VOICEOVER:
This podcast channel it’s about you, successful international entrepreneurs, successful ex-pats, successful investors. Sponsored by HTJ.tax
DERREN JOSEPH:
Okay. I believe that we are now alive. Good evening, everyone. And good morning to those joining us from the US, but good evening to most of you who are in Australia. So welcome to HTJ.TAX Livestream. Today, we are talking about US taxes for ex-pats in Australia. Two of my colleagues in Australia were due to join me, but they are not able to do so because of that virus, which you know, which we cannot name otherwise, we get sensitive on certain platforms.
So, we wish them a speedy recovery. Was WhatsApping them and they’re okay. They’re just really under the weather. So onwards and forwards. Thank you for those who did submit some questions and some comments that they would like to explore. Thank you for that, appreciate it. We’ll address them more or less in the order in which we got them.
Remember that this is not to be construed as advice. We are talking generally about general principles, which you have hotel attention, and you’d like us to explore. So, it’s a general conversation. If you need specific advice, you need to be in touch with a tax professional that knows your situation inside out, and whom you have engaged for that purpose. So, without further ado, let’s jump in for those who did not get a chance to submit their questions, you can do so by typing them in the box below. If you are on zoom, if you’re on YouTube or one of the other platforms like LinkedIn, you can just type below the streaming image. So, yeah, thank you and welcome.
So, first question, since moving to Australia years ago, we have started a few businesses. When we arrange to pay taxes, will the IRS just need to know your personal income or drawings, or would they need to see the financials of all the businesses? I’m assuming if they need to view the business financials, it will cost substantially more. What is the most cost-effective way to navigate this?
So that’s a great question, especially since many of our clients are entrepreneurs and business owners and investors. So, our sweet spot to be honest, really is with business owners and entrepreneurs, including those in crypto and as opposed to just a regular expats employee. So just saying that this is a type of question that we face on an almost daily basis. So, thanks for sharing this.
If it is that you have, you’re in Australia, you are US exposed. You have a US passport or green card, and you have invested in businesses in Australia. New Zealand is somewhere else in Southeast Asia. The main need to be reported on your tax return. So will be reported as you pointed out, they’ll report it on your personal tax returns. To the extent you get a distribution from it.
So that’s, if you take out dividends, if you got some consulting fees or if you sold it and you made some gains on the upside capital gains. So yes, that will need to be reported. So that much is clear, right? And of course, you won’t be double taxed and that’s because you get to offset taxes that you would have paid in Australia against the US tax liability. And then since generally speaking, Australia taxes tend to be higher. The offset is quite effective, and the US has liability is considerably lowered or eliminated. You knew this already.
So, let’s cut to the chase, right? What about reporting the actual companies? So, if it is that your share of value of voice, and this is being very, very, very specific value of voice. So, I’m not just talking about if you have shares in the company, but in terms of an equity stake. So, if it is that you are, you’ve bought debt, you have bonds, or you have some sort of debt structure, or you use a nominee and someone who shares on your behalf or some entity, for example, a trust, which is quite popular in Australia. And we got to later. So, if it is your share value of voice exceeds 10%, then yes, you would need to declare the existence of that entity on your tax return on the Form, 5471.
And then the actual investment going in will be in a Form 8926. And you know, the financials of that company, the income statement and the balance sheet, as well as any other us shareholders would be on the 5471, right? So, 10% or more. So, the answer is yes, because Australia is a relatively high tax jurisdiction from a corporate tax point of view. We won’t necessarily talk about the GILTY rules, which I know some of you were interested in that will be triggered in a low tax jurisdiction like Singapore, Hong Kong, or a Labuan in Malaysia. So, we’ll park that aside for now.
So, the point is in terms of reporting, yes, once you hold 10% or more, now, if it is that your personal, your foreign financial assets exceed a certain threshold, and that threshold would vary by whether you file jointly or singly, you may trigger Form 8938, in which case, even though your interest in that company may be less than 10%, it would be reportable.
