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Ashley works with clients to bring strategy, structure, clarity and confidence to their global financial lives and keep it that way. ​In 2013, Ashley founded Arete Wealth Strategists, a fee-only financial planning and investment management firm for Australian/American expatriates.
June 9, 2022

Top Financial Issues for Americans Living in Australia and Returned Australians

If you are an American living in Australia, or even an Australian expatriate who has returned to Australia—you may find your globe-trotting lifestyle comes with some extra financial challenges. 

As a returning Aussie expat, or US citizen retiring in Australia, you need to consider how your taxes, Social Security, retirement, estate planning, and other financial matters will be impacted.

By gaining a solid understanding of the financial issues that may arise, you can make informed decisions about your money and achieve financial peace of mind. Keep reading for some of the top financial considerations for Americans living in Australia.

Tax Considerations for Americans Living in Australia

Australia practices legal residency-based taxation. This means that you are only considered a tax resident of Australia if you pass one of the four residency tests:

  • Resides test
  • Domicile test
  • 183-day test
  • Commonwealth superannuation test

The US practices citizenship-based taxation. If you are an American citizen, you are always a US tax resident—even if you live in Australia or are abroad elsewhere. 

If you are an American citizen who also has Australian residency—you will be a tax resident for both countries. In essence, US expats will always have tax reporting obligations to the United States, no matter where they reside. Fortunately, due to a combination of foreign tax credits, the foreign earned income exclusion and the U.S./Australia double income tax treaty, there are few circumstances where a U.S. person in Australia would be double taxed. Typically however, you will need to pay the higher of the two tax obligations, and generally, Australia will have higher federal tax obligations.

Passive Foreign Investment Corporation Taxes

A Passive Foreign Investment Corporation (PFIC) is a foreign (non-US) corporation in which passive income (dividends, interest, and capital gains) comprises more than 75% of the corporation's total gross income, or more than 50% of the assets held by the fund produce passive income. As a result, practically all foreign mutual funds, ETFs, money market funds, listed investment companies and real estate funds held outside of retirement accounts are PFICs. 

There is some uncertainty as to whether the investments held within certain foreign retirement accounts are to be taxed as PFICs.

If you are a US citizen or green card holder and you own a PFIC, then you are subject to certain tax rules. If you own more than $25,000 in PFIC shares you are required to file a PFIC annual tax return (Form 8621).

Annual Tax Filings for US Expats in Australia

As a US expatriate in Australia, you will be required to file several tax forms. While your individual situation will determine which specific forms you will need to file, there are a few common ones:

  • FBAR (Form FinCEN 114): For foreign bank accounts with a balance greater than $10,000 USD at any time during the calendar year.
  • Form 8938 (Statement of Specified Foreign Financial Assets): A form 8938 must be filed if account balances are greater than the amounts listed below.

  • Form 8621 for Passive Foreign Investment Corporation (PFIC) tax reporting: This pertains to accounts deemed ‘Passive Foreign Investment Companies’ with a balance greater than $25,000. Further detail is provided below on what investment qualifies as a PFIC.

US Taxes on Foreign Earned Income

If American expats wish to avoid double taxation, they will need to understand how the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit work. 

FEIE dictates that US citizens can exclude up to $112,000 USD (2022)  in foreign earnings from income tax. This can significantly help reduce or eliminate US taxes on foreign earned income. For anything earned above the maximum, you would be eligible to use a Foreign Tax Credit to avoid double taxation.

The Foreign Tax Credit (FTC) is a United States tax credit that is intended to help offset income tax that has been paid abroad. US citizens and residents who earn income abroad and have paid foreign taxes may qualify for this credit. The FTC may be carried forward up to 10 years, so any returning Americans could use the accrued credit to offset future federal income tax.

Passive Foreign Investment Corporation Taxes

A Passive Foreign Investment Corporation (PFIC) is a foreign (non-US) corporation in which passive income (dividends, interest, and capital gains) comprises more than 75% of the corporation's total gross income.

