# US Citizen living in Australia - PFIC and ETFs



## ConfusedWoman

Hi all,

I am a US citizen who has been living overseas for nearly 10 years. I haven't filed US taxes in that time, and will be working with a professional to file back taxes and historical FBARs.

Earlier this year, I opened an Australian Vanguard account and put money into an Australian domiciled ETF. Unfortunately I realised yesterday that this is a very bad idea, both from a tax % perspective, and the time and effort involved in filing an 8621. I read that the 8621 is a crazy form and can take many, many hours (and as a result, it will no doubt cost a fortune).

_Q1. Is it advisable to pull all my money out of this ETF prior to the end of this calendar year, to avoid this issue spanning two years? I will get the professional to sort it, but I'd rather pay for one year of forms than two. I won't be able to get in touch with him for another week or so which is partly why I'm posting now._

I would still like to invest my money in some sort of fund, but I don't want to send my money to the US to invest it there - I don't expect to live there any time soon and would like my money to be more accessible and in AUD. 

Vanguard does have a couple of US-domiciled ETFs that you can buy in Australia, these are referenced in another recent thread on the first page.

_Q2. Is owning these US-domiciled ETFs relatively painless?

Q3. Is it cleaner to get the dividends paid out instead of reinvested?_

_Q4. I feel I clearly need help to get up to date with my taxes. Moving forwards, given the potential penalties, would you recommend that I always use a professional - or is it realistic to file myself?_

If you think there is something glaring that I have missed and should be aware of, please let me know.

Many thanks for your time!


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## Bevdeforges

Basically, as a US citizen living overseas you probably "should" avoid investing in any sort of fund through a local broker, or other financial institution outside the US. All foreign financial accounts (at least those that don't issue you a US 1099 or similar tax document at the end of the year) will have to be reported via FBAR and/or 8621 - not to mention a form 8938 once the value of your reportable assets exceeds $200,000.

What you ultimately decided to do depends on your ties to the US, your options regarding nationality (are you a dual national or could you take on Australian or another nationality?) and the amounts of money involved here. 

You also may want to consider why you find it necessary (or desirable) to "fix" your US tax situation now. If you've gone for 10 years "under the radar" there isn't really any urgency to getting legal just now. If you intend to invest in just about any form without sending your money to the US, you are probably looking at using paid tax preparers for the foreseeable future and yes, they can be very expensive. (Also be aware that they must take a "safe" approach in order to maintain their own reputations with the IRS.)


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## Nononymous

I would second Bev's response. Some basic questions:

Why are you coming into US tax compliance now? Are you planning on moving back anytime soon?

Are banks and financial institutions in Australia aware of your US citizenship?

Do you have Australian (or any other) citizenship, or are you planning to acquire it?

Generally speaking, US tax compliance by non-residents in a bad idea. There are far greater costs and risks to filing than to not filing. 

You can also take the approach of firing your tax preparer, educating yourself, and filing a "simplified" return that excludes any investments likely to cause problems with the IRS.

Most importantly, do not rush to file. There is no hurry unless you really need to prove compliance, and the only case where that makes sense is someone planning to return and sponsor a spouse for a green card. Take your time, do some research, and decide whether making yourself known to the IRS is worth the risks.


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## ConfusedWoman

Thanks, that is all super helpful.

A few additional details on why I am looking to potentially file my taxes:
1) In Australia you have to declare your US citizenship with your banks. When I signed up for my first account 6 years ago this wasn't readily apparent, but on a new account I opened this year I declared it because it's plainly obvious and hard to deny you missed a small T&C
2) In Australia you also need to report your US citizenship to the Australian Tax Office (ATO) - again, this hasn't always been super obvious when filing but it's increasingly obvious and will be tough to say I didn't know soon enough
3) I am going to work in the US for 6 months starting in January, and my Australian company will be reporting this to to the ATO and will impact my Aussie taxes
4) I am not at all rich, but I have quite a bit of liquid savings (which I put into the Vanguard). I think this position could grow significantly over the next 2-3 years, so I don't want to end up in a ton of tax trouble then
5) I am looking to buy a house in Australia in 12 months. Again, I think this sort of thing might come under tax scrutiny when it goes up in value etc

As far as I can tell the US is making it very difficult to have plausible deniability of your tax obligations in places like Australia going forward.

