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The income tax compliance of expats under US law is creating concern in light of new data sharing arrangements between the US and Australia.
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IRS, ATO data causing a stir
09 March 2018
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Under Freedom of Information laws, raw data reported by the ATO to the IRS about bank accounts held by US citizens in Australia is publicly available.
“That’s causing a bit of panic because, under the US system of taxing citizens on their worldwide income, US tax returns should have been filed even though no tax may have been payable because of the credit for Australian tax paid on the locally-sourced investment income,” said head of tax at Chartered Accountants Australia and New Zealand, Michael Croker.
“The application of ‘transition tax’ measures to non-US private companies controlled by US citizens living Down Under may also be a conversation starter. And there is the on-going issue of FATCA data, making voluntary disclosures to the IRS and getting US tax filings up to date,” he added.
Australian accountants should also prepare to deal with compliance queries from their clients with mixed residency and international assets.
“Many tax agents will need to deal with cross-border tax compliance problems amongst their Australian client base once the Common Reporting Standard starts triggering queries from the ATO about bank accounts which Australians hold abroad,” he added.
One international law firm, Moodys Gartner, has found the new rules are not particularly well understood, especially in a superannuation context.
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For example, Moodys Gartner director Roy Berg last year explained that it’s not strictly US citizens that are subject to US estate tax, in a podcast with Accountants Daily.
“It’s one of those issues that not many people know about. You [might know that] you’ve got some US stocks in your super – but US estate tax is not top of mind, the income tax is more top of mind, it’s an issue that gets frequently forgotten,” Mr Berg said.
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-million-dollar 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-million-dollar condo in Hawaii.”
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.
“If you’ve got a million-dollar position in Microsoft or Starbucks, it could cost you hundreds of thousands that you may not have been counting on,” said Mr Berg.
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