholder). Under the CFC regime, company loans to an expat owner can trigger a so-called “Section 956 inclusion,” i.e., current inclusion of the loan amount in a 10% or more US shareholder’s gross income. Starting with the 2018 tax year, certain non-subpart F income will also be required to be included currently at the shareholder level under the new so-called “GILTI” rules.
Another good example is participation in an Australian pension plan. In this regard, over 90 percent of employed Australians currently have savings in a superannuation pension account – employment contributions to these accounts may be tax deferred in Australia but are generally currently taxable in the US. Further US tax and reporting implications may arise depending on whether the superannuation fund is a public super fund or a self-funded super fund. In some instances, a self-funded super fund may be viewed as a “foreign grantor trust” for US tax purposes, which may trigger additional reporting obligations, such as the requirement to file a foreign trust form (IRS Form 3520). For these and many other reasons, it is essential that US expats participating in a superannuation or other pension fund understand the full US tax and reporting implications.
TIP #4 – US TAX BENEFITS ARE AVAILABLE TO US CITIZENS WORKING IN AUSTRALIA
The good news for expats living in Australia is that both US domestic tax law and US-Australia bilateral agreements contain a number of provisions that are designed to prevent “double taxation,” or taxation on the same income in both countries. These include the foreign earned income exclusion (“FEIE”), foreign housing exclusion (“FHE”), and foreign tax credit (“FTC”).
These provisions, in many cases, can reduce or even eliminate the US federal income tax that would otherwise be due by the expat taxpayer. Keep in mind, however, that even if no US tax is owed, a US tax return still generally must be filed and the failure to do so can result in severe penalties.
TIP #5 – FATCA HAS EXPANDED THE REACH OF THE IRS
FATCA stands for the “Foreign Account Tax Compliance Act.” FATCA is a relatively new designed to combat offshore tax evasion by requiring US citizens to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS. As part of the implementation of FATCA, starting with the 2011 tax season, the IRS requires certain US citizens to report (on Form 8938) the total value of their “foreign financial assets.”
In order to further enforce FATCA reporting, starting on January 1, 2014, foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) became required to report the balances in the accounts held by customers who are US citizens. To date, we have seen several large foreign banks require that all US citizens who maintain accounts with them provide a Form W-9 (declaring their status as US citizens) and sign a waiver of confidentiality agreement whereby they allow the bank to provide information about their account to the IRS. In some cases, foreign banks have closed the accounts of US expats who refuse to cooperate with these requests.
If you are a US citizen working in Australia, it is essential that you remain compliant with your continuing US tax obligations. Our experts at Expat Tax Professionals are available to help you understand your US tax filing requirements and to assist you with all of your US tax compliance needs.
