# US tax on unearned Australian income



## rionada

This might be too arcane for this forum, but I thought I'd give you all a go since clarification on this topic has been hard to come by.

Background: We are married US expats living in Australia as a permanent residents (just applied for citizenship... woohoo!). My partner in a physician - so a high wage earner, while I am a stay at home carer. We pay lots of Australian tax on my partners earnings, which completely offsets our US tax (we file every year and pay zero US tax). We are now finally starting to accumulate enough to start investing in Australia.

Since Australia treats married couples as individuals for tax purposes and does not differentiate between earned and unearned income, and since Australia allows you to make $18,200/year before any taxes are due... we are thinking that we should open a brokerage account in my name (I am the one with no income) rather than opening a super for me - since a super charges 15% on earnings and has rules about withdrawals.

Finally to the question: *How will the US treat my unearned Australian income?*

When I experimented with TurboTax - it looked like there would be a 3.8% tax on the earnings due to the Obamacare Tax (yep, so even though we get Australian Medicare and don't pay US Social Security -we now make enough to hit the $250,000 USD threshold for the "Net Investment Income Tax") ... does any of this sound correct to you? Thoughts? Recommendations? 

Cheers everyone


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## JustLurking

Welcome. I'm neither Australian nor American -- with luck, someone with more direct experience might come along soon -- but the following points leapt out at me from your post ...



rionada said:


> ... we are thinking that we should open a brokerage account in my name (I am the one with no income) rather than opening a super for me - since a super charges 15% on earnings and has rules about withdrawals.


The US does not recognise Aussie super accounts as tax-deferred. Results can be pretty horrible.

https://www.greenbacktaxservices.com/blog/australia-superannuation-us-taxation/


> Taxation on the growth depends on whether your superannuation trust is considered a foreign grantor trust or an employee trust. The determining factor is control. As a grantor trust, superannuation ownership and income need to be reported on Form 3520 and 3520A, respectively for all years of ownership. On Form 3520A, realized and unrealized income (growth) plus contributions are reported and then taxed on the US return.
> 
> Also, PFIC investments held within a foreign grantor trust must be reported separately on Form 8621 on an annual basis.


Independently of any interaction with supers, these appalling PFIC rules will also apply if you hold any non-US domiciled funds or ETFs in an ordinary taxable brokerage account.

https://thunfinancial.com/home/amer...-shares-in-a-non-us-incorporated-mutual-fund/


> The tax treatment of PFICs is extremely punitive compared to the tax treatment of similar investments that are incorporated in the U.S. For example, an American holder of a U.S. incorporated mutual fund invested in European stocks pays the low long-term capital gains rate of 15% if the fund is held for more than one year. The same American investor who buys a nearly identical fund listed in the UK or in Switzerland (or any place outside the US) will find their investment subject to the PFIC taxation regime, which counts all income (including capital gains) as ordinary income and automatically taxes it at the top individual tax rate (39.6%). In some cases, the total tax on a PFIC investment may rise to well above 50%. Furthermore, capital losses cannot be carried forward or used to offset other capital gains.





rionada said:


> When I experimented with TurboTax - it looked like there would be a 3.8% tax on the earnings due to the Obamacare Tax (yep, so even though we get Australian Medicare and don't pay US Social Security -we now make enough to hit the $250,000 USD threshold for the "Net Investment Income Tax") ... does any of this sound correct to you?


Entirely believable. The NIIT is famously out of scope for foreign tax credits, leading to probable double-tax.

https://www.pwc.com/gx/en/hr-manage...ent-income-tax-may-result-double-taxation.pdf


> A critical issue is whether the NIIT may be offset by foreign tax credits for US federal income tax purposes. This question has been resolved under the final regulations in an unfavorable manner for US taxpayers – no foreign tax credit may be claimed to reduce the NIIT imposed under Section 1411 of the Internal Revenue Code (Code). Though the final regulations did not directly rule out the possibility of a foreign tax credit being possibly available under the terms of an income tax treaty, comments in the preamble to the final regulations indicate that both the Treasury Department and the IRS do not believe that such a credit should generally be permitted.
> 
> As a result, many high earning US taxpayers with net investment income that is subject to both the NIIT and foreign income tax may be faced with double income taxation.


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## rionada

Thanks so much JustLurking,

You have confirmed that the Super investment is off the table due to being taxed by both USA and 15% Australia.

It sounds like you are saying that we may incur US taxes on my brokerage investments. But, it also sounds like those taxes may be offset by the taxes we have already paid in Australia (we pay way more in Australia than we owe in the US - so if they treat my passive Australian income as personal income that could work because our Aussie taxes would offset the US taxes) - is that correct.

I see no way around the NIIT and, not that I want to pay it, but it's only 3.8% - far better than 15% Super tax or even any capital gains tax.

From my research it appears that I could make up to $18,200 AUD, pay no Australian taxes, and only pay 3.8% US taxes. Is that how it appears to you?

Cheers mate


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## Nononymous

I don't have enough specific knowledge to get into the weeds on this, but in the long term, you will probably need to take one of the following paths.

1. If you want to live and invest like a normal Australian, without paying a US surtax, you'll need to either renounce or stop being fully compliant with US taxes. Depending on your ties to the US, the latter is a perfectly valid option, particularly once you have dual citizenship.

2. Don't live and invest like a normal Australian - which means either limiting the options available to yourself, or investing in the US, though that might create complications for your Australian taxes.

There may useful resources for you via fixthetaxtreaty.org, Karen Alpert's organization.


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## rionada

Thank you for your thoughts Nononymous



Nononymous said:


> There may useful resources for you via fixthetaxtreaty.org, Karen Alpert's organization.


Excellent resource - thanks mate




Nononymous said:


> 1. If you want to live and invest like a normal Australian, without paying a US surtax, you'll need to either renounce or stop being fully compliant with US taxes. Depending on your ties to the US, the latter is a perfectly valid option, particularly once you have dual citizenship.


Renouncing US citizenship looks like a serious and expensive undertaking. And I have no idea how I would stop being fully compliant without invoking the wrath of the IRS




Nononymous said:


> 2. Don't live and invest like a normal Australian - which means either limiting the options available to yourself, or investing in the US, though that might create complications for your Australian taxes.



I may be wrong, but I think that my Australian taxes paid do not offset any gains made in the US... so if I invested through a US brokerage account I would owe US capital gains tax.

So far, it still looks to me like an Australian brokerage account might be the way to go. I'm waiting to get talked out of it.


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## Bevdeforges

rionada said:


> Renouncing US citizenship looks like a serious and expensive undertaking. And I have no idea how I would stop being fully compliant without invoking the wrath of the IRS


Renouncing is a serious decision - best left until you've cut most or all ties back to the US. Maybe not such a great idea if you still have investments or close family members back there (though that can depend on personal circumstances).

Invoking the wrath of the IRS isn't really a huge risk for us "overseas taxpayers." It's very often a matter of making a "good faith effort" (or just not being too obvious about any shortcuts you take). Chances are, with a brokerage account, there will be reporting requirements for the brokerage house (i.e. to report that they have a US person as a customer) - and that does tend to lead some institutions to want to avoid opening new accounts for US citizens. But find out what exactly they do report and work with or around that.



> I may be wrong, but I think that my Australian taxes paid do not offset any gains made in the US... so if I invested through a US brokerage account I would owe US capital gains tax.


I'm not entirely sure about that (and you do need to do a bit of research into the US-Australian tax treaty). One thing for sure is that using the Foreign Tax Credit, you have to offset taxes paid on "passive income" (like investment income) against the taxes accrued on "passive income" on your US returns. As long as you are paying Australian tax on your brokerage account assets (i.e. interest, dividends and gains) that should probably offset your US obligation on the investments.



