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US FACTA compliance efforts span the globe

FACTA Compliance

In the last 6 weeks there has been a lot of talk about the US Foreign Account Tax Compliance Act (FACTA), particularly here at RaboDirect. The reason for this is because as a bank we have to comply with the act. The impact of FACTA isn’t limited to US expats either, Aussie’s investing in the US could also be affected. Guest writer Anthony Fensom, shares the detail:

Australia’s infamous tax evaders have often sought foreign exile, but for Americans there is no escape from the long arm of the US Internal Revenue Service (IRS). That was the message from US lawmakers with the passing of the act, which also threatens to hit Australian institutions.

Enacted by the US Congress in March 2010, FACTA aims to track down the overseas assets and income of US tax evaders, whether they are residing in Tasmania or Timbuktu.

According to the IRS, FACTA “will require foreign financial institutions to report directly to the IRS information about financial accounts held by US taxpayers, or held by foreign entities in which US taxpayers hold a substantial ownership interest”.

Financial institutions that do not comply could incur a 30 per cent withholding tax on all payments received from US sources, with the reporting requirements set to start on January 1, 2014.

High thresholds for expats

Fortunately for Americans living abroad (generally longer than a year), the IRS applies a higher exemption on foreign financial assets, such as deposits held in Australian banks. These overseas taxpayers are may be required to file a Form 8938 (“Statement of Specified Foreign Financial Assets”) only in two cases declare their foreign financial assets to the IRS:

  • For those filing a joint return, where the value of the specified foreign assets is more than US$400,000 on the last day of the tax year, or over US$600,000 at any time during the year.
  • For all other returns, where the total value of the foreign assets exceeds US$200,000 on the last day of the tax year, or more than US$300,000 at any time.

Penalties of up to US$60,000 are may be applicable for failing to report such foreign assets, which include bank deposits, stocks and mutual funds but not art, antiques, cars, precious metals and real estate held directly. A penalty of 40 per cent is may also be applicable on underpayments of such tax, along with possible criminal penalties.

While the thresholds are high for expatriate Americans, it could be possible to trigger a reporting requirement should a property asset be held through an Australian company or trust, for example, or by being the beneficiary of a foreign estate.

Australians also hit?

In November 2012, the Australian government announced it was in negotiations with Washington for an intergovernmental agreement aimed at reducing the compliance burden for local banks, as well as increasing existing reciprocal tax information sharing arrangements.

Pending the final outcome, FACTA could potentially hit Australians investing in US assets. For example, unless an Australian bank could identify a buyer of US bonds as a non-US person or provide the required information to the IRS, it could be forced to withhold 30 per cent of all interest payments.

The current pressure from the IRS enforcing FACTA compliance is likely to mean The result is likely to be more regulations on any US investments by Australians, while Americans living Down Under could have their assets placed under even closer scrutiny. As the old Benjamin Franklin quote goes, “nothing is certain but death and taxes”, and few Americans would disagree.

Important Information

The tax related information contained in this article is derived from publicly available information. This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice or tax advice. You should seek independent professional tax advice before making any decision based on this information.

[Sources]