Beginner's Guide to U.S./Australia Taxes (Reporting Examples)

US Tax of Australia Income

Overview of U.S. Tax and IRS Reporting for Australian Expats

U.S. Taxpayers who have foreign accounts, assets, investments, trusts, entities, etc. in Australia may have several tax and reporting requirements each year with the Internal Revenue Service. Unlike almost every other country across the globe, the United States follows a worldwide income tax model for Taxpayers who qualify as U.S. persons for tax purposes. The three main categories of U.S. persons (individuals) for tax purposes include:

Just as many different types of foreign assets are required to be reported to the U.S. government — there are also several different types of international information reporting forms at the IRS requires Taxpayers file each year. While some of these forms are more straightforward (FBAR), other forms are much more complicated such as when a Taxpayer has to report their PTY limited in the United States. Let’s work through the basics of Australia/U.S. foreign account and asset reporting.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

Australia Bank Accounts

When Taxpayers have bank accounts in Australia and the value of the bank accounts and the annual aggregate total exceeds certain reporting requirements, the Taxpayer may have to file different forms with the IRS:

      • Example: Adam has three bank accounts in Australia. Two accounts have less than $10,000 but one account has $340,000. Adam may be required to report the accounts on the FBAR and Form 8938. And even though only two accounts exceed $10,000, since the total value of all accounts combined exceeds $10,000, Adam must report all three accounts.
      • Example: Adrian lives in Australia and has two bank accounts with a combined value of $170,000. He files married filing separately. The accounts have never exceeded $300,000 in the current year and does not have more than $200,000 on the last day of the year. While Adrian may have to file the FBAR, he may fall below the form 8938 requirements presuming he does not have any other foreign accounts, assets, or investments that are reportable.
      • Example: Amanda has one bank account that typically only has less than $10,000 in it in Australia but after selling her foreign property and before transferring the money to the United States she had $900,000 in the foreign account for only two days. Even though the money was in the account for a short period of time, she’s still required to report the account on various international information reporting forms.

Superannuation (Non-SMSF, Non-Public Super)

From a U.S. tax perspective, Superannuation can get very complicated – and involves both taxes and reporting. Let’s look at a few examples of some of the basics of superannuation, noting that these examples represent the more common types of supers (such as a UniSuper and not self-managed superannuation (SMSF) or public superannuation, each which may come with its own set of specific nuances).

Superannuation Contributions

      • Example: Brenda works for an Australian employer and that employer makes contributions to her superannuation. From a U.S. tax perspective, Brenda must include this income on her U.S. tax return and does not receive tax deferred treatment like a 401K. While some countries have entered into agreements with the United States which exempts certain pretax employment retirement income similar to a 401K, unfortunately, the U.S./Australia tax treaty is outdated, and this component is not included in the treaty.

Superannuation Growth

      • Example: Brent lives in the United States and does not make any contributions to his superannuation. Brent has not received any distributions from the superannuation either — and his employer has contributed more to the Super than his own personal contributions. The typical position that most tax professionals would take with these facts is that since Brent is not at the age where he can take distributions yet and he has not received any distributions, he may be able to avoid having to report the growth of the superannuation for U.S. income tax purposes.

Superannuation Distributions

      • Example: Belinda lives in the United States as a U.S. citizen but previously worked for many years in Australia for an Australia employer. She has accumulated a very large superannuation account that distributes a significant amount of income to her each year. Since Belinda is receiving distributions, she would generally have to report these distributions as income. In addition, since she is not actually paying the tax on the superannuation but rather it is being withheld within the super itself, the IRS typically takes the position that foreign tax credits are not applicable since she did not actually pay the taxes.

Superannuation Reporting

      • Example: Brian has two superannuation for a combined value of $1.6 million. He has not made any contributions since becoming a U.S. person or ever received any distributions from the superannuation, since he is only 52 years old. In general, Brian is required to report the superannuation on the FBAR and Form 8983. Brian may also have to report the superannuation on various international information reporting forms as well but there are certain exceptions, exclusions, and limitations that can apply.

Securities and Investments

One of the most common types of situations that require PFIC reporting is when the Taxpayer owns foreign mutual funds and/or foreign ETFs. Depending on whether the funds are held within an account or individually may impact the extent of their reporting, but pooled funds are reportable.

      • Example: David invested in various foreign mutual funds that are all contained within one single account at a Foreign Financial Institution. The only assets in the investment account are mutual funds and the total value of the funds are $170,000. For FBAR purposes, David will report the single account, but for PFIC/Form 8621 purposes David will report each fund individually.
      • Example: Michelle invests in different ETFs but does not hold the funds in a single account – rather, she owns each fund individually. The total value of the funds is $650,000. Michelle will have to file the FBAR to report each fund individually as well as having to report each fund separately on Form 8621.
      • Example: Peter owns two mutual funds (not in an account) with a combined value of $19,000 and no distributions from the funds. Peter must file the FBAR to report the mutual funds, but is only required to do very limited reporting on Form 8621 because he files as ‘Single’ and is below the $25,000 exception. Noting, there is contradiction between what the regulation requires and what the instructions require for this Form 8621 exception — with many Taxpayers choosing to err on the side of caution by filing the Form 8621 just to complete the very top portion of the form for each fund.

Foreign Stock

When a Taxpayer has investment accounts in Australia, they are both taxable and reportable in the United States. It does not matter whether the account is active or whether it is the Taxpayer or his family members abroad managing the account. Noting, it can get very complicated depending on the asset mix within the investment account.