> So far, it still looks to me like an Australian brokerage account might be the way to go. I'm waiting to get talked out of it.


Possibly. A "foreign" brokerage account will get you a certain level of additional reporting - which can become time consuming. But if Australian taxes on the income are higher than the US taxes, it's definitely worth considering.


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## Nononymous

rionada said:


> Renouncing US citizenship looks like a serious and expensive undertaking. And I have no idea how I would stop being fully compliant without invoking the wrath of the IRS.


Yes and no. It will cost you US$2350 to renounce. Contrary to popular myth, it is not necessary to be compliant before you renounce, nor is it required to file the exit tax paperwork after renunciation. (That is necessary to exit to the US tax system, which is quite separate from giving up US citizenship. If you had been compliant before and it was straightforward to make the final filings, probably worth doing as long as no money was owing. For those who've never been in the US tax system, renouncing is not a good reason to enter and begin filing.)

The wrath of the IRS is highly overrated. There is no legal basis for them to collect penalties in Australia, even if you are only a US citizen. I would however recommend obtaining Australian citizenship before dropping off the radar, because there is a possibility in future of US passports being denied to those with significant tax debts. It's perhaps an extreme measure, but for some folks - particularly those who run businesses and face ruinous bills from the new "transition tax" - suddenly ceasing all communication and going dark is the best course of action. Your family and financial ties back to the US will of course factor into your decision.

Long-term, it's not really possible to live like a "native" in terms of investment, pension and savings IF you choose to continue being compliant with US tax filing requirements. You will either be punished with double-taxation or you will need to forego opportunities available to your neighbours. If you don't want this outcome, you must choose between renunciation and/or non-compliance with US tax laws. The good news is, there is much less risk to non-compliance than people first assume.


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## Moulard

I think I am the token Aussie who posts on this forum. 

This is long and rambling, as I am trying to rush this, before I have to head out the door this morning...

On superannuation, there has been no formal guidance from the IRS in terms of either revenue rulings, private letter rulings or regulations that indicate how superannuation should be treated. There are a number of PLR which are assumed to be from Australian super funds which did clarify that the fund itself is a trust. But that is pretty much as far as the formal advice goes. 

The closest we have is an IRS FOIA request which makes it pretty clear that even within the IRS internal counsel there is disagreement. So basically like every other person with super you are more or less on your own.

Paraphasing the direction the IRS appeared to be leaning, was that SMSF would be treated as grantor trusts in which the contributions and earnings would be treated as income, while Industry and company type funds would be treated as employee trusts under s.401(b) and employer contributions would be taxed as income, but the growth would be treated as income on distribution. 


There are a couple more way out there positions that have been taken.

The first one is that superannuation is treaty exempt. There is a lot of skepticism on this one because the tax professional who pushes this view has kept his cards rather close to his chest on how. But just recently he published an article that gets into his mindset. I haven't read it carefully (no time yet), but fundamentally, he argues that the US is bound to use the OECD definition of a pension, and that super meets the OECD definition, and thus super is exempt under the relevant clause of the US-Oz tax treaty.


Another out there position, is that you need to consider superannuation in light of the relevant superannuation legislation. Super has been introduced through a legislative slight of hand. Legislatively, employer contributions are actually a tax debt to the employer which is put in trust for the employee. The way that the Superannuation guarantee (administration) act works is that if an employer fails to pay super, there is no debt to the employee, it is a debt owed to the ATO. The legislative arguing behind this position, means that technically the Australian government is the grantor of all superannuation trusts and thus only distributions would be taxable.


On the NIIT, I think it is worth exploring at the ability to take an Australian Foreign Tax Offset on US taxes paid on Australian sourced income. Its been a long time since I looked at the the relevant Interpretive Decisions, Rulings and legislation in the ATO Legal Database, but I suspect that 

Depending on the sums involved it might be worth exploring administratively binding advice from the ATO (cheaper and quicker that a private ruling). 

I can say, from memory at least, you are unlikely to be able to take the same approach on taxation of super as an individual, because under australian tax law contributions are unassessed income and thus ineligible for an offset. However (and I suspect that this is the case) if you have a SMSF it may be possible that the fund itself may be able to take a position that claws back some of the US taxation of the fund.

Sorry this is a bit rushed...


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## rionada

Thank you so much everyone for your responses!

Disclaimer: since I am not a tax preparer - I may use the wrong terminology, but I'll do my best. 

After further experimentation with TurboTax (Home and Business 2018) - it looks like all of our foreign income is treated as personal income (I tried all sorts of foreign income... interest, dividends, mutual funds, stocks, bonds... ) This is good news for us because we always have lots of unused US tax credit (repurposed by treaty) due to high taxes paid in Australia. 

So, no matter how I run it, the only additional tax burden appears to be the NIIT (Obamacare tax) at 3.8%. Even though Australia will not tax my first $18,200 - the US taxes my Australian unearned passive income at only 3.8% (albeit unfairly - since I can't receive Obamacare) - the personal brokerage account still seems like the way to go.

Side question - if anyone wants to comment: *Best/cheapest brokerage account available in Australia* (I'm leaning toward Vanguard Australia since I only buy mutual funds and I am not a short term trader)

Back to the main question about US tax ramifications on Australian passive unearned income

We can end the discussion about the Super investment option as I have ruled out investing in a Super (for me... my partner has a super through work) Also, I can't renounce my citizenship any time soon... I have lots of family and some reasonable investments in the US - so that's off the table as well.

I am curious about what "noncompliance" looks like - what do you have in mind?

And I would love to have final clarification on my opinion that I will only owe 3.8% US tax on my unearned passive Australian income (on mutual fund investments). 

Cheers everyone - I am very appreciative of your help


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## Bevdeforges

You should NOT be paying any sort of "Obamacare" tax - none whatsoever. As a taxpayer who is resident overseas, you are exempt from that. On the new tax forms (2018) there is a little check box on the top of the 1040 form to indicate that you either have an approved plan or you are exempt (it's all the same check box). Check that box and there's no 3.8% (or any other) tax on your health care status. (And besides, didn't the latest tax bill do away with that penalty anyhow?)

And be aware that TurboTax is set up for domestic taxpayers. While you can use it for filing from overseas, there are lots of tricks and tips in order to get your taxes to come out correctly. Make very very sure that you have indicated in all the necessary places that you are filing from an overseas address and that you are eligible for the Foreign Earned Income Exclusion, whether or not you take the exclusion.

As far as non-compliance goes - simple example is to first see if you can find a broker to open an account for you. And then, you simply don't report the "earnings" from the account - or even the account itself, if you prefer. Depending on your tax risks (i.e. do you have accounts or investments in the US? level of overall income, born in the US or not, etc.) it may not even produce a question from the IRS. But the IRS' ability to audit those living overseas is very limited, unless and until you get into very high income figures and/or very complicated and obvious types of "tax dodge" schemes.

There is also the option to open an investment account through your (or another) bank in your home country. (Not all countries do things this way.) Report the account, but as a plain old ordinary bank account, declaring the income from the account each year like you would interest on a bank account. It may require a bit more reporting (when the balance goes over $200,000 or $400,000) but at least you're reporting it in a "good faith" manner - while avoiding all the needless complication.


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## rionada

*US-AU tax treaty and the NIIT*

Alright - I'm really going to get into the weeds now...

I have been reading the actual tax treaty between the US and Australia and the IRS interpretation of said treaty. Here's where it gets interesting... 

IRS section 301.6114-1 - Treaty-based return positions, Subsection (c) Reporting requirement waived. 