But in that case, you’re not reporting the financials for that company. All you are doing is reporting that, hey, I have shares in company XYZ, and this is the approximate value. So hopefully that answers your question.
Now, there is all ways. So, the US has a number of anti-deferral rules. And the way they came about is because people were investing. Americans were investing abroad outside of the US and they were doing so in a tax-advantaged way, they were able to defer paying taxes until certain key liquidity events. And that made those investments more compelling than domestic investments. And it also made tax avoidance easier. So, for a number of reasons, the number of anti-deferral rules, I hinted at one of them, which is GILTY, which is when you invest in a corporate structure, that’s in a low tax, relatively low tax jurisdiction in the neighborhood. So, Singapore where I’m based, or Hong Kong, or Labuan, right? So that’s typically or Cook Islands or, you know, Vanuatu. So basically, low or no tax jurisdiction. You need to be thinking about GILTY. Now, if it is, you’ve invested in a company outside where it triggers something called Subpart F. So, you may invest in a company in one jurisdiction, but it actually does business in another jurisdiction outside of the US and you need to talk to your task professional about that.
That may also trigger the anti-deferral rules, or if it is that you have a holding company structure, a company that mainly derives passive income. So, it’s not an operating company per se, the returns on that company in the form of dividends, interests, you know, rental, you know, rental income streams. So, you may have what is called a PFIC. So, whether it’s GILTY, Subpart F or PFIC so those are the three more popular anti-deferral rules.
And what that means, and this is where I think you were really going with this question. You were really asking, are there situations where the company has a US tax liability, even though the company is incorporated in Australia. And one of those other jurisdictions that I mentioned, and the answer can be yes, if one of those anti-deferral rules are triggered. So, in summary, typically you’re correct. Once there’s a distribution from the company to you, whether it’s in the form of dividends, interests, consulting fees, or whatever, that’s definitely taxable in the US return.
And of course, you get credits for whatever you would have paid in Australia. If it is that you trigger ownership stakes, in terms of not just ownership but share value voice 10%, an excess or 10% or more. And definitely when it’s over 50%, you trigger control foreign corporate rules. But basically, when your ownership threshold is passed, then that trigger reporting on your tax returns on the 5471 that I mentioned, or 8865, whereas a foreign partnership so definitely. And what you fear the most, sorry to be the bearer of bad news. If it, is you trigger one of those three anti deferral rules that I mentioned, the GILTY, the PFIC or the Subpart F, then that foreign company’s profits may be taxable on your personal tax return. So again, you need to sit with your tax advisor who understands what the Australia side and the US side, because they work in tandem with each other and do some tax planning.
If it is, as you’ve mentioned, you’ve been doing this for a few years, then you may need to retroactively address some of the omissions, if there are omissions for those whose non-compliance was deemed to be non willful, then the streamlined may work for you, speak to your tax advisor to make sure. Streamlined is an amnesty in all, but name where you go back three years on your US tax return, because three years is statute of limitations and you declare whatever it is, you missed out.
You put it on those tax returns and the IRS agrees to waive any penalties, civil and criminal. If there’s taxes due, then interests will be accrued, obviously, but it’s a good deal because the civil and criminal penalties are waived on the streamlined. So, you just speak to your tax professional by that. So, we’ll look back will be three years. So right now, I guess there’ll be 2019, 18, right?
If it is those companies that you’ve invested in, you have signature authority over their bank accounts, even though you are not the beneficial owner of those corporate bank accounts that are reportable on your FBARS, which will be your foreign bank account report. And if you have not done that, part of the streamline allows you to look back for six years on your FBARS and make those declarations again, just to emphasize the FBARS are not a tax calculation. It is simply reporting requirement. However, the penalty for not disclosing those foreign accounts can be quite aggressive. So, for something where there’s absolutely no downside because it’s not part of any ta calculation, please make sure that your FBARS are up to date. Okay, hope that helps.
Moving on to the next question. Okay. All right. Someone is based in the US and based in the US and like company has offered me a transfer it to the Australian subsidiary. I have the option of being tax equalized. What does that mean? Should I accept it?
