Despite protectionism being on the rise in recent times, the world remains relatively globalised with people choosing to live overseas on a short-term basis, or potentially longer. For Australians who become US residents, a major challenge that often arises is how to handle the tax treatment of a change in residency. From your residency status to buying gifts, there are some key things you need to consider to ensure you meet your tax obligations in the US and Australia.
Determine your residency status
You become an American resident for tax purposes the first time you enter the US after receiving your green card. This, however, doesn’t mean that your Australian residency status automatically ends, so you need to review your residency status to ensure you comply with tax law in each country. The Australian principles of tax residency will determine if you’re a non-resident for Australian tax purposes. If you determine that you’re not a non-resident for Australian tax purposes, you may be a resident for tax purposes in Australia and the US.
If you determine that you’re a resident for tax purposes in both countries, you need to look at the tax treaty to determine whether a tie-breaker test applies to treat you as non-resident from an Australian perspective. The first step in this test is defining your ‘permanent home’. This process can become complicated if you have a home in both countries.
It is also possible you became a US resident at an earlier point in time due to the ‘substantial presence’ test. This applies if you spent significant time in the US on a working visa before getting a green card.
Understand your tax obligations for superannuation
Each year you’ll be required to notify the IRS of your superannuation balance. You may potentially have to pay American income tax on gains in value, even if the value is unrealised. If the value of your superannuation balance falls, you won’t be entitled to a deduction. This means you’ll need to pay income tax at American marginal rates on earnings in your super fund. These earnings are already taxed at 15% per annum in Australia.
Consider CGT on investments
You have two options for the tax treatment of your investments when you become a non-resident for Australian tax purposes:
- Option one: let a notional realisation happen for capital gains tax (CGT) purposes and pay CGT in Australia on that gain to date.
- Option two: keep the assets and pay CGT when you dispose of the assets.
Under option one, the assets become part of your American tax affairs. This means all income and capital gains need to be declared on your American tax return. If you keep assets such as Australian shares, you will need to advise the share registry you are now a non-resident — the registry will then deduct tax from your Australian distributions at the normal non-resident rate.
The key consideration with option two is that the 50% CGT discount won’t be applicable as non-residents aren’t entitled to the discount.
There is also a specific US/Australia tax treaty clause that can solve the ‘deferred CGT’ issue. This clause says that if you defer CGT for Australian tax purposes, then the whole capital gain will be taxed in the US only. This clause only applies if you are a US resident at the time of the sale.
Declaring foreign gifts
If gifts received in a year exceed USD100,000, you will need to complete a Form 3520. Failure to declare foreign gifts can result in penalties of up to 25% of the unreported amount.
Declaring inheritance
Receiving an inheritance also requires the completion of a Form 3520. Australian CGT may be payable in the estate of the deceased, but if the beneficiary is a non-resident, the capital gain cannot be rolled forward as it can be if you are a resident. In some circumstances, a capital gain might be rolled forward if the asset is ‘taxable Australian property’ (e.g. real estate situated in Australia).
Tax laws between countries can be complex and intricate, so it’s important you seek expert advice sooner rather than later. If you have questions about your tax obligations between countries, contact your Pitcher Partners specialist.