(1) Pursuant to the authority contained in section 6114 (b), reporting is waived under this section with respect to any of the following return positions taken by the taxpayer: 
(v) That income of an individual is resourced (for purposes of applying the foreign tax credit limitation) under a treaty provision relating to elimination of double taxation.

There's also this from section 4 of the same Subsection (c) Reporting requirement waived. 
(iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers

Maybe I'm reading it wrong... I probably am, but it seems to say that reporting is not required for anything deemed by the taxpayer to be double taxation. The 3.8% NIIT is an Obamacare tax. I get Australian Medicare... and I am exempt from US tax by virtue of the taxes I pay in Australia. *If I really pushed it - maybe I don't owe ANY US taxes on an Australian brokerage account.*

Anyone want to take a crack at this one?


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## rionada

Sorry Bey - I hadn't seen your previous response. Ordinarily I would owe no NIIT tax, BUT, as soon as one crosses the $250,000 US threshold then one, in theory, is subject to the 3.8% NIIT. I have seen many opinions on weather or not an expat should owe and/or pay the NIIT. Most tax "experts" say it must be paid, but, as seen in my prior post, it looks to me like it may not need to be paid... there is no consensus on this though.


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## Bevdeforges

And that's what's called "taking a treaty position." File your returns that way and if the IRS has a problem with it, they'll be in touch. (But don't hold your breath - chances are that will be the end of the matter.)


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## Moulard

Not to try to muddle things here on the NIIT too much, but when considering how to treat it, the NIIT is covered in Chapter 2 of the IRC. Chapter 2 is all about self-employment taxes, not income taxes. So technically it is not an income tax. NIIT has been tacked on as Chapter 2A. This is why IRS regulations on the NIIT state that you cannot use foreign tax credits to offset it (as an example)

I haven't had time to read all of the fine print on the totalisation agreement , but I would suggest that it might be worth exploring exemption from it under the totalisation agreement (given its purpose to fund medicare). Of course the totalisation agremeement was written before the NIIT came into play so you might have to dig around a bit.

If the IRS do have a problem with however you treat it (regardless of the approach you take), there is one last possible solution to reduce your tax burden, which in intimated in my original post. Using domestic Australian tax law to offset the US tax. Of course this ends up eroding the Australian tax base... but lets set this aside for a moment.

While Australian residents are normally subject to foreign income tax only on their foreign source income, the foreign income tax offset applies to all income on which foreign income tax has been correctly applied. This situation will arise in very limited circumstances and the fact that the US uses citizenship based taxation is in my belief, one of those circumstances.

You would have to factor in any component of the NIIT amount that was on Australian Non-Assessed, Non Exempt income... as you can only claim a foreign tax offset on amounts that were actually assessable income in Australia (key one being any US tax on Super growth, if for example you had a SMSF or other foreign trusts)

Are you able to provide a link to the IRS interpretation of the treaty that you cite? I collect stuff on the US-Aus treaty and I don't think I have ever seen that before.


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## rionada

*Interpretation sited*

Thanks Moulard,

Much of what you just said is going straight over my head. At this point, I am planning on opening the brokerage account and then will most likely just pay the 3.8% NIIT. But, it's possible that I will not declare the brokerage account (based on the interpretation sited) and see if they come after me for it. And, if they do, I'll quote the interpretation as my reason for filing as I did. I'll do some more research before I make the final decision on that one. In the mean time, it's been very helpful understanding the ramifications of each decision and it's nice to have clarity on my original brokerage vs super question. 

Here is the interpretation sited, I'll be interested to know what you think:
https://www.law.cornell.edu/cfr/text/26/301.6114-1


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## Nononymous

Always better to ask forgiveness than to ask permission. And if the IRS starts demanding huge fines, turn out the lights and don't answer the door.

If you plan to not declare something, just be careful that it isn't being reported by FATCA. At present it doesn't sound like the IRS has any ability to use the data, but one day in the future it might.


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## Moulard

Rionada,


> ... and then will most likely just pay the 3.8% NIIT.


While you may, of course choose to do as you like, but personally, I would be taking the view on my US return that I was exempt under the totalisation agreement between the US and Australia. 
For the United States, the totalisation agreement covers Social Security contributions (including the U.S. Medicare portion) and Social Security retirement, disability and survivors insurance benefits. 
The net investment income tax was designed to pay for an expanded Medicare. In the statute, it is called a “Medicare contribution.” 
Obviously as the Totalisation agreement came into force in 2002 it doesn’t specifically mention NIIT, but the agreement does state that the it also applies to future laws which amend or supplement the laws in scope of the agreement; those being covered under Chapters 2 (self-employment tax) and 21 (FICA tax) of the IRC. 
If the IRS disagreed and deemed that you were not exempt, then I would be looking to take relief via my Australian return. If the sums involved are large, then I might obtain administratively binding advice from the ATO before filing my US return to have that ace up my sleeve.


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## rionada

*US AU tax discussion continues...*

Thank you for checking back in Moulard... and thanks to everyone that has weighed in,

After further research and review, and in consideration of the learned advice of those who shared their opinions here... I am now planning to not pay the NIIT. If possible, I will simply not declare my brokerage account to the IRS. Which looks to have legal precedent and cover considering all of my research and our previous discussion.

The tax involved in paying the NIIT will likely be less than $1000/Yr USD so it may not be worth seeking administratively binding advice from the ATO? I know nothing of that process or cost.

New Question:
*So far, I have not filed any FBAR or FATCA forms (on any of our accounts) - should I being doing either? Both? *

Cheers all


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## Bevdeforges

It may depend a bit on your plans, but technically you "should" be filing FBARs if the total of your foreign financial accounts (i.e. bank and investment accounts) exceeds $10,000 at any point during the year.

The main factor to consider, however, is whether any of your banks or brokerage firms have asked you to provide your US SS number or asked you to give them a W9 form or equivalent. If that's the case, then they will probably be reporting the existence of your account(s) plus the year-end balance to the US Treasury Department each year. What the Treasury Dept. does with that information is anyone's guess at this stage, but since the information is tied to your SSN, they could potentially compare it all to your tax and FBAR filings. 

Up to you how you want to handle this. But FBAR filings are informational only and don't result in any additional taxes. 

The FATCA forms are additional forms for your tax returns that mostly report the existence of the accounts and then trace any income from each account to where you have included it on your tax returns.


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## Moulard

Information on all the types of advice and rulings that the ATO can provide..

https://www.ato.gov.au/General/ATO-advice-and-guidance/


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## rionada

*Medicare Levy?*

I thought about starting a new thread, but the question is really related to the last one:

Partner makes $400,000 AUD in wages.
I make $18,000 AUD unearned income.

In Australia I pay no income tax, But ...

*Do I owe any Australian medicare levy* since my partner is a high wage earner?

Cheers


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## Moulard

Medicare Levy Calculator

https://www.ato.gov.au/Calculators-and-tools/Medicare-levy/

Note the page appears broken, you need to scroll way way down the page to find the calculator (of course it could just be it doesn't play nicely with my browser).

All things Medicare Levy and Medicare Levy Surcharge can be found here...

https://www.ato.gov.au/Individuals/Medicare-levy/


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## rionada

I got the same result as you when I tried to go to the medicare levy calculator... broken.
I've read the ATO write up on the medicare levy and it looks to me like I would pay zero medicare levy. But, the way it's written is confusing. If I were single, it seesm clear that I would pay no medicare levy on $18,000. But, because my partner is a high wage earner, the result is unclear. Can anyone clarify this?


