Impact of Australian Investments on US Taxes
Learn how investment opportunities and structures that are tax efficient in Australia can impact your US taxes.
Why it matters: The IRS requires all US tax residents to report their worldwide assets and income. If you hold certain investments and trusts in Australia, you will need to report them to the IRS and may be taxed on them. If you are a US tax resident and hold these, it’s important to consider whether the benefits outweigh the consequence.
US Tax residents who hold a PFIC, SMSF, Trust, or Proprietary Limited in Australia may be subject to additional:
1) Forms to file with the US tax return
2) Expenses ie. hiring a specialized accountant to prepare these forms
3) Taxes
Failing to report these investment vehicles and structures to the IRS can result in significant penalties.
Passive Foreign Investment Companies (PFIC)
A PFIC is a foreign domiciled (i.e. not based in the US) corporation or trust that meets one of two criteria:
1. At least 75% of the corporation’s gross income is passive (e.g. dividends, interest, capital gains)
2. At least 50% of the company’s assets produce passive income (e.g. dividends, interest, capital gains)
Examples: Australian mutual funds, index funds, exchange traded funds and listed investment companies.
US tax residents must report PFIC holdings annually if their total exceeds $25,000USD (for single filers) or $50,000USD (for married filers) or have excess distributions. Failure to report can result in fines starting at $10,000USD per unreported form.
Self-Managed Super Funds (SMSF)
SMSFs are viewed as foreign grantor trusts by the IRS, leading to annual taxation on fund growth. Reporting requirements include Form 3520 and possibly Form 3520-A, with penalties for late submission.
Trusts
Trusts held in Australia may trigger additional reporting requirements for US tax residents. Annual filing of Form 3520 and Form 3520-A may be necessary, with potential taxation on trust income by the IRS.Trust income may be taxed.
Proprietary Limited Company (Pty Ltd)
Australian expats owning 10% of a Pty Ltd must file Form 5471 due to their ownership in a foreign corporation. Profits from these businesses could be subject to US taxation, with additional taxes like GILTI potentially applying. Form 5471 is complex and non-compliance incurs a minimum $10,000USD penalty.
Failed to report any of the above?
Depending on your situation, you may need to amend your US tax return to include missing forms or you may be eligible for a tax amnesty program.
Contact us to explore your options.