Investing with One Hand Tied Behind Your Back An Australian Perspective on United States Tax Rules for Non-Resident Citizens

Abstract

The United States is unique in taxing non-resident citizens under the same rules as residents. For Australian citizens and residents who are also US taxpayers, the impact of this is much greater than the generally minimal amount of US tax due each year. The US grants citizenship broadly and makes it difficult and expensive to cleanly exit the US tax system. Planning one’s tax affairs under two very different tax systems is complex and often results in sub-optimal financial outcomes. Australian citizens and permanent residents who are required to file US tax returns will find it more difficult to effectively save for retirement than their peers, and will be more likely to rely on the Australian government’s social safety net in their later years. The US tax code significantly discriminates against many non-US investments and business structures, which constrains the options of affected Australian-resident taxpayers, many of whom are also Australian citizens. The treatment of Australian superannuation on a US tax return is the subject of some disagreement among tax professionals. Australian investment opportunities outside of superannuation are also limited for US taxpayers. Australian managed funds are punitively taxed under the Passive Foreign Investment Company (PFIC) rules. For entrepreneurs and small business owners, the US tax treatment of “foreign” corporations owned or controlled by a US person can unravel any Australian tax advantages. Family trust structures often recommended for asset protection and tax planning purposes in Australia would likely be treated as disregarded entities on a US tax return. Finally, US law may make it difficult for non-resident US citizens to open financial accounts in the US making it difficult to avoid the punitive US tax treatment of Australian investments. Although this paper focuses on Australia and the interplay between US and Australian tax rules, the issues raised are broadly applicable to US citizens residing anywhere outside of the US.