Overall I feel like I'm in the lowest risk position now and it will only get increasingly complex and punitive in the future - but I'm really not sure!

On your other questions: I am a UK citizen and will be applying for my Australian citizenship. This can take 2 years. Aside from this short term work trip I do not plan to move back to America anytime in the next decade.

Thanks again for your help.


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## Bevdeforges

Actually, it sounds like you're in a position where it might be best to get all caught up (now, while you're "small fish") so that you don't run into problems during your work assignment in the US. 

You may want to look into those "US domiciled" Vanguard accounts - though check with the local Vanguard office to see if they'll be treated as a "foreign branch of the US Vanguard" for US tax purposes. If they are, that should save you a whole lot of trouble on the tax front.


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## Nononymous

> 1) In Australia you have to declare your US citizenship with your banks. When I signed up for my first account 6 years ago this wasn't readily apparent, but on a new account I opened this year I declared it because it's plainly obvious and hard to deny you missed a small T&C


It depends on your comfort level with lying, of course, but in countries such as Canada and Australia where they do not actively check for place of birth, it's only the customer's self-certification that matters, so answer according to your conscience. Your UK passport will only show city of birth, so you could potentially use that as ID and if the city name is ambiguous, it wouldn't give you away. But your accent might be another matter. The main point is, just because banks are required to ask that customers declare their US citizenship, this does not mean that customers need to cooperate.



> 2) If Australia you also need to report your US citizenship to the Australian Tax Office (ATO) - again, this hasn't always been super obvious when filing but it's increasingly obvious and will be tough to say I didn't know soon enough


Interesting - I have not heard this before. I would check in with Karen Alpert at fixthetaxtreaty.org to confirm that this is the case, and that you are not being sold some faux scariness by a fear-mongering tax advisor. 



> 3) I am going to work in the US for 6 months starting in January, and my Australian company will be reporting this to to the ATO and will impact my Aussie taxes


If you stay on Australian payroll, the fact that you're in the US for 6 months is not relevant, and that income will not be reported to the IRS. If you are on US payroll that's a different matter, and obviously the IRS would know about that.



> 4) I am not at all rich, but I have quite a bit of liquid savings (which I put into the Vanguard). I think this position could grow significantly over the next 2-3 years, so I don't want to end up in a ton of tax trouble then


If you are planning to be compliant long-term, then it makes sense to arrange your affairs now, when it is simple to do so. Just be aware that you may face restrictions on how you can invest, and may not enjoy the same privileges as other Australian residents. As for "a ton of tax trouble", remember that the US government has no means to collect from anyone living in Australia without US assets. Compliance, and payment of penalties, is purely voluntary on the part of the US taxpayer. They can't touch you otherwise.



> 5) I am looking to buy a house in Australia in 12 months. Again, I think this sort of thing might come under tax scrutiny when it goes up in value etc


Capital gains on the sale of a primary residence, after an exemption, are taxable by the US. (But presumably you can't write off mortgage interest on your Australian taxes, so a bad deal.) Payment of tax on such gains only happens if you report them, however. The IRS would not otherwise learn of the sale.



> As far as I can tell the US is making it very difficult to have plausible deniability of your tax obligations in places like Australia going forward.


Yes but so what? Global compliance rates for US citizens abroad are under 10 percent, and for a good reason - the IRS doesn't look for anyone and can't collect from anyone they would want to penalize.



> Overall I feel like I'm in the lowest risk position now and it will only get increasingly complex and punitive in the future - but I'm really not sure!


Coming into compliance now may seem relatively simple, but it could in future become expensive. It's probably better not to enter the US tax system than to be in it and decide you either need to renounce or go dark and stop filing returns.



> On your other questions: I am a UK citizen and will be applying for my Australian citizenship. This can take 2 years. Aside from this short term work trip I do not plan to move back to America anytime in the next decade.


This is good. The only leverage the IRS has over you, in theory, is the threat to revoke or not renew your US passport, if they cannot collect on a tax debt over $51k. (Of course you need to be in the system to pile up a debt - it's not an issue for someone completely non-compliant.) With a second passport, that threat goes away. That being said, the sooner you get your Australian passport the better. In a handful of countries (Australia not among them, fortunately) the IRS can request collection assistance against anyone who is not a citizen of that country. You generally have more rights and protections as a citizen.

Question: given that you have UK citizenship, what is your country of birth?

Overall you probably won't find compliance too painful at first, but over time it could cost you, and you'll be facing a tougher decision. Unless you want to keep your options open for an eventual return, it's probably still safer to not file US tax returns, even if you are truthful to your bank about US citizenship.


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## Bevdeforges

One small caveat here:



> If you stay on Australian payroll, the fact that you're in the US for 6 months is not relevant, and that income will not be reported to the IRS. If you are on US payroll that's a different matter, and obviously the IRS would know about that.


I am not sure that is the case. For a US citizen working in the US (even for "only" 6 months) I believe they will be subject to full US taxation, including US Social Security. Especially if the Australian employer is relying on the OPs US passport to avoid having to get a visa for the secondment (or whatever the arrangement is). 

It's also likely that the OP will have to re-start the "physical presence test" on return to Australia. (I.e. to accumulate the necessary 12 consecutive months outside the US for the Foreign Earned Income Exclusion). 

If it weren't for the 6 month assignment in the US, I'd agree that there's no great need to catch up on the US taxes. But I don't believe there is an option to keep a US citizen (or anyone for that matter) "on the Australian payroll" to avoid having to pay taxes while working in the US.


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## 255

ConfusedWoman -- I will only address a couple of your questions:

From your first post: "Q3. Is it cleaner to get the dividends paid out instead of reinvested?" It depends. If the assets are held in a taxed account, yes it is much "cleaner" to take the dividends, so you don't have to do basis calculations for every incremental purchase (from the reinvestment of dividends) for your ultimate sale. If the assets are held in a U.S. based (or treated like a U.S. based) retirement account, which are taxed defered (before tax contributions,) like a 401K or IRA, or tax exempt (after tax contributions,) like a Roth IRA, it is probably simpler to just reinvest the dividends.

From your second post: "5) I am looking to buy a house in Australia in 12 months. Again, I think this sort of thing might come under tax scrutiny when it goes up in value etc" Fortunately, real estate (held in your own name) is one of the few things that are not reportable investments on the FBAR and there is no tax reporting required, until your eventual sale (capital gains) and then only after the exemption ($250k for singles, $500k for joint filers,) assuming this RE is for a personal residence. Incremental rise in value (unrealized capital gains) have no current reporting requirements, but both Bernie Sanders and Elizebeth Warren, have this in their platforms for raising money to pay for their proposed national medical programs. Of course, if this RE is a rental, you'd have to report rents (income) and you will also be able to deduct expenses. Cheers, 255


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## Moulard

> 1) In Australia you have to declare your US citizenship with your banks. When I signed up for my first account 6 years ago this wasn't readily apparent, but on a new account I opened this year I declared it because it's plainly obvious and hard to deny you missed a small T&C


Australia has enabling legislation for both FATCA and CRS. Grandfather clauses exist for legacy accounts so long as the balances remain under certain thresholds. While you could avoid FATCA by carefully selecting financial institutions that were exempt, it isn't possible with CRS requirements, and most institutions have instituted a one size fits all solution.



> 2) In Australia you also need to report your US citizenship to the Australian Tax Office (ATO) - again, this hasn't always been super obvious when filing but it's increasingly obvious and will be tough to say I didn't know soon enough


I just checked my copy of my tax return for the 18-19 tax year and there is no question on it related to foreign citizenship. What is the circumstance where you have had to report foreign citizenship to the ATO? 



> Earlier this year, I opened an Australian Vanguard account ...


I am surprised they did not ask you about your US status when you opened it. I hear lots of stories of Vanguard Australia closing accounts of US persons, and I believe there are statements on their website that indicate that their products are not offered to US persons. I assume you have a copy of the PDS - its possible I am confusing different financial products.



> 5) I am looking to buy a house in Australia in 12 months. Again, I think this sort of thing might come under tax scrutiny when it goes up in value etc


I assume this is after your return to Australia. Do bear in mind that the capital gains tax exemption on ones primary residence may not apply if you are not a tax resident of Australia. It was part of the 17-18 budget papers, but not enacted in legislation... but could be enacted by the Liberal Government in future. If you are planning on going back and forth, you only get a total of 5 years of renting or being a non-resident before the eventual sale of the property is subject to capital gains tax.