Well, so the tax equalizations mean, it means different things to different companies, and you’d need to speak to the payroll, or, I guess your line manager, just to get the specifics of your company. However, generally speaking, the principle of tax equalization is that you are, when you take an expert assignment on the same, and I’ll tell you a whole market, you will be no better, no worse off than had you stayed at home. So even though you’d be based in Australia, you’ll be paid, and your taxes will be based, will be calculated more or less. There’s kind of like this esoteric kind of calculation kind of gets confusing, but you should be no better, no worse off than if you have remained in your home market.
If you remain if you stay back in the US. So, it tends to work to your advantage. When you go into a higher tax jurisdiction like Scandinavia, Australia, and your case, and that you are sped to some extent, the pain of paying a higher tax bracket, but it often works against you. If you subsequently get transferred to a law tax jurisdiction like Singapore or Hong Kong, because then you are stuck at your home base tax rate, and you don’t get to enjoy the benefit that comes with being in a lower tax jurisdiction.
So again, it varies by company, and you may want to get professional advice, bear in mind that the team within your company or the accountant that your company rep recommends he or she works for your company, not for you. So, it’s in their best interest. Typically, what we see is they would advocate what’s best for the company. Not necessarily what’s best for you. So, you may want to seek independent tax advice and what firms such as ours.
I mean, you don’t have to come to us just Google and whoever comes up when you feel comfortable with you can have a conversation with them. And what we typically would do, what any tax team would typically do is run a simulation. Okay. Show me your most recent tax return. Let’s assume that you’ve got that in whatever the jurisdiction is that says Australia, and what will be your take home pay to see if you’re better or worse. So, what is the cash in your pocket and money in your bank account at the end of each month and each year?
So, by running that scenario, you can compare apples to apples and see whether it makes sense for you. I hope that helps. Next question. And again, I’m just dealing with this in the order, in which it’s someone just, okay. Yeah. Someone is typing below. So just continue to take below and I’ll just address them in the order in which they scroll up to me. Right? So, I’m looking at my other laptop where the questions are scrolling. So, I’m a dual citizen, US and Australia, and we have an Australia family trust, which is of course, pretty popular tax planning tool in Australia.
Right. Should I report it to the US and my US tax returns? What if I’ve never done so before? Well, the answer’s a hundred doubted absolutely. Yes, it is reportable on your us tax return. Absolutely. That’s. And to your second part of your question, if you have not done so before, as I mentioned in response to the previous question, like two questions ago, you would want to consider together with your chosen tax professional.
Of course, exploiting the streamline compliance procedure, streamline is, and streamlines is all but name, but it allows you to come forward to the IRS confer before they figure things out on their own. So, and you correct the past three years of your tax returns and you, in this case, you would declare the existence of the family trust and any distributions you may receive from, from that family trust.
And if that family trust has a bank account, which you may have a signature authority over, then you may want to correct your prior year FBARS, or your foreign bank accounts as well. So definitely you would need to declare the bank accounts attached to that trusted existence of that trust and the assets you would have transferred to that trust in any distribution you may have received from that trust. So, I would urge you to speak with your chosen, chosen tax professionals, soon as possible.
Next question, I’m a musician, so a little bit different. I’m a musician, Australian musician, and I have a US type visa. Okay. That’s a visa for foreign entertainers, right? So normally I fly back to Australia in between gigs, but now I prefer to, I prefer to remain in the US because of quarantine issues on return to Australia, what are the tax implications?
So, all ordinarily speaking from a US tax perspective, you know, tax rules are different from immigration rules. What that means is that the immigration rules, so the visa that you use to enter is less important than the tax rules would speak to the amount of time you spend on us soil or USA space. So, it sounds as if you have triggered S, you may have triggered substantial presence.
So, I’m talking about section 7701 of the US tax code. So, by virtue of you spending a certain amount of time in the US it just like Australia is 183 days, but the calculation is a bit more esoteric. And in the sense that there’s a look back period of a couple of years as well. So, you speak to your tax professional. I won’t get into the calculation right now, but it involves looking at your present year, which is 2020 plus 2021, sorry, plus 2020 plus 2019.
