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The Green Card Taxation Trap

What is less known, is that during these bilateral talks, the Australian Government also agreed to giving the US unrestricted access to the Australian taxation system.

This applies where young Australians, who move to the United States then stay on a long-term basis whether for work or personal reason, and decide to take up a Green Card and with it, lawful permanent residence.

A Green Card is synonymous with the “land of opportunity”. Most people wish for one when moving to, and living, in the United States on an extended basis. But like all splendid things, it comes with a price.

Unlike a general work permit, a Green Card and citizenship can grant the United States government total worldwide access to taxing activity. This applies to Australia which has, through signing the bilateral agreement, agreed to allow the US government access to Australian taxation systems.

By taking up a Green Card, Australians who have moved to the United States on a long-term basis will find themselves subject to US tax laws — which are more intrusive and the tax rates higher.

Many young professionals such as lawyers and accountants have substantial wealth. They may have a business in Australia or a trust of which they are a beneficiary, or maybe a real estate investment. While in the US they may get married and have
children who are US citizens and, therefore, beneficiaries of the assets back in Australia. These will all have US tax implications. And if any Australian who is a long-term resident within the US, should die, the US also has estate taxes which again can affect the assets back home.

Unfortunately, even discarding the Green Card does not prevent this taxing activity.

And the rules governing the giving up of a Green Card have become tighter. What most people don’t realize is that if they have held a Green Card for more than eightyears, and then decide to give it up and return home, the US Government will continue to tax them for another io years — an expatriate rule which is again a condition of the Australian and US Government’s bilateral agreement.

There are many talented Australian nationals going to the US for work. They may stay for 10 or 15 years, obtain a Green Card, and then get a nasty surprise when they come home.

In order to avoid these pitfalls, Australians moving overseas for any length of time, particularly to the United States, should undertake pre-immigration and tax planning before they leave these shores. They need to be aware of the trans national implications of their financial affairs because there are some serious taxation implications.

Expatriates should plan, analyse and work out issues in advance, so they know exactly what is in store. The acquisition ofa Green Card which leads to becoming a US citizen, should be avoided from a tax perspective, as it brings with it, a whole raft of taxation obligations, including Estate Tax.

Even buying a home in the US can be a disaster for an Australian, as this will confer automatic domicile status, again, giving the US wide access to any Australian assets. The best solution here is to rent.

It should also be kept in mind that trusts in Australia can be intergenerational and Australians living in the US for lengthy periods will have their Australian assets subject to the US's somewhat arcane rules in terms of foreign trust distribution.

Australians who go to the US for an extended time — whether for work, education or romance, need to plan for the immigration and taxation risks well before they leave home. They should be aware of US immigration and taxation rules, and seek out a cross-border solution that combines both country’s tax planning, and set up structures in Australia, and which will reduce or eliminate exposure to US taxes.

We thank Pitcher Partners www.pitcher.com.au for allowing us to reproduce this article from their newsletter Contact. The original article was written by Chris Braun, Director of Expatriate and Trust at US accounting firm Virchow Kraus, an affiliate of Pitcher Partners through the Baker Tilly internatioal network.

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