Tax fears: US-Aussie dual citizens provide IRS with details of $184 billion
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Tax fears: US-Aussie dual citizens provide IRS with details of $184 billion

Record numbers of Americans living in Australia are considering a divorce from Uncle Sam because of US taxes on their Australian income, says a tax lawyer who advises Americans living abroad.

At the same time, a freedom of information request has revealed that details of $184 billion held in about 862,339 Australian bank accounts by US citizens living in Australia were provided to United States' Internal Revenue Service in 2016.

Karen and Frank Alpert gave up their American citizenship 18 months ago.

Karen and Frank Alpert gave up their American citizenship 18 months ago.Credit:Robert Shakespeare

The Australian lobby group Fix The Tax Treaty, which is fighting the tax treatment of US citizens living outside of America, obtained the information from the Australian Tax Office.

Fix the Tax Treaty's Karen Alpert, who lectures in finance at the University of Queensland Business School, said these accounts represent 6 per cent of the non-superannuation financial assets owned by all Australian households and businesses.

Other than Eritrea, the United States is the only country in the world that taxes non-resident citizens – and even holders of a Green Card (alien resident permit) who are also living outside the US – on their worldwide income, regardless of where it is earned or where they live.

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This requires the estimated 200,000 Americans who live in Australia, many of whom are dual citizens, to file tax returns in both countries.

Until the introduction of the 2010 Foreign Account Tax Compliance Act (FATCA), the US government had no way of discovering details of the 8 million Americans who live abroad.

After Australia signed an intergovernmental agreement with the US in 2014 agreeing that banks would provide this information to the IRS, the number of Australian accounts provided to the IRS rose twentyfold from 44,120 to 862, 339 in 2016, the last year available, the FOI revealed.

A form sent by the Commonwealth Bank to its customers asking if they are US citizens.

A form sent by the Commonwealth Bank to its customers asking if they are US citizens.Credit:Louise Kennerly

In the same period, the value of these accounts jumped from $5 billion in 2014 to $44 billion in 2015 and to $184 billion in 2016, the FOI revealed.

Dr Alpert said many dual citizens had been shocked to discover that they were liable for US tax on their Australian incomes.

"By complying with FATCA, Australia has exposed these accounts to potential US taxation," said Dr Alpert, a former US citizen who renounced her citizenship nearly two years ago. "They had no clue when they set up their accounts," she said.

As well, a new one-off transition tax passed by the Trump administration last December means US citizens who own some or all of a private business overseas could face taxes of 15.5 per cent on cash assets and 8 per cent on non-cash assets.

The transition tax "absolutely punishes many US citizens living abroad", said Alexander Marino, a tax lawyer who heads the expatriation group with Moodys Gartner tax law firm. His group is holding seminars in Australia on how dual citizens can renounce citizenship and manage their tax obligations.

From 8am to 7pm, his phone rang with people asking how they can give up their American citizenship.

While the transition tax was designed to encourage large US companies like CISCO to bring all of their operations back to the United States, it didn't factor in how it would affect its citizens abroad, Mr Marino said.

The Wall Street Journal reported last month that CISCO would repatriate $67 billion of its foreign cash holdings to the US.

In Australia, a US dentist with a $2 million privately held company may be liable for a tax of 15.5 per cent on its income.

"All of a sudden you owe Uncle Sam ... That's not a good day," Mr Marino said.

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Before 2010 and FATCA, around 1000 Americans a year expatriated or renounced their citizenship every year. Now there are about 6000 a year, and that figure is rising, Mr Marino said.

Dr Alpert said one of the biggest frustrations of US taxpayers in Australia had been the uncertainty of the US tax treatment of superannuation.

"The taxation on Australian superannuation was contrary to the interests of Australia – it reduces the ability of Australians to save to fund their retirement and increases the probability that the affected Australian citizens will be reliant on the Australian government for the age pension once they retire," Professor Alpert wrote on the Fix the Tax Treaty's website.

The Australian government is aware that the US's tax treatment of Australian super can produce "anomalous outcomes". But Australian super accounts - including those in a self-managed fund - are not reportable to the IRS under the Australian US tax agreement, said an ATO source.