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## LogosYu18

I thought the first US$100K of earned income is also tax free for people living overseas for 11 months of the tax year. Your capital income will be taxed at capital gain rate unless you put them in Roth IRA.


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## rionada

LogosYu18 said:


> Your capital income will be taxed at capital gain rate unless you put them in Roth IRA.


That does not appear to be true...

That would be true on US unearned income, But it does not appear to be true for Australian unearned income (reclassified by treaty).

It looks like my Australian unearned income will be lumped in with our earned Australian income (as it applies to US taxes) and offset by the taxes already paid in Australia (due to tax treaty). I'm not 100% positive, but that's what my research has lead me to believe. Also. I have put all the numbers through TurboTax and that is the outcome - no additional tax - and no capital gains tax need to be paid.

To be clear - we do owe additional taxes in the US on my unearned income, but those additional taxes are more than offset by the much higher taxes that we pay in Australia - the result being that we do not have to pay any extra to the IRS.

Of course I could be wrong...


Still looking for clarification on the Medicare question.


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## Moulard

rionada said:


> I got the same result as you when I tried to go to the medicare levy calculator... broken.


The calculator itself does not appear to be broken. Only the rendering of the page.


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## Moulard

LogosYu18 said:


> I thought the first US$100K of earned income is also tax free for people living overseas for 11 months of the tax year. Your capital income will be taxed at capital gain rate unless you put them in Roth IRA.


US schemes like IRAs get no preferential treatment in Australia.

The Administrative Appeals Tribunal (Baker v. FTC) found that an Individual IRA is not a superannuation fund for Australian tax purposes and is therefore not a foreign superannuation fund. 

One of the key issues being that money can be withdrawn at any time prior to any retirement event at the complete discretion of the IRA holder. As a consequence it was held that an IRA did not qualify as one for the payment of benefits in the nature of superannuation upon retirement or death within the meaning of s 305-55(2).

Thus distributions (and possibly growth) of funds in IRA will be taxable in the year they are vested.


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## rionada

I hope you're right Moulard...

The calculator (which appears to have been repaired) does indicate that no additional Medicare Levy would be owed.

I tried it both ways - my income ($18,000) and then spouse income ($400,000) and the answer was $0 medicare levy.

Then I did my partners income first and mine as the spouse income and the answer is the same as if mine were not added = $8,000 medicare levy.

Just to make this more complicated than it needs to be I called the ATO... 
I got what sounded like a nice young man who knew nothing. He looked up the question and told me that in my case the medicare levy WOULD BE owed on my income (because of my spouses high income). But, he didn't sound very sure so I had him "ask an expert"... He put me on hold and then came back with the same answer that I would owe the tax. Not very convincing... 

Here's hoping that the online calculator is correct!


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## Moulard

rionada said:


> I've read the ATO write up on the medicare levy and it looks to me like I would pay zero medicare levy. But, the way it's written is confusing. If I were single, it seesm clear that I would pay no medicare levy on $18,000. But, because my partner is a high wage earner, the result is unclear. Can anyone clarify this?



I believe you are correct. Although I am happy to stand corrected...unusually ATO published info is pretty clear and easy to follow. But the introduction of the Medicare Levy Surcharge made this more complicated.

I do not believe that you will have to pay the Medicare levy. However if you do not have qualifying health insurance then you will be subject to the Medicare Levy Surcharge. I suspect it is the difference in rules between the Medicare Levy, and the Medicare Levy Surcharge is causing you confusion.

You do not have to pay the Medicare levy as your taxable income is equal to or less than $21,980 ($34,758 for seniors and pensioners entitled to the seniors and pensioners tax offset).

Your household income only comes into play if...

1) Your income was between $21,980 and $27,475 - their income would determine if you would pay a reduced rate (i.e less than the standard 2%). 

2) You no not have medical insurance with qualifying hospital cover. The Medicare levy surcharge looks at household income. Given your husband's income you would be subject to a 1.5% Medicare Surcharge Levy.


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## rionada

Thanks Moulard,

I also concluded (and hoped) that he was confused between the medicare levy and the medicare levy surcharge.

For the record: We have private health insurance - so we do not pay the medicare levy surcharge.

I will consider the question answered: I will not have to pay any medicare levy.

Just as an afterthought I should mention that it is my female wife that is the high wage earner... I, the male husband, am the low wage earner.


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## Moulard

Apologies to your wife. Its actually uncharacteristic of me to use anything other than spouse or partner.

There is one last thing I do want to draw to your attention. 

I think that you have misinterpreted "re-sourced by treaty". In treaties resourcing clauses look something like ...

"Income, profits or gains derived by a resident of one of the Contracting States .... shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State."

Its a long time since I have read the US-Aus treaty carefully, but I don't recollect our treaty having any resourcing rules in it.


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## Bevdeforges

Just thought I'd mention one thing here (though I admit to having no experience with the Australian tax system). In general terms, once you've figured out a tax position in good faith, like it sounds like you have, it pays to document for yourself what you're basing your position on and tuck that away with your copy of your returns or declarations for the relevant year.

In the event that questions are raised, you have your notes in order to explain why you did what you did. Most tax systems I've encountered will accept a good-faith effort to meet the tax requirements, and even if they decide your position is wrong and demand the additional tax, they may be more inclined to waive any penalties when you can explain your reasoning.
Cheers,
Bev


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## rionada

*Many Thanks!*

Thanks Moulard.

Good advice Bev... I'll do that.

Thank you for all your help!

And thank you to all who have taken the time to share their wisdom.


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## JungleJim

Bevdeforges said:


> Just thought I'd mention one thing here (though I admit to having no experience with the Australian tax system). In general terms, once you've figured out a tax position in good faith, like it sounds like you have, it pays to document for yourself what you're basing your position on and tuck that away with your copy of your returns or declarations for the relevant year.
> 
> In the event that questions are raised, you have your notes in order to explain why you did what you did. Most tax systems I've encountered will accept a good-faith effort to meet the tax requirements, and even if they decide your position is wrong and demand the additional tax, they may be more inclined to waive any penalties when you can explain your reasoning.
> Cheers,
> Bev


Yes... back it up. We were hit last year with $800,000 in NIIT tax because of the sale of our business in farming worth $35million. We paid our 49% tax in Australia on the profit, and then had to pay the NIIT also to the US, which we feel has no business taxing us on our Australian income as we have no connection to the US for the 30+ years we have lived in Australia, and are Australian Citizens. 

However, we used an international tax attorney to argue our position which he said: "The is one of the more complicated areas of the new rules and there is little direct guidance from the IRS. The basic issue involves an interpretation of the limitation on claiming foreign taxes against the transition tax which is based on the premise that since the IRS allowed a deduction of around 56% of earnings when computing the income that is included, then the foreign taxes need also to be reduced by the same 56%. If we would have followed this plain reading of the law it would have caused your transition tax to be over $1M! Instead, we spent significant time analyzing the rules and arriving at a position that the limitation on the foreign taxes applies only to a case where a corporation (or an individual claiming to be treated as a corporation for purposes of the transition tax) is claiming indirect foreign tax credits and is first including the credit as income (called Section 78 “gross up” and is similar to the Australian idea of a “franking credit”). In that case, the inclusion is reduced by 56% and therefore the related foreign tax credit is also reduced by the same 56%. Without belaboring the point, I am just pointing out that we worked our hardest to optimize your position and in this case it saved you over $1M (which would have been double taxed, by the way).

So, we paid the tax so as to not be delinquent, but sent in our objection and outlined the reasons above from the attorney. The IRS then apparently saw merit in our argument and refunded our tax paid and we received the whole amount refunded nearly a year ago. :fingerscrossed:
So... maybe someone is listening - but back up your position with someone who has a good grasp on this - because it is still a mystery to me...