Right? And it’s a ratio of 2020 and a ratio of 2019. So, one third and one six. And once you add it up and it exceeds 183 days, so once you hit a certain threshold, in terms of time in the US you will be deemed to be US tax resident and subject to taxes and your worldwide income, because as an entertainer, what you would have experienced before, when you were just flying in and out before the, the present situation, of course, you would have been paid by the promoter and they would withhold, and they might give you a Form 1042 as to demonstrate that they will have withheld a certain amount and remitted that to the children revenue service.
Sometimes they withhold too much. And then you would file a non-resident tax return to get a refund based on Australia, us tax treaty, if it applies. But right now, if it is that you are not returning to Australia between gigs, then you may trigger a substantial presence who you will be US tax resident and subject to taxes and your worldwide income. So that’s, you know, obviously it may have implications depending on your earnings in Australia itself, and that being exposed to US tax system. So, I’ll suggest again, that you sit with your preferred advisor and get some planning done. It may not be too late. So have that conversation.
Next question. I’m an American working in Sydney, which return should I typically do first Australia. or US? So, well, you’re base in Australia. So typically, and then the Australia tax is different from US. In a US it’s a calendar year, right? So, you would typically work with your well in an ideal world, your US and the Australia tax teams under the same roof, obviously. But if it is that you, you’re doing them yourself, or you have two separate teams that don’t necessarily know each other, speak to each other, it makes it a bit more complicated. And typically, just by virtue of the timing differences, you would typically start with the Australian one first. And, and assuming that you sit, you are employed.
So, you’re working as an employee in Australia. So, then Australia has first bite of that cherry. So, then Australia typically is the, the first one, and then the tax credits applied to us tax returns after. So again, in an ideal world in tandem, but if you are dealing with two separate teams, so it’s just you by yourself trying to figure it out. Typically, you start with you, the Australia one first, so hope that helps.
Okay. I now live in Bali, Bali, Indonesia, since 2020, dual Australia, US. So, this person is an Australian citizen, and then the US citizen. And they’re based in Indonesia and Bali. How do I update a tax residency with Australia? So, you would need to speak with your Australian tax professional to get advice on that.
So, I can introduce you to one of my colleagues in Sydney and Melbourne, and you can have that conversation with them. Or if you do have one, you can check it out, or you can just go to the ATO website, but of course, the website can be a bit cryptic sometimes, right? So, the reason why I say that you probably want to get advice is because it can be a bit complicated to separate tax residency as an Australian citizen. And then by merely spending time in Bali, that does not necessarily mean that you have said that your Australia tax non-resident because there’s certain specific steps that you needed, you should have done to alert the, to you as to new status.
And then in Indonesia and Bali, you should be doing certain things to prove that you, if there’s an inquiry, there is some sort of question from the ATO. You would need to produce certain documentation to prove that you’re born and a resident of Bali. So, you know, it can be a bit subjective sometimes. And, on our website, if you go to HTJ.tax and we have a thousand free articles on international tax issues, I do go into the nuances of Australian tax residency.
And I do quote some recent court cases that have shed a lot of lights or made it even more complicated, depending on how you look at it, depending on your perspective. But essentially you want to prove that the emphasis here is on proving that you’re a bonafide resident of Indonesia or Bali. So, you would, you know, like the rental agreement, I’m not talking about Airbnb, I’m talking about a proper lease for whatever your accommodation is. Ideally, I’d want to see you being Indonesia tax resident. Do you have a KITAS? Are you paying your Indonesian taxes? Where’s your Indonesia tax return. So, you have to sever ties and your center of life is no longer in Australia that you’ve really put down roots in Bali, Indonesia. So, it is nuanced. It is subjective. I highly recommend that you seek advice just to make sure that you’re on the right page, both for Australia and for Bali and Indonesia, a US tax status more or less remains and changed in that the US is going to tax any worldwide income, no matter where you are, the only way around that is to give up your US passport.
