For US citizens residing in Australia, tax compliance can involve certain filings, especially when foreign trusts and corporate trustees are involved. In the case of Australian trusts, US citizens may need to file forms such as Form 3520, Form 3520-A, and Form 5471.
Below, we’ll walk through these requirements using the example of Tom, his wife Lisa, and their son Jack, including a surprising filing requirement for Jack.
Key IRS Forms: An Overview
- Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts: Reports contributions to, ownership of, or distributions from a foreign trust.
- Form 3520-A – Annual Information Return of Foreign Trust With a US Owner: Provides the IRS with detailed financial information about the foreign trust.
- Form 5471 – Information Return of US Persons With Respect to Certain Foreign Corporations: Required when a US person has an interest or control in a foreign corporation, which may include corporate trustees.
Example Scenario: Tom, Lisa, and Jack’s Family Trust
Meet Tom, an Australian-US dual citizen who resides in Australia. Although he’s never lived in the US, his citizenship by birth requires him to meet US tax obligations. Tom has set up a family trust in Australia to support his family, appointing an Australian corporate trustee to manage the assets. The beneficiaries of the trust are his wife Lisa, who is an Australian citizen, and their son Jack, who, like Tom, holds US citizenship due to Tom’s status. The trust distributes income to Lisa and Jack. While Lisa isn’t subject to US tax obligations, both Tom and Jack must report their interests to the IRS.
Tom’s Filing Requirements
- Form 3520 – Reporting the Trust: As the grantor of the family trust, Tom must file Form 3520 each year. This form reports his relationship to the trust, including contributions, trust income, and any distributions.
- Form 3520-A – Reporting Trust Finances: Tom must also ensure the trust files Form 3520-A annually. This form details the trust’s financial information, including income, distributions, and assets. If the corporate trustee does not file it, Tom may face penalties and will need to attach this information to his US tax return.
- Form 5471 – Reporting the Corporate Trustee: Since Tom’s family trust is managed by an Australian corporation, he must file Form 5471 to report his interest in the corporate trustee. This form includes information on ownership structure, financial activity, and Tom’s relationship to the trustee, even if the corporation exists solely to manage the trust.
The Unexpected Twist: Jack’s Filing Requirement
While Tom is prepared for these filing requirements, Jack, his adult son and a US-Australian dual citizen, encounters an unexpected obligation. Because Jack receives distributions from a foreign trust, he too must file Form 3520 to report the distribution amounts received each year—even if he isn’t involved in managing the trust. This means Jack will need to report his share of the trust income to the IRS, adding a layer of complexity to his own tax obligations. Compliance Tips for US Citizens with Australian Family Trusts For US citizens like Tom and Jack, managing compliance for Australian trusts can be challenging. Here are a few practical steps:
- Coordinate with Trustees: Australian trustees may be unfamiliar with US filing requirements, so working with a cross-border tax advisor can help ensure accurate filings.
- File Forms Timely: Form 3520 is due on April 15, while Form 3520-A is due by March 15. Form 5471 is due with Tom’s annual tax return.
- Seek Professional Guidance: Given the complexity of cross-border tax obligations, consulting a tax advisor with expertise in international reporting is highly recommended.
Conclusion
For US citizens residing in Australia with family trusts, compliance with IRS requirements involves understanding and filing Forms 3520, 3520-A, and, where applicable, Form 5471. This example illustrates that both grantors and beneficiaries of foreign trusts may have unexpected reporting obligations, highlighting the importance of staying informed and seeking professional guidance to navigate these requirements effectively. If you would like to discuss your US tax position with us contact us today.