      • Example: Brent has an investment account in Australia with $400,000 in it and the account is comprised solely of stocks. Even though the account has been relatively inactive, some of the stocks generate dividend income.  Brent must report the foreign accounts on the FBAR and Form 8938 and the interest income on his tax return — even if it is only accrued and not yet distributed.
      • Example: Brian also has an investment account in Australia with $400,000 in it but his assets are comprised of $250,000 of stock and $150,000 of foreign mutual funds. Brian is required to report the account on the FBAR and Form 8938. In addition, Brian is required to report each foreign mutual fund separately on Form 8621 and he will have to carefully assess whether any of those funds have issued distributions and especially of any of those distributions are considered excess distributions.
      • Example: Brad has an investment account in Australia worth $140,000. He does not manage the account, but his father abroad buys and sells stock and funds in the investment account. Even though it is Brad’s father who is managing the account, since it is Brad’s money and account, he is responsible for the tax and reporting in the United States. Like Brian, Brad is required to report the foreign mutual funds on Form 8621, and he will have to carefully assess whether any of those funds have issued distributions and especially of any of those distributions are considered excess distributions.

Foreign Trusts

When a Taxpayer has ownership of a foreign trust, they may be required to file form 3520 and form 3520-A. The reporting requirements for ownership of a foreign trust are typically more complicated than when a Taxpayer files a Form 3520 to report the receipt of a gift or distribution.

      • Example: Denise is a U.S. Citizen who has non-resident alien family members living abroad. Her sisters — who are all non-resident aliens– decided to form a foreign trust and wanted to include Denise as one of the owners. Now that Denise is an owner of the foreign trust, she is required to report her ownership on form 3520 and 3520-A.
      • Example: Daniel is a Lawful Permanent Resident who recently became a U.S. person in the current year. Now that Daniel is a Lawful Permanent Resident and a U.S. person for tax purposes, his ownership in his foreign trust is reportable on Form 3520 and 3520-A (U.S. owner of a foreign trust). In other words, even though the only action Daniel took was to become a U.S. person, his previous ownership in a foreign trust that he owned before becoming US person is now reportable.

Rental Properties (Net Gain or Loss)

When a Taxpayer has income from a rental property in Australia, they are required to report the rental property on their U.S. tax return whether the income nets a gain or a loss. When the rental property is not part of an entity, then usually it is not reportable for FBAR or FATCA purposes — but if it is in an entity then it may be reportable for Form 5471 purposes:

      • Example (Net Gain): Peter owns three rental properties in Australia. The total gross income is $30,000 and the total expenses are $13,000. Peter also paid about $3,000 in taxes in Australia. Here, Peter would report the total gross income on schedule E and the expenses on Schedule E as well. Peter will file a form 1116 to report his foreign tax credits.
      • Example (Net Loss): Patricia has a single rental property that she inherited in Australia. After factoring in expenses, she has a net loss, so she does not include this information on her U.S. tax return. This is incorrect, and instead Patricia should report the total income and expenses on Schedule E. In addition, she may be able to take the loss or carry it forward to a future year.

Mortgage Loan Offset Account (Reporting and Tax)

Mortgage and loan offset accounts may be both taxable and reportable from a U.S. tax perspective:

      • Example (Tax): Jeffrey has a mortgage offset account that generates $$10,000 of interest a year which is used to offset the interest component of his Australia rental property mortgage loan. From a U.S. tax perspective that $10,000 is taxable because it is interest income gained on an account even though it is being applied for the mortgage.
      • Example (Reporting): Jeffrey’s mortgage offset account has $900,000 in it. Therefore, the mortgage account is reportable on all the applicable international information reporting forms in the United States. It is important to note that distinction that this is not a mortgage account that has a negative balance but rather a mortgage offset of account that has a positive balance used to offset the interest.

*Even if the mortgage account has a higher negative balance than the offset account has a positive balance, that generally means that the negative balance account is reported as zero but it is not used to 0 out the positive balance offset account.

PTY Ltd

One common situation in which a U.S. Taxpayer may have to file Form 5471 is when a U.S. person forms a foreign corporation. This will depend on what type of foreign corporation it is, whether the Taxpayer makes any elections, and whether the company is a controlled foreign corporation:

      • Example: Sam became a U.S. person and is a 100% owner of a foreign company. The company is considered a controlled foreign corporation since Sam is a U.S. shareholder and U.S. shareholders in total own more than 50% of the company. Sam may have to file a form 5471 but may qualify to report it as a disregarded entity
      • Example: Samantha became a U.S. Person but still has family members overseas. Her grandma decided to distribute shares of her foreign company to her grandchildren and Samantha receives a 14% ownership in the foreign company. Samantha may have to file a Form 5471.
      • Example: Scott relocated to the U.S. and has 15% ownership in a foreign company owned more than 50% by U.S. persons. Scott had control of the company in the current year and the foreign corporation runs on the same tax year as Scott. He may have to file a Form 5471.

Treaty

There is a bilateral income tax treaty between the United States and Australia. Therefore, some Taxpayers (primarily U.S. Persons/non-U.S. Citizens) may qualify for certain benefits under the treaty. In general, the United States taxes individuals on their worldwide income when they’re considered U.S. citizens, lawful permanent residents, or foreign nationals who made this substantial presence test — but various exceptions, exclusions, and limitations may apply.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. Contact our firm today for assistance.