So, business as usual from a US perspective, hope that helps moving down the list. Okay, I’m a dual citizen, again, Australia, Australia, citizen, and a US citizen. And I have 1, 2, 3, 4, 5, 6 questions. This person has six questions. So, they’re asking about the superannuation. I think there’s no life stream on US, Australia tax that is complete without talking about the super everybody’s, you know, cause it’s such an important part of most people’s portfolio, right?
So, it’s, it’s natural. It makes sense. So, okay. Contributions to Australia, super taxable to the US they don’t receive the same tax deferred treatment as if you were in the US and concrete into like a 401k or some sort of IRA, right? So, it does not reduce your US taxable income as it would potentially reduce your Australia taxable income. So yes, contribution taxable it’s as if you know, it really makes no difference.
You don’t get that tax deferred treatment. I know in some, and then people are going to ask me, well, what about the treaty? What about the Australia us tax treaty? Yes, it is attached treaty, but it is not as specific as let’s say the us UK tax treaty, which means that some of the contributions to quantified us UK pension vehicles do get that tax deferred treatment. So, the, the wording of the US UK treaty is different from the wording of the UK, the us Australia tax free.
So generally speaking, unfortunately, no, the contribution here, there’s no tax benefit. You don’t get to defer paying tax on the income. You don’t get to reduce your taxable income to the U S by contributing to an Australia. Super next question is growth in the fund, taxable as, as growth in the fund, taxable income to the US. So, while the pension is growing in the retirement fund there, the treaty should protect the growth within the fund.
So generally speaking, the growth is not taxable, however, because there’s always a, but right. There’s always an exception that was in detail unless distributions are being taken or the person, if you are a highly compensated employee, highly compensated individual, a highly compensated employee. So, if you’re getting a distribution, then the growth may be taxable. So again, you may want to sit with a US tax professional to go to you in your unique circumstances to see what the correct tax treatment is.
And if the correct tax treatment doesn’t work for you, maybe there’s something that you guys can do to mitigate and to do some tax planning around that. Okay. Yeah. So I can answer that before our distributions taxable to the US yes, generally they are taxable with some exceptions, so, and plus you get foreign tax credits to reduce it, but generally speaking, yes, distributions are taxable, but if it is that you are going to invoke the treaty and exclude certain gains within, because there are certain, there are circumstances where there will be some sort of tax mitigation by invoking the treaty.
Then you, you sit with your tax team and work out what section of the treaty that will be. And you would be for you would be declaring that in a, for media data, through a treaty disclosure. So generally speaking, they are taxable. There are certain circumstances I don’t want to get too detailed into super. If, if you do, if you know, I look at the questions after, and the people come back to that, then I’ll take a deeper dive. But generally speaking, the yes, they are taxable. There are circumstances where that tax can be reduced or eliminated by looking at the treaty or the nature of the jurisdiction itself.
And in that case, it needs to be properly disclosed. So, you can get those tax breaks. I’ll leave it there. Okay. How is your super reported on the US return? It depends. So, it definitely in your AF bars, as I mentioned before, the foreign bank account report, if you hit those thresholds, which I mentioned before, the form 89, 38, which discloses your foreign financial assets will disclose your super as well. And depending on the nature of the investments within the super, it may trigger some additional forms such as P fix and stuff like that.
So, depends moving on, scrolling down, scrolling down. Yes. I see your questions. Okay. What strategies help with minimizing tax on us? Retirement funds to Australia and India. And is there any difference if I pull it out monthly versus once a year?
So, so this person is living in Australia and they’re receiving retirement funds from the United States, right. Okay. So, then we’re looking at the article 18 of the US Australia task tree, the answer’s yes. Under certain circumstances, there would be an opportunity to, to minimize the tax. So, first of all, it should not be double taxed because at the very least, depending on whatever investment vehicle you’re tapping into, you get foreign tax credits, right?