Unfortunately, we can't renounce because of the exit tax imposed so we are stuck arguing at great costs the unfairness of these laws for years to come, while paying US attorney's and accountants each year to navigate the complexity of US tax code.


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## Moulard

There have been a couple of NIIT related private letter rulings related to whether they are eligible for foreign tax credits. Those have all been knocked back because NIIT is in Chapter 2A and FTC only cover stuff under Chapter 1. 

I actually think there is a reasonable argument to be had that NIIT is a social security related payment (given it is effectively a medicare tax) and thus for the purposes of the totalisation agreement between the US and Australia and thus for an Australian resident it could be moot.


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## underation

JungleJim said:


> Yes... back it up. We were hit last year with $800,000 in NIIT tax because of the sale of our business in farming worth $35million. We paid our 49% tax in Australia on the profit, and then had to pay the NIIT also to the US, which we feel has no business taxing us on our Australian income as we have no connection to the US for the 30+ years we have lived in Australia, and are Australian Citizens.
> 
> However, we used an international tax attorney to argue our position which he said: "The is one of the more complicated areas of the new rules and there is little direct guidance from the IRS. The basic issue involves an interpretation of the limitation on claiming foreign taxes against the transition tax which is based on the premise that since the IRS allowed a deduction of around 56% of earnings when computing the income that is included, then the foreign taxes need also to be reduced by the same 56%. If we would have followed this plain reading of the law it would have caused your transition tax to be over $1M! Instead, we spent significant time analyzing the rules and arriving at a position that the limitation on the foreign taxes applies only to a case where a corporation (or an individual claiming to be treated as a corporation for purposes of the transition tax) is claiming indirect foreign tax credits and is first including the credit as income (called Section 78 “gross up” and is similar to the Australian idea of a “franking credit”). In that case, the inclusion is reduced by 56% and therefore the related foreign tax credit is also reduced by the same 56%. Without belaboring the point, I am just pointing out that we worked our hardest to optimize your position and in this case it saved you over $1M (which would have been double taxed, by the way).
> 
> So, we paid the tax so as to not be delinquent, but sent in our objection and outlined the reasons above from the attorney. The IRS then apparently saw merit in our argument and refunded our tax paid and we received the whole amount refunded nearly a year ago. :fingerscrossed:
> So... maybe someone is listening - but back up your position with someone who has a good grasp on this - because it is still a mystery to me...


_[Caveat: IANAL, nor an expert of any kind]_

Getting round the treaty obligation to allow FTCs seems to have been a big challenge for the tax theorists and taxwriters who were trying to implement the transition tax. You can see the evolution of the transition tax strategy, in various proposals and academic papers that appeared in the years leading up to between 2013 (when the then Ways&Means Chair Dave Camp produced what became known as the “Camp Plan”), and 2017 when the final iteration became law in the shape of the TCJA: “A Corporate Offshore Profits Transition Tax”, Susan C. Morse, April 2013; the Camp Plan, proposed later in 2013 by the then Chair of the Ways and Means Committee; “A Simpler Off-shore Transition Tax”, Susan C. Morse, 2014; “Getting from Here to There: the Transition Tax Issue”, Fleming et al.,2017; TCJA, 2017.

And others.

It’s pretty clear, if you take the time to scan through some of these discussions, that the lawmakers were (rightly IMO) nervous about the possibility of a legal challenge to the schemes for getting round the FTC treaty obligation. It seems likely (to me) that the IRS continues to be very much aware that this element of the transition tax legislation is treading on very thin ice, and that consequently it would not be wise to risk court action - particularly against a US Person who was clearly neither a multinational US corporation nor a tax evader.

Congratulations to you and your adviser for your successful challenge. 



> Unfortunately, we can't renounce because of the exit tax imposed so we are stuck arguing at great costs the unfairness of these laws for years to come, while paying US attorney's and accountants each year to navigate the complexity of US tax code.


For what it’s worth, if you have no US assets or income, the exit tax is not actually enforceable. If you wish, you can renounce as soon as you can get an appointment at your nearest consulate. You then become a NRA, as soon as you’ve taken the Oath. Later, you get the CLN which proves your loss of nationality. File no further US tax forms of any kind. It’s perfectly legal, entirely proper, and it’s your right.

I never knew about CBT until FATCA came along; consequently, I never filed US tax returns. Six weeks after a snotty teenage bank clerk demanded my SSN, I was no longer a US citizen. Happy days! 

(The situation is different, of course, for those who have US income, assets, or financial entanglements. Everyone’s situation is different.)


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## JungleJim

Thanks for those comments "underation".

That has stirred a few thoughts about revisiting the renouncing issue... it would save heaps of conversion, success and accounting fees with US accountants. Yes, we have no assets in the US and our immediate family is all here in Australia, so no issue with any entanglements, or even any close relatives to visit - if they ban our travel to the US.

Interestingly, 3 months after I filed, my son used the same argument about the NIIT when he filed. He too had paid the NIIT tax, and then a couple months later - he received a $200k check back from the IRS refunding that. So, this isn't just an aberration or overlook... :fingerscrossed: again, I'm hoping.

This year our International accountants are already working on my file and of course there is more tweaky stuff that is new in the IRS code, that I don't understand compliments of the IRS, so again we pay good money to comply... making the renouncing argument stronger and stronger.


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## Nononymous

JungleJim said:


> Yes, we have no assets in the US and our immediate family is all here in Australia, so no issue with any entanglements, or even any close relatives to visit - if they ban our travel to the US.


You sound like a perfect candidate for renouncing and ceasing to file US tax returns if a punitive exit tax cannot be avoided. As you may be aware, the IRS is not capable of imposing penalties on an Australian citizen (or for that matter anyone) living in Australia with no US assets.


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## underation

Nononymous said:


> You sound like a perfect candidate for renouncing and ceasing to file US tax returns if a punitive exit tax cannot be avoided. As you may be aware, the IRS is not capable of imposing penalties on an Australian citizen (or for that matter anyone) living in Australia with no US assets.


Indeed - and even more importantly, the IRS is not capable of *assessing * taxes on the non-US-source income (or future income) of a non-US-resident individual without the co-operation of the individual.


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## Nononymous

underation said:


> Indeed - and even more importantly, the IRS is not capable of *assessing * taxes on the non-US-source income (or future income) of a non-US-resident individual without the co-operation of the individual.


Minor quibble here. If a non-US-resident individual is a US person and has accounts subject to FATCA, the (non-US-source) income from those accounts would be reported to the IRS. Whether the IRS would assess tax on that is an open question, but in theory they could. All other non-US income sources are however opaque to the IRS unless reported voluntarily.


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## underation

Nononymous said:


> Minor quibble here. If a non-US-resident individual is a US person and has accounts subject to FATCA, the (non-US-source) income from those accounts would be reported to the IRS. Whether the IRS would assess tax on that is an open question, but in theory they could. All other non-US income sources are however opaque to the IRS unless reported voluntarily.


Actually, not. 

a) The US doesn’t have taxing rights on non-US-source income received by an individual who is not resident in the US. The taxing rights rest with the source country or the residence country (usually one and the same).

b) US tax law is law in the US, but not in Australia or any other country. Outside the US, CBT is merely a _citizenship obligation._ A renunciant has by definition freed himself/herself of the benefits _and the obligations_ attached to US citizenship.

I repeat, IANAL, or any kind of expert. I’m just commenting.


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## Nononymous

Regardless, in theory the IRS could use FATCA data to generate an assessment and send someone a bill. No evidence they've done this to anyone yet, but I wouldn't rule it out.