If you are a US citizen or green card holder and you own a PFIC, then you are subject to certain tax rules. If you own more than $25,000 in PFIC shares you are required to file a PFIC annual tax return (Form 8621).

Banking and Investment Considerations for US Persons in Australia

Both Americans moving to Australia and US-based returning Australians should be aware of the potential banking and investment implications. 

During your time in the United States, you have probably opened US-based accounts. Once you leave the United States, you may not have access to the same financial services through those accounts. 

Due to US tax compliance requirements, American banks may not offer certain banking products and services to customers who reside outside of the United States. This means that you might not be able to open a US-based checking or savings account, get a US credit card, or invest in certain US-based securities. You may even be forced to close the account.

The following regulations that have been put in place by the US government may impact your ability to bank and invest as an American living in Australia:

  • The Patriot Act (2003): As part of the Patriot Act, know your client (KYC) rules were established to prevent illicit sources of financing.
  • Foreign Account Tax Compliance Act (FACTA) (2010): FATCA requires that US citizens with foreign accounts report them to the IRS.
  • 14 FinCen (2012): FinCen Further enforces due diligence on US clients and their assets placed with foreign banks to prevent money laundering.

How Banking and Investing May Be Impacted for Expat Americans

While these requirements have been in place for many years, they are becoming more stringently enforced due to increased compliance costs for banks and other financial institutions. These rules impact bank accounts, retirement accounts, such as IRAs and 401(k)s, and brokerage accounts in the US.

Thus, being a non-resident account holder can lead to:

  • Account closure: You may have a deadline (often 30 days) to move your account. Otherwise, you may face a forced liquidation, and accompanying tax consequences
  • Restrictions on mutual funds and ETFs: The firm may prohibit any activity (beyond selling) once they find out you are a non-US resident.
  • High account minimum balances: Some banks may require over $1M in assets before they are willing to work with you.
  • Your account moving to a special group within the firm: These special groups may have their own specific rules and restrictions.
  • Location restricted activity: A firm may restrict any activity to only when the client is physically present in the United States.

The type of service restrictions will vary by the firm you are using. Some of the firms that participate in these restrictions include:

  • Merrill Lynch
  • Morgan Stanley
  • Wells Fargo
  • Ameriprise
  • Edward Jones
  • Raymond James
  • TIAA
  • USAA
  • UBS

This list is not exhaustive, and many other institutions have these restrictions.

Understandably, these banking and investment challenges can be daunting for American citizens and other US persons living in Australia. Americans will need to find a banking partner that can meet their cash and lending needs outside of the United States. This banking partner must be comfortable knowing their client is located in Australia and will not close your account because you are a US expatriate. 

However you may still face some restrictions. For instance, US expats should be aware that US securities law requires that mutual funds can only be sold in countries where they are also marketed. This has led to a situation where only certain funds are available to those located in Australia. Thus, even if you do work with a brokerage firm that works with Americans abroad, you may not be able to invest in certain US-based mutual funds.

Superannuation Accounts

Superannuation is the primary form of retirement saving in Australia. Almost all employees of Australian companies are entitled to Super contributions from their employer. Any Australian resident over 18 and under 65 can contribute to Super. If you are a contractor, temporary Australia resident, or (under certain circumstances) non-resident, you may also be entitled to contribute to Super.

There is no specific US law that clearly states how superannuation accounts are treated by the IRS. Most CPAs agree that Australian superannuation is not afforded the same tax concessions available to qualified US retirement accounts.

Tax treatment is typically determined by the following formula:

  • If the employee's contribution is less than that of the employer’s and they haven’t been actively changing investments within the account, then the tax treatment of the employee contribution will most likely be that of an Employee Trust.
  • If the employee's contribution is greater than the employer’s, or one holds a Self-Managed Super Fund, then the tax treatment of the employee contribution will most likely be considered a Foreign Grantor Trust.

Tax Implications of United States Retirement Account Distributions

When it’s time to withdraw from your US retirement accounts, such as 401(k)s and IRAs, US persons living in Australia face additional tax complications. 

