The eight million United States citizens who live abroad in any of 192 countries - including Australia - are finding that United States law requires them to file an American tax return that includes their world earnings - and that includes those who hold a "green card " entitling them to work in the United States.
This is not a new law but one that has been virtually ignored because the US lacked the ability to track overseas earnings by its citizens, and all that changed in 2010 when FATCA arrived on the legal books. FATCA stands for " Foreign Account Tax Compliance Act " and is now a legal requirement on world banks to divulge foreign earnings to US tax authorities. Any bank refusing to comply would be automatically cut off from trade with the American banking system.
What daunts many Americans living abroad is the complexity of the US tax legislation. It runs to 74,608 pages compared to its Australian counterpart - which is a modest 3657 pages. There is also a glaring anomaly in how the US tax law relates to the Superannuation requirements in the Australian tax system, resulting in many Americans suffering double taxation.
We are now seeing a steady stream of US citizens living abroad relinquishing their American citizenship simply because it is now uneconomical to retain it, and that includes those who managed to hold joint citizenship in both countries - but even that has problems. The US is one of only two world countries that insists on levying tax on the world earnings of its citizens - and it does not retreat from that stance lightly.
It seems reasonable that any citizen living permanently abroad would seriously consider citizenship in that country but the 1996 Reed Act imposes a penalty. It states that if any citizen relinquishes citizenship " primarily for the purpose of avoiding tax " that person will be permanently refused reentry to the United States for the duration of their life.
Along with paedophiles, terrorists and known criminals, those who insist on paying tax only where the money is earned are consigned to criminal class and will not be allowed to visit relatives or friends in the US - permanently.
It is obvious that the Australian tax system is much more benevolent that the tax regime in the United States. Here winning a motza on a horse race or by winning the lottery is tax free. In the US, that win is added to your anual earnings - and you are taxed accordingly. As a result, few lotteries insist on a lump sum prize and usually pay on the basis on regular annual dividends over a period of years to spread the tax take.
Should a visiting American tourist have the good luck to win one of the regular Australian Lotto jackpot prizes of thirty million dollars at least half of that would be confiscated by the US tax system because it would be added to his or her yearling earnings when paid as a lump sum. Certainly a good reason to consider relinquishing citizenship, even though that may permanently close the entry shutters to their former homeland.
When we grizzle about the tax system we may be wise to do a few comparison tests with the rest of gthe world.
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