It remains to be seen how much of Trump’s pre-campaign rhetoric makes its way into policy, but here are the major details of what’s been said so far:
- Reducing the corporate tax rate from 35% to 15%
- One time deemed repatriation tax of 10% on US corporate profits held offshore
- Lowering the top marginal rate for individuals from 39.6% to 33%
- Rationalising lower income tax brackets for individuals, resulting in an overall reduction in rates across the board
- Removing the 3.8% Net Investment Income ('Obamacare') Tax
- Eliminating the Alternative Minimum Tax
Most of these policies are likely to provide the greatest benefit to people just like Mr Trump. Let’s examine the implications for individuals and corporates:
For US citizens living in Australia, a reduction in US personal income tax rates may actually have little impact. Their effective tax rate is generally the higher of the two jurisdictions – and Australia already levies a higher rate of personal tax than the US.
However, a reduction in personal income tax rates may have a positive impact on other tax inefficient arrangements. For example, where income of a controlled company or family trust is attributable to a US citizen, there is often leakage to the IRS due to Australian tax being borne by another taxpayer.
Superannuation has long been an area fraught with the potential for inefficient taxation; the concessional Australian tax rates aren’t accommodated by either US tax rules or the Double Tax Agreement. The US personal income tax rate generally acts as a ‘top up’ to the Australian tax treatment of super, so lowered income tax rates should have a positive impact.
The removal of the gift and estate tax would mitigate a key planning concern for many wealthier US citizens, including those who are also Australian taxpayers.
Planning for the estate tax is a very difficult task, especially for younger taxpayers, because there are an almost infinite number of possible events that may happen before they die. The Trump changes may represent a window of opportunity for a 40-something taxpayer to reorganise their affairs to better prepare them for the future, as it would be likely the Democrats would reintroduce the tax if they return to power.
Australians with significant business or work interests that require frequent travel to the US may be tempted to consider a permanent relocation to take advantage of the relatively lower tax environment.
Cutting the corporate tax rate to 15% is a clear incentive to Australian companies considering the establishment or expansion of a business into the US.
A lower corporate rate will allow greater reinvestment of profits into the business. To the extent that business profits are simply repatriated to an Australian resident owner, this change may only represent a timing benefit, as Australian marginal tax rates would ultimately apply to the income at the personal level.
Included in the corporate tax policy proposal is a one time deemed repatriation tax of 10% on US companies with untaxed profits offshore. The result of this policy could mean that corporate profits of US companies that have been retained in Australian business operations may be sent back to the US.
Economic forecasts have predicted a $4.4 trillion revenue fall over the decade as a result of the tax plan, so it will be interesting to see whether Trump’s tax plan ever becomes reality.
It may be more realistic to expect that a watered down version of these proposals will eventually introduced as a budget compromise. Nevertheless, with the Republicans now in control of House and Senate as well as the Presidency, it seems inevitable there will be serious steps taken towards meeting these aspirations.