So, you’re not going to be tasked twice in the same income, not going to happen very unusual, but typically it doesn’t happen. Now under certain circumstances, the treaty would allow you to have the income only task in one of the two jurisdictions. So, the other jurisdiction won’t tax it at all. So again, it depends on whether it’s a, you know, like a company pension plan or social security or whatever the case may be. So, you’d want to sit with your chosen tax professional and go through the various types of retirement income that you’re drawing on and remitting into Australia from the US and see how you can work to leverage article 18 of the, the treaty to minimize the tax.
Because I think it’s only no one should paying more than their fair share of taxes, you know? So, no more than the, the taxes that you’re legally required to paint. You want to sit you too professional. You’re going to look at article 18. The answer is, yes, you, at the very least, you will not be charged twice best-case scenario. Only one jurisdiction can touch it. The other one won’t. So, I’ll leave that with you. Okay. You have two more questions. I’m seeing the other questions. Are there strategies for us capital gains in Australia, right?
Depends on the nature of the capital gains, but at the very least, as I mentioned before, you will get fantastic credit. So, the income will not usually be taxed twice, especially if you sit in Australia, right? So, the, if, if it’s a gain arising from selling shares, like if you sell your Tesla, Apple shares or whatever in the US the US well, it’s a US Situs asset will be taxed at first, and then you get the credits against whatever the Australia tax liability is.
So, it may be worth. Let’s see, let me just have a, just a quick look. Yeah. It may be worth, depending on the nature of the, the asset being sold, whether article 13 of Australia, US tax for you may be invoked. So, yeah, so it may be worth sitting with your tax professional to see whether article 13 could be leveraged to further reduce whatever tax liability you may have and perhaps make it only taxable in one jurisdiction as well.
So, you’d want to sit with a tax professional to have a look at that next one, estate taxes, same person. This is the last of your questions, at least so far, unless you want to type something else below estate, state taxes for Australian kids of US, citizens related to us assets, federal, or possibly state, while you’re very succinct in that question. So, I’ll need to try and interpret what it is you’re asking about. I’ll start off by seeing that from a US tax perspective, estate taxes are not levied on the beneficiaries or those inheriting the assets.
It would be on the estate itself, right? So, assuming the estate will be yours because you are in Australia with some US Situs assets. It may. So, the US Situs assets would typically be subject to US estate taxes. So, when the unfortunate moment you’re, you’re passing, then whoever you’re, the responsible party would be administrator or whatever your attorney would be filling out the returns, filling other records and paperwork on behalf of your estate.
And if any taxes are due, it would need to be settled by the estate. Typically, before the assets are passed on to the kids, now, a determination would need to be made by a professional. So qualified to see whether you are US domiciled for transfer tax purposes or Australia domicile, or you’re not US domiciles. So, US or not so the tax code is silent on that.
So typically, we look at case law and what case law says is that the fact patterns are the judge will pay attention to would be in 10 plus the deliberate action. So, when you left the US to move to Australia, was it your, I mean, an extreme example would be, did you have a going away party? You stream it on Facebook live? And you said, goodbye. I’m out and never coming back. I’m done, you know, and you’ve slipped.
You sold more serious stuff. Obviously, you kept some assets, which you’re talking about now, but for the most part, you severed ties with the US, and you made Australia the center of your life. And in a situation like that, yeah. You may be deemed to not be US domicile. It can vary because you’ve severed ties. You’ve got the alternative of the opposite would be, well, you know, when I left the US I kept, you know, like I kept a membership with my, some of my social clubs, and I fly back every year for certain key events with my friends.
And, you know, I probably still have the family home. It may not even be rented out because I just want a place that I can stay when I come back to the US and, you know, again, looking at the fact patterns, maybe a judge would say, you know what? You really did not intend to permanently leave the US I mean, the US is still the center of your life, right? Then you’d be deemed us domicile for the purposes of transfer taxes. Why is this important? This ties back to the question that you’ve asked on the state taxes, if it is, you’re not domiciled in the US then the threshold for those estate taxes is lower.
