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Can you keep wearing 2 hats? Why might you consider renouncing US citizenship?

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A number of our clients hold dual citizenships – Australian and any one of a plethora of others, including US citizenship. Traditionally, US citizens would never consider giving up their citizenship despite living abroad permanently, but that once unshakeable tenet is now being shaken.

More and more dual citizenship holders are renouncing US citizenship after the introduction of the 2010 Foreign Account Tax Compliance Act (FATCA) which requires banks and financial institutions in countries which have agreed to FATCA (and Australia has so agreed) to provide details of every American citizen’s bank balance and earnings. The big stick is that if banks do not oblige, they can be banned from operating in the US.

So why might a US citizen consider renouncing their citizenship?

There are in essence two (2) main reasons:

  • The somewhat onerous obligations in regard to filing annual tax returns in two (2) countries particularly when no income is being earned in the US; and
  • The treatment of Australian super funds by the IRS.

Australian superannuation funds are unusual animals in a legal and financial sense being a hybrid governed by both trust deeds and by legislation and having characteristics of partly being income generating vehicles (by investment earnings) and partly being regulated pension schemes.  There is nothing quite like Australian superannuation funds in the American system and the IRS finds them difficult to classify.  Some earnings in super funds have been regarded as income in the US citizen’s hands, even though those earnings are not payable to the US citizen until that person enters into pension phase or takes lump sum payments from the superannuation fund.

However, renouncing US citizenship is not an easy or inexpensive option and could come with potential negative consequences including the imposition of a US exit tax, imposition of inheritance tax, and possibility, if the reason stated is the avoidance of tax, permanent inadmissibility from the United States.

This is not a simple area or a simple issue but if you are wearing a couple of citizenship hats perhaps you should think about whether you really only need to be a citizen of one country?

For assistance and guidance in this area, please contact a member of our Estate Planning Team.


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