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## underation

Nononymous said:


> Regardless, in theory the IRS could use FATCA data to generate an assessment and send someone a bill. No evidence they've done this to anyone yet, but I wouldn't rule it out.


Not to try to assess a former citizen for the exit tax, if the former citizen has no US income / assets / financial doings. There is no US-taxable income to be assessed.

The question of whether the IRS could use FATCA to assess a US citizen with no US income/assets for tax on their current non-US income is more complicated, because the citizenship itself creates the US-tax-residence. It’s a fact of life, to be planned around or otherwise dealt with. I personally think the IRS is unlikely to waste time trying to cook up an assessment which can’t be collected, but as long as the citizenship exists, the US has other potential ways of “persuading” the citizen to comply (e.g. threats of passport revocation).

But a _former_ citizen (with no US income etc) is _not_ tax-resident in the US, and ceases to be reportable as such the minute they finish uttering the Oath in the presence of the consular official. 

Again, this is my view. Everyone has to make their own decision.


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## Bevdeforges

While admittedly, a "former citizen" is no longer subject to the IRS, the individual is still liable for any (theoretical or otherwise) taxes incurred prior to the date of their renunciation.

Think of Boris Johnson. While he renounced once the whole brouhaha erupted over the taxes due on the sale of his house in the UK, he still wound up paying the tax to the US (because he was still a US citizen at the date of sale). 

Hm, if he winds up the next PM of the UK, I wonder if they'll let him into the US any more even on government business? They don't often invoke that part of the law, though allegedly they have done so for a few "notorious" cases.

Ah, may we live in interesting times!


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## underation

Bevdeforges said:


> While admittedly, a "former citizen" is no longer subject to the IRS, the individual is still liable for any (theoretical or otherwise) taxes incurred prior to the date of their renunciation.


I agree, if the individual was filing US tax returns, before renouncing. The IRS could send an amended assessment, if they discovered unreported income or any other error/violation, and that would be a legal debt.



> Think of Boris Johnson. While he renounced once the whole brouhaha erupted over the taxes due on the sale of his house in the UK, he still wound up paying the tax to the US (because he was still a US citizen at the date of sale).


Johnson didn’t renounce over the taxes he was assessed on the house sale. He paid the bill, grumbling, to keep the passport. He renounced after being appointed Foreign Secretary - whether because he was leaned on by HMG, or because he decided the diplomatic passport would be sufficient, or thought the US citizenship might hinder his further rise to power, I do not know but strongly suspect number 3.



> Hm, if he winds up the next PM of the UK, I wonder if they'll let him into the US any more even on government business? They don't often invoke that part of the law, though allegedly they have done so for a few "notorious" cases.


Sorry? Which part? Johnson is no longer a US citizen.



> Ah, may we live in interesting times!


It’s going to get worse - much worse - before/if it gets better. IMO


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## underation

underation said:


> Johnson didn’t renounce over the taxes he was assessed on the house sale. He paid the bill, grumbling, to keep the passport. He renounced after being appointed Foreign Secretary - whether because he was leaned on by HMG, or because he decided the diplomatic passport would be sufficient, or thought the US citizenship might hinder his further rise to power, I do not know but strongly suspect number 3.


Johnson paid up in 2015, according to the Telegraph.
(https://www.telegraph.co.uk/news/po...nson-to-pay-six-figure-American-tax-bill.html)

And didn’t renounce until he was appointed Foreign Secretary.


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## Bevdeforges

underation said:


> Sorry? Which part? Johnson is no longer a US citizen.


The part that says that the Attorney General can deny a former citizen (i.e. someone who has renounced) any sort of visa (which includes the VWP) to enter the US. But, hey, would AG Barr do something like that to Boris? I guess we will find out, won't we....


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## underation

Bevdeforges said:


> The part that says that the Attorney General can deny a former citizen (i.e. someone who has renounced) any sort of visa (which includes the VWP) to enter the US. But, hey, would AG Barr do something like that to Boris? I guess we will find out, won't we....




It’s an entertaining idea, but alas, I don’t think PMs of foreign countries enter on visas. I think they enter on diplomatic passports. ICBW


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## underation

Bevdeforges said:


> The part that says that the Attorney General can deny a former citizen (i.e. someone who has renounced) any sort of visa (which includes the VWP) to enter the US. But, hey, would AG Barr do something like that to Boris? I guess we will find out, won't we....


I had a look for this and couldn’t find it.

The Attorney General can apparently deny a visa to an immigrant, without appeal. Former citizenship isn’t a factor.

There’s also the Reed Amendment, whereby a former citizen who can be shown to have renounced "for tax purposes” can be denied entry. Apparently this is almost impossible to enforce unless the former citizen says "Hi, I’m a foreign citizen and I renounced for tax purposes", or words to that effect.

Such laws aren’t really necessary, anyway. Any country can keep out any individual it doesn’t want to let in, unless the individual has a right to enter. There doesn’t seem to be any evidence that the US wants to bar former citizens simply for renouncing. 

I suspect the rumours about being banned probably emanate from tax advisers who don’t want to lose their client base, or renunciation advisers who don’t want prospective renouncers to realise that it’s actually very easy to renounce without paying a professional to help.


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## Bevdeforges

There was a guy several years ago who was formally banned from entering the US after having renounced. He was a big tech entrepreneur who had made tons of money in the US and then went to live in Singapore. Oh here he is: Eduardo Saverin. Then there is the Bitcoin guy, Roger Ver.

Admittedly, you have to be really really rich. But it happens.


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## underation

Bevdeforges said:


> There was a guy several years ago who was formally banned from entering the US after having renounced. He was a big tech entrepreneur who had made tons of money in the US and then went to live in Singapore. Oh here he is: Eduardo Saverin.


Was he actually banned, or was there just a lot of talk about “he ought to be banned”, “he might be banned” etc. Because as I understand it, Saverin was completely compliant, including paying the exit tax. https://www.bloomberg.com/opinion/a...-saverin-left-u-s-as-a-taxpayer-not-a-traitor

I can’t find any report of him ever being banned.




> Then there is the Bitcoin guy, Roger Ver.


As I understand it, he was once refused entry to attend a conference, on suspicion of trying to immigrate. Another time, he was admitted.

Some politicians (not only in the US) are quick to introduce bills that will speak to the vengeful among their constituents. It seems to have been Saverin’s renunciation that led to the Reed Amendment, but I can’t see any report of the Reed Amendment being actually used against him.


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## JungleJim

Nononymous said:


> You sound like a perfect candidate for renouncing and ceasing to file US tax returns if a punitive exit tax cannot be avoided. As you may be aware, the IRS is not capable of imposing penalties on an Australian citizen (or for that matter anyone) living in Australia with no US assets.


Unfortunately, the more I look at renouncing again, I'm not seeing how to get around the over $2mil in assets exit tax. Yes, I have no US assets for many years, but I had to report the sale of my business here and they know we are way over that minimum. I am not sure going dark after renouncing won't still allow them to make an assessment, and collect via some tax/enforcement agreement with Australia. 

I am still researching, so maybe I will see the light (or not)...


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## underation

JungleJim said:


> Unfortunately, the more I look at renouncing again, I'm not seeing how to get around the over $2mil in assets exit tax. Yes, I have no US assets for many years, but I had to report the sale of my business here and they know we are way over that minimum. I am not sure going dark after renouncing won't still allow them to make an assessment, and collect via some tax/enforcement agreement with Australia.


It’s not necessary to hide. The IRS can’t assess a NRA as owing tax on non-US-taxable income which the NRA hasn’t even received. And although 5 countries have mutual collection agreements with the US (can’t recall whether Australia is one of the 5), no country (including the US) has a mutual agreement to collect another country’s taxes from its own citizens.