It’s actually something like $60,000 or something like that. So, it’s, it’s pretty low above that estate taxes at the federal level. I’m going to forget the state because you didn’t mention what state you’re in. So, at the federal level state taxes will be due above that a very low threshold, if it is that you’re not done sell in the U S I mean, you, you know, if it is you, you, you know, you’ve severed all ties in your Australia. You know, Australia have not looked back.
So therefore, the potential estate tax liability on those U S Situs assets would be higher than if you would deem to be us tax domiciled. And then you will, right now, the threshold is around $11 million. So, assuming that your assets of less than a million, 11 million, then that lifetime exclusion would come to cover everything. And at the federal level, there should be no estate taxes due.
So, tax planning time, you need to sit with your professional and go through your, your situation, your unique situation. Are you still tax domicile in the us for the purpose of transfer taxes, or are you not? And, you know, you need to factor in what are your Australia’s income? What are your Australian assets as well? You know, if everything is above 11 million, then you may be subject to state taxes on your Australian assets as well.
So, you need to sit with someone, go through your situation, see what position given your assets, your portfolio, which position works in your favor. And perhaps you can make some adjustments to your lifestyle, to either be domiciled in the U S for transfer tax purposes or not, depending on what works for you. So, it’s tax planning time. It is this state planning time. So, hope that helps next question, blah, blah, blah, Australian e-commerce company that sells mostly to the US with you give a number, but I think that’s confidential.
So. let’s just see you in, you’re doing revenue in the seven-figure space, right? You have a third-party warehouse in the US, but all your staff is in Australia. Okay. You’re asking about what your us tax liability, oh, your us tax responsibilities would be. So, you’re asking what IRS taxes you’d be liable for. It starts really with the state, because you have, from what you’ve disclosed here, you know, of course you need to seek a box, but just for the general conversation that we’re having right now, you have no boots on the ground, in the US you, if that is true, then you should have no permanent establishment, which is a, a term use to amuse.
When an entity, a foreign entity may trigger tax per a taxable presence in a foreign jurisdiction, right? But you have the responsibility for sales and use tax, which is like a VAT or GST, right? So, you first, your first concern would be around your sales and use tax liability. How do you do that? So again, sit with your chosen tax professional, who has expertise and experience and us sales and use taxes for farmers.
And they’ll probably want to recommend that you do a nexus study. They’ll know what it means. If this is their thing, they want to do a nexus study with you. They want to see what your sales activity has been across the US I mean, the US yeah, they’re 50 states, but they’re over 13,000 sales and use tax jurisdictions, because each state is divided into different new stature, his diction, each one, you know, sometimes it’s different that the, the tax rate changes and it’s different.
They are reporting frequency changes. Some of them are monthly. Some of them are every six months. Some of you know, it varies and some of them are manual reporting and some of them are to meet it, right? So, it really varies. And the threshold, so they ballpark, when you do, you’re Googling, and you found someone who claims to be an expert, they will say, well, broadly speaking, you’re looking at a hundred thousand dollars or 200 units, whichever comes first that triggers economic nexus with the state, with the jurisdiction.
And you need to be looking at whether you have a sale and use tax reporting requirement. Yeah. But some of them that’s generally speaking. Some of them are a hundred units or $50,000. Some of them are 15 units. It really depends. So, you’d want to get a proper nexus study done to see what your exposure is. Now, if you want seven figures into the U S chances are you didn’t start this business yesterday. You’ve been doing this for a while. So, then the next question will be, well, what is the liability that’s outstanding for your past transactions?
And then you need to work that out. And then the, some states have, remember, we spoke about streamlined in response to one of the earlier questions, as a way, it’s an atmosphere, but name, but for the federal level, when it comes to sales and new stats, there is something called a voluntary disclosure program. So, you know, VPs or videos, depending on what state it is, right? So, are you sure you go for voluntary disclosure, you know, should you go for voluntary disclosure and disclose these past transactions that you’ve been doing in these states?
