06/04/2017
A wise man name Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” For the approximately 200,000 American expats currently residing in Australia, filing tax returns not only in Australia, but also in their country of origin is an absolute certainty. The United States is one of the only countries in the world to impose an income tax on its citizens’ worldwide income. Libya, North Korea, Eritrea and the Philippines also have similar policies for their citizens. However, the tax systems of these countries are not as developed as that of the US and their government has limited access in collecting the necessary data to enforce such a strict tax law. Now with the stringent banking requirements for Americans with foreign financial accountants through the Foreign Account Tax Compliance Act (FATCA) legislation, there seems to be very few places left on earth for Americans to run and hide their money from the cross-border authority of Uncle Sam.
Because of the United Bank of Switzerland scandal in the mid-2000s, the Bank Secrecy Act has created a mandate for US citizens residing abroad. All US expats must now annually notify the Treasury Department if the value of their foreign financial accounts exceeds $10,000 in aggregate. The values of these accounts are filed by submitting a form known as the F-Bar. (Foreign Bank Account Report/s) Foreign financial accounts include foreign branches of US banks, but not US branches of foreign banks. So an American living in Sydney or Melbourne who thinks they don’t have to complete the F-Bar just because they have their Australian Dollars in a Citibank account are sadly mistaken.
Moreover, the consequences of not completing the F-Bar can be quite severe. The potential civil penalties for not complying with FATCA are quite alarming. A penalty of $10,000 could be imposed for non-wilful violations. For more extreme cases, the Treasury Department can impose a penalty of up to 50% of the aggregate account value or $100,000 per year for wilful violations, whichever is greater. Moreover, there is a six-year Statute of Limitations, so the Financial Crimes Enforcement Network (Fin-Cen) of the Treasury Department can go back to 2011 for any unscrupulous characters they investigate and prosecute this year. In addition, it can go so far that they can enforce criminal penalties on a violator, which can include criminal penalties of up to $250,000 and a five-year sentence in the US Federal Prison system. As demonstrated, the long-term risks for not filing the annual F-Bar form far outweigh the temporary frustration of consolidating your bank statements every year.
The F-Bar is just a reporting statement; American expats do not necessarily have to pay any tax on the money in their bank account, unless they earn any interest on their deposits.
Which leads to another point, how much income tax do US citizens actually have to pay on their global income? Fortunately for American expats in Australia, there are many benefits in the US tax code which they can utilize to offset any tax liability they might have to the US. For one, the majority of US expats who earn income overseas may qualify for the Foreign Earned Income Exclusion (FEIE), which is $101,800 for 2017. To qualify for FEIE, a US expat must pass the criteria of the Physical Presence Test or Bona-Fide Residence Test. Additionally, Australia has a tax treaty with the US. So any income taxes paid to ATO by an American expat can be credited to their tax liability to the IRS, thereby eliminating any double taxation on the same income.
This article was co-written by David Shaw, CEO of WSC Group and Tony Eaton, Director at US Global Tax
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