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The “Super” Reason Australians are Renouncing Their US Citizenship

US citizens living in Australia and worldwide are finding themselves facing the tough decision to keep or renounce their US citizenship. Years ago, the idea of renouncing one’s US citizenship was, for most, unthinkable. Fast-forward and wait times to book renunciation appointments at US consulates and embassies worldwide have exploded, with 2020 setting record numbers of quarterly and annual departures documented.[1] So why is this article dialled in on our Aussie friends when US renunciation appears to be a global movement? The reason is Australia’s popular retirement vehicle known as a superannuation fund (commonly referred to as a “super”), something that can have negative cross-border US tax implications. The super problem for US citizens in Australia is fuelling a heightened desire to give up US citizenship.

A superannuation fund is a financial vehicle in Australia that provides an individual with income in retirement. Like most governments that sponsor retirement programs, Australia supports its citizens’ contributions to the funds by providing advantageous tax treatment. It is estimated that by March 2021, Australians had AUD 3.1 trillion in Super assets.[2] For a country with an estimated population of 25.7 million, this is significant and beneficial for many Australians in their golden years. But this is not the case for Australian residents who are also US citizens. For an estimated US citizen population in Australia of between 200,000 and 300,000, the super poses problems.[3]   

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But before we dive into why super funds are causing Australians to renounce, it is essential to understand how the United States taxes its citizens. The United States is one of the few countries on earth that taxes the worldwide income of its residents, citizens, and foreign persons admitted as permanent residents.[4] Thus, US citizens across the world are taxed by the US on all the income they make, regardless of its currency, location earned, or if the US citizen has ever set foot on US soil. The consequence of this to the US citizen living abroad is the burden, cost, and headache of meeting annual IRS filing and reporting obligations.

The harsh consequences of citizenship-based taxation do not stop there, however. On top of being taxed on one’s worldwide income, US information reporting obligations,[5] and the potential of owing US tax, US citizens living in Australia must also deal with the consequences of the US estate and gift tax regime during life and at death.[6] To complicate things even further, the Foreign Account Tax Compliance Act (FATCA)[7] went into full effect on July 1, 2014. This dragnet, enacted to catch non-compliant US taxpayers with funds located abroad, is causing many US citizen expats in Australia sleepless nights in anticipation of a notice from the IRS. The Australian Taxation Office clearly outlines the effects and requirements of FACTA on both US citizens and the financial institutions within Australia’s borders, stating:

“From 1 July 2014, the Foreign Account Tax Compliance Act (FATCA) requires Australian financial institutions to review customer accounts to determine whether they are held by US citizens, US tax residents or US entities (or in some cases non-US entities controlled by US persons). Customers may be contacted by their financial institution (for example, by letter) about confirming whether they are a US citizen, tax resident or otherwise a US person.” [8]

As US citizens worldwide begin to understand how the IRS taxes its citizens and how they can now be found abroad through FATCA, the next logical step is to look for a solution. In doing so, the overarching question US citizens living in Australia and abroad are asking themselves is whether their “US citizenship juice is worth the squeeze?” In other words, do I need my US citizenship and, if so, what are the benefits? Clients are often emotionally and financially drained after the process of becoming US tax-compliant, staying US tax-compliant, and continually planning for cross-border US estate and gift tax issues.[9] Not only can the filing and reporting costs seem ludicrously expensive and intrusive, but the penalty regime for non-compliance can be catastrophic if not dealt with properly.

To make matters worse, after jumping through the hoops of becoming US tax-compliant, many Australians realize that they may owe US tax due to their interest in a super. The only thing worse than paying lawyers and accountants to file complex cross-border US tax returns is to then cut a USD check to the IRS. Add those factors to FATCA’s arrival to the cross-border compliance party in 2014, and more and more US citizens living in Australia have had enough. While outside the scope of this blog, I have written a detailed article on whether or not renouncing makes sense for you and the many associated pitfalls to avoid along the way.

If individuals decide to renounce their US citizenship, they need counsel to ensure it is done the right way. Not properly renouncing one’s US citizenship can result in highly negative consequences such as the imposition of the US exit tax[10] or permanent disbarment from the United States.[11] Advice and planning that consider all areas of US law associated with renunciation are critical to obtaining the desired results.

In the end, there is little doubt that US citizens living abroad, both in Australia and globally, are renouncing in great numbers due to the effects of US citizenship-based taxation and FATCA. For the average US citizen living abroad, citizenship-based taxation creates problems that many are unwilling to continue dealing with. Add the super dilemma to the plate of problems facing US citizens with an Australian connection, and it is clear why many have chosen to leave the table.  

If you’re interested in more information on renouncing your US citizenship, new US tax reforms, or renunciation as a US citizen or green card holder living abroad, you’re invited to register for and attend one of our free webinars or explore our page dedicated to US citizenship renunciation

[1]  https://en.wikipedia.org/wiki/Quarterly_Publication_of_Individuals_Who_Have_Chosen_to_Expatriate.

[2] https://www.superannuation.asn.au/resources/superannuation-statistics

[3] Australian Bureau of Statistics.

[4] IRC § 7701(b)(6). Lawful permanent resident, otherwise known as a “US Green Card” holder.

[5] June 15th for filers abroad. You may be allowed an automatic two-month extension of time to file your return and pay any due federal income tax. You will be allowed the extension if you are a US citizen or resident alien and on the regular due date of your return, you are living outside of the United States and Puerto Rico, and your main place of business or post of duty is outside the United States and Puerto Rico, or you are in military or naval service on duty outside the United States and Puerto Rico.

[6] IRC § 2033 provides that the gross estate of a decedent who was a citizen or resident of the US at the time of their death shall include all of their assets no matter where situated. Residency for estate tax purposes is different than residency for income tax purposes. Residency for estate tax purposes is a domicile test. See Treasury Regulations §20.0-1(b)(1). Thus, a renounced individual could still face estate tax exposure if considered domiciled in the US

[7] The Foreign Account Tax Compliance Act was enacted as revenue offset provisions of the Hiring Incentives to Restore Employment Act of 2010.

[8] https://www.ato.gov.au/General/New-legislation/In-detail/Other-topics/International/Foreign-Account-Tax-Compliance-Act/

[9] USD 5,490,000 unified credit was available in 2017 (Indexed for inflation)—estate tax rate of 40 percent.

[10] IRC § 877A.

[11] 8 U.S.C. § 1182(a)(10)(E)(2011). (Any alien who is a former citizen of the United States who officially renounces United States citizenship and is determined by the Attorney General to have renounced United States Citizenship to avoid taxation by the United States is inadmissible.)

 
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