Long and the short, don't forget to consider CGT implications in Australia.



> For a US citizen working in the US (even for "only" 6 months) I believe they will be subject to full US taxation, including US Social Security.


This is not correct. The totalisation agreement between the US and Australia allows you to remain in the Australia system for up to five years. 



> Your Work Status...
> --You are working in the U.S....
> --For an employer in Australia who...
> --Sent you to work in the U.S. for five years or less
> 
> You are subject only to the laws of:
> --Australia


So the OP's employer would have to continue to contribute to Superannuation and the OP would not be subject to FICA taxes if they were still on the payroll of the Australian company. They will need to get a certificate of coverage from the ATO via their Australian employer to include with their US Return.



> It's also likely that the OP will have to re-start the "physical presence test" on return to Australia.


Not necessarily. 

So long as they maintain their tax residency in Australia, and maintained a close connection to Oz, and can argue that their domicile/abode remained in Australia. Thus they could continue to use the Bona Fide Residence test. One could pretty easily argue that a temporary work placement is just that.. temporary.. but it would depend a bit on what was left behind when they packed up and moved to the US. 

That said, given the higher rates of tax in Australia, it might make more sense for them to use Foreign Tax Credits. The higher tax free threshold of 18,200 (currently about USD 12,500) means that at lower incomes there is a tipping point below which the FEIE does make sense.

What with the differences in the tax years, and the length of the stay, they could probably work it in such a way that they can effectively "choose" where they want their tax residency for the 19-20 Australian tax year, and the 2020 US tax year by a combination of timing their arrival and departure slightly, as well as what efforts are made to maintain a home in Australia / establish a home in the US.



> If the assets are held in a U.S. based (or treated like a U.S. based) retirement account, which are taxed defered (before tax contributions,) like a 401K or IRA, or tax exempt (after tax contributions,) like a Roth IRA, it is probably simpler to just reinvest the dividends.


Its worth pointing out that US retirement plans like 401k and IRA do not receive the tax beneficial treatment of superannuation. If the OP plans to return to Australia, then the growth would be taxed as ordinary income. Fundamentally this is because 401k, IRA and other private retirement plans in the US do not meet the definition of a Foreign Superannuation Fund because US law makes it too easy to withdraw funds prior to retirement. Once the OP returned to Australia they would have 6 months to repatriate the funds tax free otherwise the growth would be taxed.


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## Nononymous

Bevdeforges said:


> I am not sure that is the case. For a US citizen working in the US (even for "only" 6 months) I believe they will be subject to full US taxation, including US Social Security. Especially if the Australian employer is relying on the OPs US passport to avoid having to get a visa for the secondment (or whatever the arrangement is).


Not necessarily:

US citizen flies to US, waves US passport, says "working for 6 months" if asked on entry.

Australian company pays (US citizen) employee just like they always do, into their Australian account, withholding their Australian taxes. 

If you treat it like a 6-month business trip, neither IRS nor ATO are any the wiser. But you'd want the company to pay for proper travel health insurance!

A secondment to a US office, on the US payroll, is a different matter.



> It's also likely that the OP will have to re-start the "physical presence test" on return to Australia. (I.e. to accumulate the necessary 12 consecutive months outside the US for the Foreign Earned Income Exclusion).


This is indeed a factor to consider if a person wishes to be fully tax compliant. But not a factor if someone is staying on the Australian payroll and cares not to inform the IRS of their travels.


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## ConfusedWoman

Hi all,

Thanks again for all of these responses, it's incredibly helpful. I do have a tax guy, but I never know if he's being super conservative or not. 

To respond to a few points:

1) Payroll for my US secondment: I am on a secondment being paid by the Australian legal entity into my Australian account in AUD - but my company is giving me a stipend to help with any tax issues. My assumption (probably incorrect) was that this meant something was being reported somewhere. I intend to look into this more when our office opens again.

2) My citizenship, generally - I was born in the US, and my UK passport says born XYZ Town, USA. 