With American retirement account distributions, you typically have to choose between two approaches:

  • Pay tax in the US: You can distribute the account on your return to the US, then pay ordinary income tax on the distribution. Anyone under the age of 59 ½ is subject to a 10% penalty tax on distributions. However, this option could generate a foreign tax credit that might be used to offset Australian tax on the same income.
  • Pay tax in Australia: Distribute the retirement account, and claim a tax treaty position that the tax owed is payable in Australia only on the growth of the account. This option is only available to those who are not U.S. persons (i.e. citizens or U.S. permanent residents), given the ‘savings’ clause in the US/Australian income tax treaty which provides for the U.S. to tax its citizens as if the treaty was not in effect.

Accessing Social Security in Australia

Another consideration that American expats in Australia need to take into account is social security. 

How do you know if you’re eligible for Social Security benefits? If you have worked for 10 years (40 qualifying quarters) you are fully vested in Social Security and you could still receive your Social Security benefit in Australia.

What if you only worked in the US for 5 years before moving to Australia? The good news is you can qualify even if you've split your career between the US and Australia, and even potentially other countries. 

The US and Australia have established what is called a totalization agreement. This means that if you have worked in both countries, you can combine your work credits from each country to determine whether you are eligible for Social Security benefits.

An additional benefit is that Social Security is neither means nor income tested. This means that your eligibility to receive Social Security is not based on your current earnings or assets. Once you are vested, you can receive your benefit.

Foreign Exchange Considerations for US Persons in Australia

Another consideration for Americans living in Australia pertains to foreign exchange conversion rates. An inefficient rate can easily eat into savings, especially when converting large sums of money. 

You could be losing out on thousands of dollars when you exchange your currency, so it's important to be diligent and opt for the most efficient rate. It's also important to remember that currency rates are constantly changing, so what might be a good rate today, could be completely different tomorrow

American expatriates would be well advised to have a systematic foreign exchange strategy in place. This could look like converting on a consistent basis, such as every quarter. Or one may opt for a strategy of converting a larger amount when a rate looks favorable. You may want to consider working with your financial advisor to come up with the best solution for you.

US Federal Gift Tax and Federal Estate Tax

As of 2022, US citizens may make an annual gift of up to $16,000 per person without any gift tax consequences. If you give more than $16,000, you need to file a gift tax return (IRS Form 709) to disclose the gift. US citizens also have a lifetime exclusion of $12,060,000, although tax reporting is required when giving sums larger than $16,000. 

For global assets above $12,060,000, a 40% estate tax is imposed by the US federal government. The Australia/U.S. Estate tax treaty however extends the U.S. exemption rate to Australian ‘Non-Resident Aliens’ of the U.S.

US State Estate Tax and Inheritance Tax

Some, but not all states have additional taxation requirements surrounding estates. Some have an estate tax, some have an inheritance tax, and some levy both taxes. 

As of 2022, the following states have either estate tax, inheritance tax, or both:

  • Connecticut
  • District of Columbia
  • Hawaii
  • Illinois
  • Iowa
  • Kentucky
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • Nebraska
  • New Jersey
  • New York
  • Oregon
  • Pennsylvania
  • Rhode Island
  • Vermont
  • Washington

US expats who have residency ties to any of these states must consider their long-term estate planning needs if they move abroad. You may wish to consult with a tax professional to see if you will have any future estate or inheritance tax consequences.

US Expatriation Tax

Americans who have lived and worked abroad for many years might eventually decide to make their move permanent, and relinquish their US citizenship. Americans considering renouncing their citizenship must be aware of the US expatriation tax. 

The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) may require certain ‘covered expatriates’ to pay an exit tax. If you meet the requirement for a covered expatriate, you'll need to file a Form 8854 with your final US tax return.

Learn More About Arete Wealth Strategists

American expats living in Australia and returning Australians have a lot to think about when it comes to their finances. From annual tax filing to retirement strategies, your unique circumstances require specialized financial planning.

Our firm specializes in helping American and Australian expatriates bring strategy, structure, clarity and compliance to their global financial affairs. We know the complexities that come with cross-border financial planning and are here to support you every step of the way. Visit our website to learn more about how we can help you.

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