The US is a popular destination for expats as it offers greater opportunities to advance one’s career beyond what is possible in Australia.
Although 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, it had until now not been implemented in any real sense. But as the US government looks to fill its coffers, 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 that the US government has Australians who have worked in the US in its sights.
Phil is a partner in a professional services firm. He has spent the past decade as an expat; five years in Europe followed by five years working in the US as an Australian citizen with a Green Card. Phil plans to permanently repatriate to Oz on 1 June 2015.
Now in his early fifties, Phil met and married his English wife during his European stint. Anna is on a temp visa in the US and does not have a Green Card. They have no children. Phil has two adult children from his first marriage. The couple’s main assets are a house in the US, a large US share portfolio, a significant amount of cash in USD and $500k in Phil’s Australian super (which has been essentially dormant for the past ten years).
Phil sees his future as buying a house with views of the Pacific Ocean, working for another ten years and then retiring. Together with Equitas Partners, Phil set about putting in place a financial repatriation strategy which would provide him with a time-line and a sequence of events to achieve his goals of:
- Buying a house in Australia
- Putting as much cash as possible into super for retirement
- Reducing tax exposure across both Australia and the US
- Leveraging the tax equalisation clause in his contract
When negotiating his expat employment contract, Phil had the foresight to require a tax equalisation clause (compensation for the costs associated with tax differentials between countries) as well as a currency exchange clause and a repatriation clause covering planned and unplanned costs to him.
The financial repatriation strategy
Equitas Partners’ advice to Phil involved a carefully fashioned sequence of events:
Before returning to Australia:
- Sell the US house
- Repatriate cash into Australia in Australian dollars
- From repatriated cash, add $180k as an after tax contribution to super in the current financial year
- Set up a super fund in Australia for his wife Anna and do the same (adding a combined total of $360k into super without paying tax)
After returning to Australia:
- Hand back his US Green Card to the US Consulate the day he returned to Australia (thus ceasing to be a US tax payer)
- The following day, liquidate all US shares and use the funds to provide additional cash and buy a house
- Add an additional $540k as an after tax contribution to super in July 2015 (being the next financial year)
- Add an additional $540k as an after tax contribution to Anna’s super in July 2015 (as above)
The benefits of this strategy
- By transferring cash before returning home, there is no tax payable on foreign currency gains on the money as the US dollar has appreciated in the last six months
- Maximised the amount of cash into existing super fund, achieving a combined tax free contribution into super of $1.44m over a two month period and bringing the total super balance to $1.94m
- When he sold the US shares, Phil was no longer a US tax resident, so tax was payable on one day’s gains only (that is, the shares were sold at the same price because they were sold at the same time Phil became an Australian tax resident) – there had been no gains, hence no tax payable
- The couple has cash available to buy their Sydney home
- Repatriated all assets with no tax payable in either the US or Australia
As a result of the overall financial repatriation strategy, the couple has no further obligations to the US Tax Office.
Within six months, Phil and Anna had purchased their forever home (with ocean views). In essence, Phil took control prior to repatriation and therefore avoided errors in timing and sequencing of actions which could have cost the couple hundreds of thousands of dollars in tax impacts.