Should you and retroactively, you know, do the right thing, confess, fess up, then pay any taxes with you. Again, this is a very controversial area. You’ve probably been doing some research. And when you Google, some guys say, no, forget it. You know, just cut ties, you know, and form a new entity or whatever, and just, oh, don’t even do that. Just look forward. But, you know, I I’m super conservative. So, if you come and talk to us, I’m going to be completely honest.
We’re really conservative. So, we say, you know what? Just be honest, always be honest, always, you know, just do the right thing. Then you, then those sleepless nights, you have nothing to worry about because you’ve done the right thing. And I challenge, I always, I tell my clients or people that come asking, I issue them a challenge that tax professional that told you, don’t worry about filing for the past and just ignore it and just go forward, let them put, challenge them to put it in writing.
So yeah, pay your consulting fee, put that in writing. They won’t because they know it’s wrong. So up to you, but that’s a decision you need to make. And then once you’ve dealt with the past, of course you deal with the future. Make sure you’ve registered with all the states in which you have economic nexus, economic exposure and file and pay your sales and use taxes accordingly. So again, three steps, find it a tax team that you comfortable with. And you’re based in Australia.
So hopefully someone who understands Australia and the US you embark on the next study, where you exposed, decide as to how you treat the historical exposure. And then you position yourself proactively to minimize your tax responsibilities going forward. That helps we link blah, blah, blah. You’re asking about attached free tea. So, the Australia US tax treaty is really an agreement at the federal level.
So, it doesn’t cover state taxes, nor does it cover sales and use taxes. However, you have a third-party warehouse, you mentioned in some states, and again, this is something you discussed with your tax professional, by virtue of you having physical nexus, even though it’s a third-party warehouse, it’s an independent and no connection to you. That me, aside from sales, the new stats obvious, but that may trigger a state tax requirement.
It means. So that’s something to pay attention to. It may trigger a state income tax requirement. So, it may, and, you know, just, just a heads up. So, that’s a conversation you’d want to have with your professional as well in terms of what forms to use. Okay. So, at the federal level, at the sales and use tax level, we’ll obviously when you sit with the tax team that you’ve chosen to work with, they’ll walk you through the phone.
Is that’s okay. Now at the federal level, you may want to file a protective return. So even though you believe that you have no nexus with the US as you know, the US is very linked to just society generally, and our tax authority, they’re pretty aggressive, their internal revenue service, just like YouTube. So, you’re custom to jurisdictions that take tax pretty seriously, right?
So, the IRS is pretty serious. So, what many tax advisors, advisors you form, you file a protective return. So, this is where you, I mean, you believe that your activities did not give rise to ECI or effectively connected income. So yes, you don’t think you have any nexus, and you didn’t trigger any federal responsibilities yet. If in the future, the tax office determines that, you know, yes, you did.
We’ve looked at your case and for some strange reason, whatever it is, they decided, yes, you are exposed. It allows you to preserve the right to deductions and credits later on just in case. And I admitted, you know, our team was super conservative. We, you know, we just want to on the side of caution at all times, you know, it’s better to have it and not need it than to need it, and you don’t have it. So, file a protective return. So just in case years down the line, your, your Australian company, which has been selling into the US e-commerce, whether it’s on Walmart or Amazon or whatever it is you’re doing just in case you at least have the right to mitigate whatever the tax bill would come up to be by applying deductions and credits.
So just, just a recommendation. Okay. Sorry. I’m just, I’m seeing more questions popping up. So just scrolling, scrolling, scrolling some of these advertising. Okay. Tony, thanks for advertising your service, whatever. Okay. So, we are dual citizens residing in Australia. Would assets still in the US okay.
Yeah, you send this to me twice, so I hope my response addressed your question. I’m switching to one of the other platforms now, just to see if anyone has been asking questions on that. So, switching. No questions on that. Okay. That’s great. I’m done.
Check one more just to see if anyone else has been asking questions. One that’s Paul, Paul was saying, yeah. Be careful about signing anything related to tax equalization. Yeah. Paula’s follows this stuff. Yeah, absolutely correct. Okay.
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