However, IMO it’s best for every individual to make their own decision and do what they feel comfortable with - or feel the least uncomfortable with. I’m just commenting, expressing my own opinions - not intending to give advice.



> I am still researching, so maybe I will see the light (or not)...


Good luck - and congratulations again on your successful challenge.


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## JungleJim

There isn't an exemption anywhere in the code for assets wholly owned outside the US as being exempt is there? I haven't found it... but it makes no sense that I came to Australia 30+ years ago, became a citizen in 1986, and built my business from $300k to $35mil and the US has a right to tax that as an "exit tax".


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## JustLurking

underation said:


> It seems to have been Saverin’s renunciation that led to the Reed Amendment, but I can’t see any report of the Reed Amendment being actually used against him.


The Reed Amendment predates Eduardo Saverin renouncing by some 15 years:

https://en.wikipedia.org/wiki/Reed_Amendment_(immigration)
https://en.wikipedia.org/wiki/Eduardo_Saverin

You might be thinking instead of the not (yet?) passed Ex-PATRIOT act. This _was_ an attempted response by congress to Eduardo Saverin's renunciation:

https://en.wikipedia.org/wiki/Ex-PATRIOT_Act

Of particular note is the part where congress drafted it to apply to people who renounced in the ten years _before_ the act passed into law. Bonkers. Possibly also unconstitutional.


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## underation

JungleJim said:


> There isn't an exemption anywhere in the code for assets wholly owned outside the US as being exempt is there? I haven't found it... but it makes no sense that I came to Australia 30+ years ago, became a citizen in 1986, and built my business from $300k to $35mil and the US has a right to tax that as an "exit tax".


You don’t need to claim an exemption. Once you’ve sworn the Oath, you’re no longer subject to US taxation on your non-US income.

If you nevertheless obey IRS orders and sign the exit tax form, reporting your worldwide assets and guesstimating how much they’d be worth if you sold them before you renounced, _then_ you become subject to US tax again, because by signing the form and providong the list of assets, you’ve accepted the exit tax deal.


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## Bevdeforges

Just FYI, Wikipedia has an interesting article on the Reed Amendment, where it states that only 2 people have been denied entry to the US, due to some uncertainties about the requirements for so doing. (The two they are referring to are not named.)

However, in the current political climate over there, you take your chances if you just assume you'll always be allowed to come and go to the US after renunciation. For the moment, it's just another in a long list of "potential risks" that each individual will have to take into account for their own situation. For someone with no need or desire to go back to the US, it's no big deal. For someone with family or business interests back there, it's something to consider.


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## underation

Bevdeforges said:


> However, in the current political climate over there, you take your chances if you just assume you'll always be allowed to come and go to the US after renunciation.


Indeed. Not just in the current political climate, but at any time. A renunciant loses the right to enter the US, and live in the US, the minute s/he swears the Oath. For anyone who wants to keep that citizenship benefit, it would be sensible (and IMO fair) to keep the citizenship, keep the citizenship benefits, and comply fully with the citizenship obligation of taxation.

For any former citizen who is not bothered about the right to enter America, but wants to visit occasionally, there is the normal procedure: apply for a visa or visa waiver. Just like Australia, or Britain, or France, etc. (I believe the US has special arrangements for visitors from neighbouring countries.)


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## underation

Bevdeforges said:


> Just FYI, Wikipedia has an interesting article on the Reed Amendment, where it states that only 2 people have been denied entry to the US, due to some uncertainties about the requirements for so doing. (The two they are referring to are not named.)


Interesting. I see the wikipedia entry cites a Homeland Security report (“The Inadmissibility of Tax-Based Renunciants” (https://uniset.ca/fatca/inadmissibility_renunciants.pdf). The report seems to me to do a pretty thorough job of explaining why the Reed Amendment can’t be implemented 



> Interagency coordination between DHS and DOS operations in this area is improving continuously, but there currently are no advisable options for altering enforcement of the inadmissibility ground against persons who do not affirmatively admit to renouncing their U.S. citizenship for the purpose of avoiding U.S. taxation.
> 
> In particular, DHS and DOS have determined that it is not advisable to implement section 212(a)(10)(E) through a rebuttable presumption that persons renounced citizenship for U.S. tax avoidance purposes where, for example, they failed to pay the expatriate tax (if it could be determined that an individual is subject to it), they acquired a tax windfall shortly after expatriation, or there is evidence of acquiring residence in countries that may be considered tax havens.
> 
> Among other inadequacies, any such presumption likely would be either highly under-inclusive of persons who in fact renounce citizenship for tax avoidance purposes, over-inclusive in capturing persons who did not in actuality renounce citizenship for tax avoidance purposes yet meet the requirements for the presumption, or both. Moreover, even if a renunciant were to waive Treasury confidentiality provisions, such that DHS and DOS might review specifics of an individual’s Internal Revenue Service filings, DHS lacks the expertise and resources to review tax filings meaningfully or engage in complicated tax liability analysis, involving both domestic and foreign tax law to determine whether a section 212(a)(10)(E) inadmissibility presumption could be rebutted.


I hazard a guess that the two individuals who got banned did so deliberately as a kind of mockery.


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## Nononymous

JungleJim said:


> There isn't an exemption anywhere in the code for assets wholly owned outside the US as being exempt is there? I haven't found it... but it makes no sense that I came to Australia 30+ years ago, became a citizen in 1986, and built my business from $300k to $35mil and the US has a right to tax that as an "exit tax".


There is no such exemption, to the best of my knowledge. That's kind of the point, it doesn't matter where you or your assets are located, all US citizens are treated equally.

Of course it makes no sense that the US be able to claim an exit tax were you to renounce. It also makes no sense for you to have been filing US taxes for 30+ years, given that you made your life in Australia.

Four options:

1. Keep US citizenship, continue filing US tax returns. (The status quo.)

2. Keep US citizenship, cease filing US tax returns. (You'll save money but there might be travel repercussions given the past sums involved; denial of passport renewal is technically possible.)

3. Renounce US citizenship, exit the US tax system properly. (Likely to be rather expensive due to exit tax, but at least run the numbers.)

4. Renounce US citizenship, cease filing US tax returns. (You'll save money but there might be travel repercussions given the past sums involved.)

The five countries with collection assistance agreements - from which their own citizens are exempt - are Canada, France, Netherlands, Denmark, Sweden. For the US to go after the assets of a current or former US citizen in Australia, it would need to bring a case in the Australian courts, and as far as I'm aware, there's no precedent for that being successful.


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## underation

“...it doesn't matter where you or your assets are located, all US citizens are treated equally.”

But of course a renunciant is _not_ a US citizen. S/he is a citizen of his/her own country, with no obligation to agree to pay tax to the US on the predicted future earnings of his/her non-US assets.


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## Nononymous

Yes we know...


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## underation

Nononymous said:


> Four options:
> 
> 1. Keep US citizenship, continue filing US tax returns. (The status quo.)
> 
> 2. Keep US citizenship, cease filing US tax returns. (You'll save money but there might be travel repercussions given the past sums involved; denial of passport renewal is technically possible.)
> 
> 3. Renounce US citizenship, exit the US tax system properly. (Likely to be rather expensive due to exit tax, but at least run the numbers.)
> 
> 4. Renounce US citizenship, cease filing US tax returns. (You'll save money but there might be travel repercussions given the past sums involved.)


