The US is a popular destination for Australians chasing their part of the American dream – it offers great opportunities to advance an executive career. The Dual Tax Treaty with the US has been in place for a long time, allowing the ATO to share information on Australian tax payers with the US tax department, however it had until now not been implemented in any real sense. This meant Australians were largely able to ignore it.
But as the US government is looking to fill up its piggy bank, the technology to share large quantities of data now exists, and the Australian government has agreed to share financial data with the US as part of anti-terrorism and anti-money laundering initiatives, there’s every sign showing that the US government has Australians who have worked in the US in its sights.
In this examination into the major financial considerations for expats, Equitas Partners looks at tax liability from both an Australian and US perspective for citizens of the US living in Australia, green card holders, resident tax payers, non-citizens with American income and people who have family members in one of these categories.
As the US taxation system is complex and different from our country’s, we have gathered here the key issues that need to be considered before, during or after a stint working in the US.
Financial considerations before leaving Australia
- Income tax residency status
Understanding whether you remain an Australian resident for tax purposes is the first step towards adequate financial planning. Essentially, if you maintain a house in Australia, are present for more than half the income year or have an employment contract which states you will return to Australia upon completion, you may remain an Australian income tax resident. As a general rule, individuals who remain income tax residents must continue to lodge an Australian tax return and declare foreign income, even if income tax was levied in the country in which it was earned.
The implication of being a foreign or Australian income tax resident can be advantageous in some cases, disadvantageous in others. What is key is to understand your status so you can choose the best options for you and your family.
- Employment arrangements
As you negotiate your expat employment contract, it is wise to try and include compensation for the costs associated with tax differentials between countries as well as planned and unplanned relocation expenses. These should cover the overseas move as well as the return at the end of your contract or for brief visits for family reasons. A travel and health insurance that covers emergency repatriation is another benefit to include in your agreement.
Another consideration when negotiating your employment contract is your retirement savings. What country will your superannuation be paid in and what are the tax implications of this? As a general rule, retirement strategies should be based around the country in which you plan to retire, thus avoiding having to go through a difficult super rollover and losing tax benefits along the way.
- Life insurance
Australia has one of the best life insurance regimes in the world. So taking out a good quality policy in Australia with worldwide cover can be a smart move before your departure.
Financial considerations while you’re away
- Managing tax issues
Although Australia has a Dual Tax Treaty with America, it is not as simple as it first appears. The agreement only applies to like-for-like taxes and at federal level. This means American state-based taxes, for example, cannot be offset against any Australian taxes. Understanding the US tax system before your move could therefore avoid you a few headaches along the way.
Capital gains tax (CGT) can be problematic for long-term expats in the US. When exiting the United States after more than five years of residence, you may have to pay CGT on all assets, including any property in Australia.
Capital gains tax is also administered differently on the sale of family homes, which applies for US citizens, but not Australians. While there may be some rollover relief, the capital gains tax is still payable for American tax payers*. An example of this is the London Mayor, Boris Johnson, who is a dual citizen. He had to pay a reported $5 million in taxes because of profit he made out of a house in London, although he had never lived in the US.
* An American tax payer is defined as a US citizen or someone with a green card or anyone considered by the US to be a tax payer.
Owners of Australian-US shares, US property or some other US asset with a value above $60,000 may also be subject to US income and estate taxes, in addition to the capital gains tax.
As for superannuation, it is generally not considered to meet the requirements of the US retirement plan. So high income earners (defined as $120,000 a year by the US) must pay a tax on superannuation, with no offset available in Australia. Depending on the type of superannuation fund, a different set of tax regimes may also be applicable.
- Planning for the return
Topics such as children’s schooling, retirement savings and career prospects when returning to Australia should all be considered carefully to facilitate a smooth transition for both yourself and your family.
Financial considerations upon your return
- Transfer of assets
Legislative differences between countries such as those related to estate planning can create complexity. Before investing in a property overseas, it is important to understand their legal system and ensure a will recognised in that country is in place so the property can be passed on according to your wishes.
- Foreign bank accounts
Australia has complex foreign exchange gain and loss rules applying to certain foreign currency transaction accounts. If an individual resumes Australian income tax residency and holds foreign currency transaction accounts, there are often implications from an Australian income tax perspective. It is complex and you need to discuss the nuances with a knowledgeable financial advisor.
- Transferral of overseas superannuation and pensions
When returning to Australia from the US, retirement funds must be withdrawn and potentially fully taxed, then placed into an Australian superannuation fund as a non-concessional contribution. Therefore, you are paying a higher tax for your retirement savings.
This is an example to show the impact of capital gains tax and exchange rates on the sale of your Australian home.
Assume the home that was purchased above was used as security to get a $500,000 loan used for other purposes (such as school fees, holidays etc) and then paid off when the house was sold. In Australia there is no gain or loss, but due to exchange rate changes there is a gain of $134,400 for US purposes and tax of $53,222 to be paid in the US.
Working abroad can have huge benefits, professionally and financially. And however complex the taxation system may be in countries such as the US, when planned carefully, your tax liability can be managed to avoid big surprises… including a tap on the shoulder from the US tax department.
Read our case study to gain insights into financial repatriation strategies for those returning after working overseas.