Establishing your tax residency status should be a top priority if you are planning to live and work in the United States. Tax processes in the USA (and other overseas) jurisdictions are highly complex and there will be major financial consequences if you get your tax residency wrong, so you will need specialised advice. Over and above the residency issue, there are other important matters, including proposed changes to the main residence exemption in Australia, that may require your attention if you are planning to live and work in the United States.
It is our pleasure to introduce Iain Forshaw, Senior Tax Manager at Frank Hirth – USA and UK Tax Advisory and Compliance Specialists – who has kindly provided this valuable summary for Australian professionals and executives in mining and resources so you may enjoy and benefit the most from living and working in the United States.
EIGHT important tax matters for Australian mining & resources professionals and executives living and working in the USA
by Iain Forshaw, Senior Tax Manager – Frank Hirth
Residence: To establish tax residency or non-residency, the USA uses a day count test over a three-year period. This means that it is possible for an overseas professional to maintain non-residency by keeping tabs on the number of days spent in the USA. Conversely, it is also possible for an overseas professional to become resident earlier than expected. Early advice is always crucial so that you can plan ahead to establish and be prepared for your residency status.
Executive packages: Mining and resources executives who are tax residents in Australia need to take great care around the vesting of any performance remuneration such as share schemes, options or bonuses once they are living in the USA. While the USA Federal system allows for a credit for foreign taxes to be paid against USA tax, most USA State systems do not. So, for example, if a bonus vests post arrival and you are a tax resident of New York, you may need to pay Federal tax with a credit for Australian tax, plus State of New York tax with no credit. That can be expensive.
Capital Gains: There is no concept of a ‘step-up in basis’ or valuation on arrival in the USA. So, if you sell an asset – a share, for example – you will pay capital gains (computed in USD) on the full increase in value from date of purchase to date of sale. There are opportunities to ‘rebase’ by selling and reacquiring prior to your arrival in the USA.
Gifts are at no gain/no loss with a carryover basis. Shares acquired as part of an employee or executive award scheme need detailed consideration and advice.
Real Estate: In contrast to Australia, there is very limited ability to offset any rental loss against other income in the USA. For mining and resources professionals and executives in the higher tax bracket, any loss would be disallowed but carried forward to use against future profits. Sale of the principal private residence is taxable and, provided it qualifies, there is an opportunity to offset up to US$500,000 against the gain for a married couple. The USA does allow depreciation and interest as a deduction.
Family Trusts/Trusts in General: The USA requires a significant amount of reporting where there is a foreign trust, either as a beneficiary of a non-USA trust or the grantor of a non-USA trust. The penalties for failing to comply are extremely high, so it is important to ensure that the trust is reviewed, and the appropriate reporting identified at the outset. Trust planning can be very effective for a wealthy individual heading into the USA. Careful planning and advice are required. If you have a trust, seek advice before arriving in the USA.
Investments: A foreign (non-USA) unit trust, managed fund or investment company would likely be regarded as a Passive Foreign Investment Company (PFIC) in the USA. The tax consequences of receiving a dividend/distribution from a PFIC or from selling a PFIC are very significant and you will need help to investigate this prior to your arrival in the USA. This will allow you to make an informed decision about whether or not to continue to hold the asset once you are a USA taxpayer.
Non-USA companies: The USA has a complex regime for taxing and reporting ownership of non-USA companies. For example, if a USA person controls a non-USA company (owning more than 50% either directly or constructively), this will be a ‘controlled foreign corporation’ and subject to a specific tax regime and reporting regime. The penalty for failure to report properly is US$10,000. It is therefore extremely important that ownership of any non-USA companies is reviewed prior to arrival in the USA and certainly in advance of taking up USA tax residence.
Non-USA pensions or superannuation: An Australian moving to the USA may be surprised to find that there is tax to pay on their non-USA pension or superannuation. Generally, the USA does not recognise the tax deferral benefits that come with a pension or superannuation, and unless there is a treaty that protects the income and gains within a pension (such as the USA/UK treaty), the USA will tax the pension. This matter is not part of the USA/Australia treaty so an Australian moving to the USA should review their pension to determine whether it is considered to be an employer sponsored plan. If it is, it’s likely the growth in value will be taxed annually. If the pension/superannuation is not considered an employer sponsored plan, it’s likely the USA will treat it as a trust and tax the underlying income and gains within the plan. (In this case, the pension would also need to file trust returns).
Senior Tax Manager – Frank Hirth
Wellington, New Zealand
Iain Forshaw is a Senior Tax Manager within the Private Client Team and a director of the New Zealand office. A dual UK and USA tax handler, Iain has an extensive background in the tax implications of international assignments and the tax compliance requirements for global employers and their international assignees. He has a further specialisation in private client tax affairs including employment tax issues on new start-up companies with international assignees and High Net Worth Individuals.
Your next step…
At Resources Unearthed, we understand that life as an expatriate in mining and resources can be challenging, and may involve complex and interacting considerations – personal, family, professional, social and financial. We can help.
Addressing the important matters outlined here will involve input from your financial adviser, your legal advisor and your accountant and business advisor. Brett Cribb of Resources Unearthed offers advice specific to financial planning. In addition, he undertakes the role of ‘central coordinator’ which means he works on your behalf to coordinate the services and advice necessary for you to make the most of your time spent living and working overseas.
Please contact Resources Unearthed today for help if you are moving to the USA or other international destination. Call 3007 2000 or email firstname.lastname@example.org
Resources Unearthed is a solutions hub that provides integrated financial, legal, property and accounting & business advisory services for executives, professionals and business owners in mining and resources.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions.