FBAR and Form 8938 in Australia
There are so many requirements placed on US citizens and Green Card Holders when it comes to US taxes. It can be hard to get your head around all the rules, so we’ve taken a look at one of the classic problem areas experienced by US tax residents in Australia.
FBAR – what is it?
When you hear people use the term “FBAR”, they’re talking about Foreign Bank Account Reports. The FBAR requirement is relatively simple, but we regularly see the rules being misunderstood. In fact, our experience in Australia shows that the FBAR requirement is a really common problem area. People often think – wrongly – that because they don’t pay US taxes, they don’t need to submit the FBAR. Failing to comply with the FBAR requirements adds unnecessary complications to your taxes.
FBAR doesn’t only apply to those living outside of the US: even if you’re in the US, if you have foreign bank accounts, you have to comply.
For both those living in and out of the US, the key figure is $10,000 USD: if the highest combined balance of your foreign bank accounts in any one year is over this amount, then you have a requirement to file an FBAR.
People often worry that by filing their FBAR, they’re generating a tax or other financial implications. The good news is that they do not! The FBAR is purely informational. Nevertheless, it is very, very important to file it.
What do I need to do?
To comply properly with your requirement, you need to:
Look at the combined balances of your foreign accounts.
If they’re over $10,000 USD at any one time, you must file.
Make sure you capture all the accounts that need to be captured – that’s all of the foreign accounts you hold.
It’s rare that a person with foreign bank accounts doesn’t need to file the FBAR.
Is it only bank accounts that I’ve got to look at?
No! This often takes people by surprise. The FBAR requirement applies to ‘accounts’, including those such as your superannuation account. People often think that, because this is not strictly speaking a ‘bank account’, they don’t need to consider their superannuation balance – this is wrong! It’s really important to include it when calculating the combined balance of your foreign accounts.
Other main accounts to look at are:
Loans associated with a mortgage – this includes, for example, mortgage offset accounts (accounts used to pay the loan each month), which are quite common in Australia. In effect, these accounts are glorified bank accounts, which therefore need to be reported.
Joint accounts held with a non-resident alien. It doesn’t matter that you’re not the only person with access to the balance; 100% of the balance needs to be reported.
Accounts over which you have signatory authority only. This is relatively rare, but we see it in cases where tax resident is a treasurer, has access to accounts for volunteer organisations, or is a signatory for small businesses (even those which aren’t your business). It’s common for people to think that all they have is the ability to transact, but it is not their money: nevertheless, these accounts are encompassed within the term ‘foreign bank accounts’ and must be filed as part of the FBAR requirement.
Accounts held by US tax resident parents, set up accounts for their kids: the money in these accounts belongs to the kids, but parents are the ones with authority to transact, so, you guessed it: they have to be included within the FBAR.
Zero balance accounts that you just haven’t got round to closing yet!
Let’s take a look at an example:
Imagine you have three accounts held outside of the US: your regular, every day bank account with a balance of $4,000 AUD; your savings account with a balance of $6,000 AUD; and your superannuation account with a balance of $20,000 AUD. Previously, you might have thought that your ‘bank accounts’ – that is, your regular bank account and your savings account – have a combined balance of $10,000 AUD, so they’re below the threshold to kick in the FBAR requirement. However, that would be wrong: as we’ve explained, the term ‘foreign bank accounts’ includes your superannuation account – once you include that balance, you are above the threshold for FBARs, so you have an obligation to file. This example shows the classic mistake we so often see, and one that can result in draconian penalties being imposed.
Is this another way of taxing me?
No. The FBAR isn’t an income tax form. As we explained, by filing it, it does not generate tax or other financial implications. The problem actually arises when you don’t file the FBAR.
FBARs are filed with the US Treasury. There is a degree of separation between the Treasury and the IRS. The IRS can get information from the Treasury department and it can access the FBARs. However, as the example above shows, the real exposure issue is when FBARs aren’t filed. A classic situation is when somebody moves from the US to Australia. That person has US citizenship by descent. They probably haven’t got much, if any, US tax liability. If they have unfiled FBARS, they can end up with a hefty penalty: penalties can be very severe – up to $10,000 USD.
There are amnesty programmes, but easiest way to avoid having to go through that is to file FBARs each year: the savings are worth it!
What about form 8938?
While FBAR is a separate filing obligation and goes to Treasury, form 8938 goes to the tax department. People call form 8938 the ‘super FBAR’. It’s attached to your tax return and lists all your foreign accounts. It makes sure that any income (dividends, income, etc.) from the accounts reported on your FBAR is declared on your tax return – verifying that you’re really reporting your worldwide income.
Is the requirement to file form 8938 automatic?
No. The threshold for form 8938 is much, much higher than FBAR. There are different ways of determining what your threshold is, which looks at your filing status (whether it’s single, MFJ, MFS, etc.), and where you live: whether that’s in or out of the US. For example, the threshold for married couple in the US is different for married couple outside US.
Some threshold examples:
- If you live outside of the US, the maximum – or aggregate – balance in your accounts needs to be much higher than that of someone living in the US. If you live outside the US and file jointly, the aggregate balance would be $600,000 USD at any time during the tax year, or $400,000 USD on December 31st. That balance means you’d have to file form 8938.
- A married couple living in Australia, filing jointly, would need a combined balance of $400,000 USD before they need to file form 8938.
- A married couple, where one of you is Australian, has a different threshold again. In that scenario, the balance needs to exceed $300,000 USD at any time, or to exceed $200,000 USD on December 31st. If those figures apply to you, the filing requirement exists.
While these figures might seem large, it is quite common for someone to have a balance of $200,000 USD in their superannuation account, or to have transactions of that amount during the year, for example, money relating to a house sale, receiving a gift or inheritance. Even if that balance is only in account for a week or two, you have to file.
What should I do?
- It’s very important to keep accurate records of balances you’ve had in your accounts.
- Make sure your bank statements are available.
- These will be looked at to make sure you comply with the requirements that apply to you when you file your tax return.
I’ve heard about people getting letters from Australian banks, asking about your US tax status – what is this?
Financial institutions have an obligation to ascertain whether you are a US tax resident and, if so, to obtain your social security number. This information is provided to the Australian Tax Office, who supplies it to the US Treasury.
It’s a relatively new development, and arose because of new legislation (FATCA). That means that financial institutions must gather this information in order to avoid having a 30% withholding tax on their US transactions. Australia deals with this by simply asking new customers the question in the standard questionnaire.
We’ll be seeing much more of these types of letters, as from January 2020 onwards, banks around the world need to ask or risk paying financial penalties.