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Remedy Sought for Taxation of Retirement Funds in Australia

AUG. 26, 2016

Remedy Sought for Taxation of Retirement Funds in Australia

DATED AUG. 26, 2016
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Friday, 26 August 2016

 

 

Mr Mark J. Mazur

 

Assistant Secretary for Tax Policy

 

U.S. Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, D.C. 20220

 

UNITED STATES OF AMERICA

 

 

Dear Assistant Secretary Mazur,

Thank you again for addressing our group from the Asia-Pacific Council of American Chambers of Commerce (APCAC) when we came through Washington in late June for our annual "Doorknock". We all appreciated your candor and willingness to discuss the many tax issues -- our desire for a territorial tax system, our problems with FATCA and the FBAR filing requirement, etc. -- that are of interest and concern to the members of our Chambers across the region.

Obviously, our interest is in seeing the best possible tax arrangements put into place to support American businesses in their mission to create and support American jobs and prosperity through trade and investment in this region.

You might recall my somewhat parochial question about the bilateral tax agreement between the US and Australia. I noted that while there is a hold on, and resultant backlog in, Senate ratifications of pending bilateral tax treaties, we in Australia are still quite interested in joining the queue for a renegotiation and updating of our bilateral agreement. You kindly suggested that I write you separately, hence this letter.

I also enclose a copy of a recent letter from US Ambassador to Australia John Berry to Secretary Lew on this subject. We have shared our concerns with the US Embassy in Canberra and were gratified to see him respond with support for our proposal to prioritize a new negotiation with Australia.

I am writing now to further make the case for that renegotiation. Our view is that, in approaching this matter, we should avoid "making the perfect the enemy of the good." We have the possibility to "tweak" some uncontroversial matters in the existing agreement, and thereby remove an onerous but potentially avoidable tax burden on the many US expats who hold Australian thrift savings accounts (called "Superannuation" here), and whose savings are now being taxed by the IRS. For us, it is preferable to fix what can be fixed without getting mired into a deep and potentially protracted negotiation over every other issue that might be addressed in the renegotiation of the bilateral agreement.

The solution we seek is simple. If we adopted the language and approach in the model US tax treaty that has been on the table in various forms since 2006, we would solve this particular problem and create relief for thousands of such taxpayers. Many of them are retirees living on modest, fixed incomes. Others who are still working are generally compensated for these additional taxes by their employers, thereby inadvertently reducing the competitiveness of American employees here as compared to other nationalities who do not face this issue. This situation imposes an additional undue burden on US companies operating in Australia, driving up their costs of doing business.

Indeed, we at AmCham Australia -- but also at the American and Australian Embassies in Canberra and Washington -- hear regularly from those expats affected by the failure to address this matter. Australia is a major export market for the US, a country with which we have enjoyed consistent trade surpluses. Having Americans in key positions helps sustain this favourable situation, as American managers tend to favor imports from the United States over other sources. For the large community of American citizens retired here, many of them are quite anguished by the situation and put into hardship by the additional taxes required of them. While this group are not AmCham members, we feel a moral obligation to advocate for them as part of this discussion.

Mr. Mazur, we will continue to visit Washington regularly, and continue to seek an early resolution of this issue whenever we visit. In the past, we have been kindly received by Mr. Henry Louie and/or members of his team. We are sympathetic to the resource constraints which force them to be so selective in deciding which negotiations to prioritize. That said, we feel a bit as though our easily resolved situation in Australia will never even be considered because there will always be something bigger to solve. In this case, and for the good of the many US businesses and citizens implicated, we are arguing for an exception, one that would allow an easy remedy to go forward now.

Yours sincerely,

 

 

Niels Marquardt

 

U.S. Ambassador (ret.),

 

Chief Executive Officer

 

American Chamber of Commerce in

 

Australia

 

Sydney, Australia

 

* * * * *

 

 

The Honorable Jacob Lew

 

Secretary of the Treasury

 

U.S. Department of Treasury

 

Washington D.C.

 

 

Dear Mr. Secretary:

As I look toward the end of the administration next year, I am on the lookout for issues where we still have time to make a positive difference for American citizens, workers, and our business community. One such issue is the bilateral income tax treaty agreement between Australia and the United States. It was last revised 15 years ago and now features one unfortunate but fixable provision that I am calling to your attention.

Australia, as you know, is a great friend and ally, and one of the best places on the planet for Americans to live, work, and do business. My view is that we should prioritize improvements in the business climate between our two countries to recognize and further build up this awesome relationship. To do that, I also believe that we should work to achieve state-of-the-art economic architecture joining our two countries. With AUSFTA (and, soon, the TPP), our bilateral investment agreement, and other economic and information-sharing agreements in place, we have almost achieved that goal. The exception is our bilateral income tax treaty agreement.

The main shortcoming of the agreement is that it does not address the treatment of Australian retirement plans -- called "Superannuation" here -- which results in employer contributions (and the future unrealized gains on these contributions) made to Superannuation funds being subject to US income tax in the hands of the individual taxpayers. This tax treatment raises the cost of doing business for American (and Australian) companies since, in many instances, the companies are the ones who incur this extra cost on behalf of the employee. I also hear regularly from both Americans and Australians who are very upset to see their retirement savings taxed by the IRS before they even have access to the Superannuation monies.

A simple solution that the two governments agree that contributions to retirement plans should not be taxed by either country will require both our administrations to agree to renegotiate the bilateral income tax agreement to exclude Superannuation from US income tax. Indeed, the US Treasury since 2006 offers a model treaty to our negotiating partners that excludes retirement plans like Australia's Superannuation from taxation -- just the outcome we seek to achieve.

There may well be other items on which the two sides would agree if they met to renegotiate the 2001 agreement, but this issue has the advantage of being uncontroversial to either side; we should avoid letting "the perfect be the enemy of the good" in this matter. If we could fix just this one issue in our agreement, that would constitute a major improvement for a number of citizens and companies in both countries.

I am therefore writing to ask you to consider making the renegotiation of the US-Australian bilateral income tax agreement a priority for the remainder of this administration, with the focus on this one issue. If other issues can be resolved or other improvements can be achieved through this renegotiation, so much the better. But this is clearly one piece of low-hanging fruit that I believe would be worthy of our attention during the coming year.

Sincerely,

 

 

John Berry

 

Ambassador of The United States of

 

America

 

Washington, DC
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