3) on the UK generally - I lived and worked there as well, hence all the challenges in even finding accounts to pay taxes on... I have small amounts in various accounts there.

4) Comments on capital gains / property - thanks for all of this, I had no idea how this works and think I have only seen fear mongering sites

5) on Vanguard / investment funds - I am speaking to Vanguard over the next couple of days. I spoke with them today and it's a paper based form to move funds at all. I'll look into moving to US fund or back into my normal savings account because it seems like the AU fund is more trouble than it's worth.

6) declaring my citizenship with banks etc - I have declared my citizenship. It was it's own large tick box with clear instructions, so didn't feel like something buried in T&C.

I think overall I'm a bit cautious generally on this issue and feel like the rules can only ever get tighter and more punitive (but per above, this doesn't really seem to matter). I'm definitely a small fish so feel like it's low risk to file now and the risks can only go up as I make more or as laws change or technology changes.

Sorry for not quoting, I'm not great at message boards if you hadn't already figured that out!

Thanks for all of your responses, this has really helped me think through my options.


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## Nononymous

ConfusedWoman said:


> 1) Payroll for my US secondment: I am on a secondment being paid by the Australian legal entity into my Australian account in AUD - but my company is giving me a stipend to help with any tax issues. My assumption (probably incorrect) was that this meant something was being reported somewhere. I intend to look into this more when our office opens again.


Nothing would be reported to the IRS then. Nor would your arrival in the US, with US passport, somehow trigger attention from the IRS.



> 2) My citizenship, generally - I was born in the US, and my UK passport says born XYZ Town, USA.


I believe it's possible to have a UK passport with only town of birth, not country. If so inclined you could obtain such a passport and use it as ID and never disclose US citizenship to any financial institution.



> 3) on the UK generally - I lived and worked there as well, hence all the challenges in even finding accounts to pay taxes on... I have small amounts in various accounts there.


Why would you need to pay taxes on small accounts in the UK?



> I think overall I'm a bit cautious generally on this issue and feel like the rules can only ever get tighter and more punitive (but per above, this doesn't really seem to matter). I'm definitely a small fish so feel like it's low risk to file now and the risks can only go up as I make more or as laws change or technology changes.


The risks will go up if you become compliant. The risks will remain non-existent if you do not file.


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## Jca1

I can confirm that it's possible for a UK passport to indicate a town of birth, with no country or state or province. In fact, this is the standard, unless it has changed recently, though typically the Home Office will accept any reasonable-sounding description provided it matches supporting documentation. 

Having only the town listed can be helpful to US persons in the case of a birthplace that is obscure or with a name that exists in multiple countries.


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## Moulard

Bevdeforges said:


> One small caveat here:
> 
> I am not sure that is the case. For a US citizen working in the US (even for "only" 6 months) I believe they will be subject to full US taxation, including US Social Security. Especially if the Australian employer is relying on the OPs US passport to avoid having to get a visa for the secondment (or whatever the arrangement is).
> 
> It's also likely that the OP will have to re-start the "physical presence test" on return to Australia. (I.e. to accumulate the necessary 12 consecutive months outside the US for the Foreign Earned Income Exclusion).
> 
> If it weren't for the 6 month assignment in the US, I'd agree that there's no great need to catch up on the US taxes. But I don't believe there is an option to keep a US citizen (or anyone for that matter) "on the Australian payroll" to avoid having to pay taxes while working in the US.


Funny how personal circumstances can sometimes align with threads of interest. I have been researching all of this ahead of a long work trip back to the US later this year during which I will work in the US as an Australian tax resident.

Bev, you are right in that ordinarily, if a US person who is a tax resident in Australia, works in the US, then technically the income they earn while in the US is subject to both Australian tax (as the person is a tax resident of Australia) and to US tax (as the income is US sourced). 

The saviour against double taxation in this case is Article 22(4) of the US Australia Tax treaty. This treaty allows allows a Tax Credit for US Sourced Income of Australian Resident because the treaty recognizes this would result in double taxation. 

Even better, 26 CFR § 301.6114-1 exempts this from requiring a treaty based return statement. No Form 8833 is required, just a re-sourcing category Form 1116 (assuming one was using a FTC) Otherwise you would just treat it as Australian sourced if your earned income was under the FEIE threshold.


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