I would suggest there are *three* practical options for a USC with no US income/assets:

a) Keep the citizenship and carry on complying with the tax obligations.

b) Renounce the citizenship, thus getting rid of the benefits and obligations, and enjoy full single citizenship of the country they live in.

c) Renounce the citizenship and file the exit tax form, and pay any resulting tax assessed. And afterwards enjoy full single citizenship of their residence country.

All three equally legal and proper - up to the individual to decide which best suits them


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## JustLurking

Nononymous said:


> 3. Renounce US citizenship, exit the US tax system properly. (Likely to be rather expensive due to exit tax, but at least run the numbers.)
> 
> 4. Renounce US citizenship, cease filing US tax returns. (You'll save money but there might be travel repercussions given the past sums involved.)


The OP's assets look to be above the current $11mil US estate tax exemption. That might make it a bigger driver of the decision than any ongoing income tax requirements. In particular, lower limits for gifts and no unlimited marital exception for non-US citizen spouse.

There would only be an exit tax on _unrealised_ gain if more than $700k or so of asset gain is unrealised. Given the sums at issue that $700k looks a bit paltry, but it's possible that the full balance might escape given the very recent sale of the farming business. Separately, the exit tax also destroys any retirement savings plans, and then there's the threat of section 2801 tax on any US citizen gift or bequest recipients post-renunciation.

Weighed against this though is the possibility of losing 40% of everything above $11mil to US estate tax should the worst happen. Assuming the OP's assets are not 'US situs', that evaporates with renunciation. And if the OP has no US citizen heirs, section 2801 is toothless.


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## Bevdeforges

All this back and forth just illustrates the point that, when it comes to a decision about renunciation or not, or full, partial or non- compliance, it's the individual USC who has to evaluate their circumstances, in full light of all the possible permutations - for themselves and for other family members who may or may not wish to follow their lead.

There are various tax issues related to USCs who inherit from NRAs (think children of a person who renounces) - or the other way around, if the person in question might be in a situation of possibly inheriting something from a USC family member. 

For some, flying beneath the radar is a perfectly acceptable solution for the long term. For others, full compliance is a better approach. But only the person involved can make that decision because only they will be bearing all the possible consequences.


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## underation

Bevdeforges said:


> All this back and forth just illustrates the point that, when it comes to a decision about renunciation or not, or full, partial or non- compliance, it's the individual USC who has to evaluate their circumstances, in full light of all the possible permutations - for themselves and for other family members who may or may not wish to follow their lead


Yep, I agree that it's up to the individual to decide whether to renounce.



> For some, flying beneath the radar is a perfectly acceptable solution for the long term. For others, full compliance is a better approach. But only the person involved can make that decision because only they will be bearing all the possible consequences.


Unfortunately, they won't necessarily be the only ones bearing all the possible consequences. If USC expats claim the privileges of US citizenship but don't accept the concomitant filing/reporting obligations, it's that much less likely that the US will ever sort out CBT, or that other countries will stop seeing everyone with a US birthplace as a potential tax cheat, and feel able to restore the data protection rights which the FATCA IGA took away.


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## Nononymous

underation said:


> If USC expats claim the privileges of US citizenship but don't accept the concomitant filing/reporting obligations, it's that much less likely that the US will ever sort out CBT, or that other countries will stop seeing everyone with a US birthplace as a potential tax cheat, and feel able to restore the data protection rights which the FATCA IGA took away.


Does not paying $2350 to renounce count as "claiming the privileges of US citizenship"?


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## underation

Nononymous said:


> Does not paying $2350 to renounce count as "claiming the privileges of US citizenship"?


I agree the renunciation fee is outrageous.


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## JungleJim

Nononymous said:


> There is no such exemption, to the best of my knowledge. That's kind of the point, it doesn't matter where you or your assets are located, all US citizens are treated equally.
> 
> Of course it makes no sense that the US be able to claim an exit tax were you to renounce. It also makes no sense for you to have been filing US taxes for 30+ years, given that you made your life in Australia.
> 
> Four options:
> 
> 1. Keep US citizenship, continue filing US tax returns. (The status quo.)
> 
> 2. Keep US citizenship, cease filing US tax returns. (You'll save money but there might be travel repercussions given the past sums involved; denial of passport renewal is technically possible.)
> 
> 3. Renounce US citizenship, exit the US tax system properly. (Likely to be rather expensive due to exit tax, but at least run the numbers.)
> 
> 4. Renounce US citizenship, cease filing US tax returns. (You'll save money but there might be travel repercussions given the past sums involved.)
> 
> The five countries with collection assistance agreements - from which their own citizens are exempt - are Canada, France, Netherlands, Denmark, Sweden. For the US to go after the assets of a current or former US citizen in Australia, it would need to bring a case in the Australian courts, and as far as I'm aware, there's no precedent for that being successful.


After revisiting this again over the last few days, I again don't see a way forward with renouncing, other than staying compliant. We have considered asset shifting into a structure such as a irrevocable self-settled, nongrantor discretionary trust so the assets are not in our name for 1 year minimum. As you are probably aware, the rules for which assets are counted are covered under Notice 2009-85, Section 3A states that the expatriating taxpayer includes all property where he or she:

“…owns any interest in property that would be taxable as part of his or her gross estate for Federal estate tax purposes under Chapter 11, Subtitle B of the Code as if he or she has died on the day before the expatriation date as a citizen or resident of the United States.”

We are now investigating if our Australian trust laws have a vehicle that would suffice for the US to consider the trust a "Irrevocable self-settled, nongrantor discretionary trust" and the beneficiaries would be our children, and not us. I don't want anything to do with a US trust, so hopefully we can adapt the language in an Australian trust formed to accomplish the key elements.

Of course that brings up the problem one of our sons is thinking about renouncing also and I'm not sure how the trust with them as beneficiaries would impact his tilt at renouncing. Still a work in progress...


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## Moulard

Nononymous said:


> For the US to go after the assets of a current or former US citizen in Australia, it would need to bring a case in the Australian courts, and as far as I'm aware, there's no precedent for that being successful.


Larry Richard Williams eventually agreed to his own extradition from Australia to the US rather than wait for it to proceed through the courts. But he had no Australia assets, and had basically come to Australia for a book tour. That is the only extradition to the US for tax related matters I am aware of.. I think there have been a couple others, but not many. But that is not an Australian asset forfeiture or confiscation example.

If we were talking Australia-New Zealand, I could probably come up with some examples, but there are much closer and stronger agreements in place there...

As for the US, like you I am not aware of any precedent, but it could happen as the legal frameworks are there...

Even where there is no o mutual assistance agreement in place, Australian courts can take action to register foreign restraining, forfeiture or pecuniary penalty orders under the Mutual Assistance in Criminal Matters Act 1987 to seek a domestic restraining orders pending receipt of a foreign restraining orders. 

But there is actually a specific agreement between the US and Australia - the Mutual Assistance in Criminal Matters (United States of America) Regulations Act (1999) and that agreement specifically supports forfeiture and confiscation but it would have to be a Proceeds of Crime request. 

Long and the short.

Person must have been convicted of a criminal act subject to more than 1 year of prison or a fine greater than AUD 50k.

The US court would have to request an Australian domestic order.

Before any confiscation could take effect, the AG would have to be satisfied that the conviction and proceeds of crime were not subject to further appeal in the US.

And given how long these things can take to work through the court system, one might die of old age first.


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## underation

> Person must have been convicted of a criminal act subject to more than 1 year of prison or a fine greater than AUD 50k.


Therefore not relevant in the current case, surely?

Regardless of whether a USC living outside the US renounces and doesn’t file any further US tax forms, or simply stops filing without renouncing, neither of those things is a criminal act. 

Even for USCs living in America, not reporting income to the IRS is not a criminal act, even though the income in question is US-taxable.


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