I write this with an understanding that the ATO cannot provide advice on US tax law, but note that the ATO is the competent authority on the Australian side both for the Totalization Agreement and the Income Tax Treaty with the United States.
I am keen to understand whether you can advise if the topic of the United States’ Net Investment Income Tax has been discussed and whether a mutually agreed position has been reached between the ATO and the IRS on the Net Investment Income Tax issue.
For context, I am a dual US - Australian citizen who has been living in Australia for 5+ years and am considering taking a position that the Net Investment Income Tax is a Social Security related payment that’s covered by the Australian Totalization Agreement by properly disclosing it on the IRS Form 8833.
I appreciate that there is insufficient guidance as to whether this tax is a social security tax covered under a Totalization Agreement or an Income Tax to which regular foreign tax credits apply. While the IRS clearly holds one stance, Tax Courts note that it comes down to a treaty-by-treaty analysis and what the other country (i.e. Australia) deems is appropriate. For this reason, the IRS often stand down from their position during the appeal process when persons make a treaty based claim that is covered by the Totalisation Agreement.
One of the main arguments for not paying NIIT (taking a position that it should be considered a Social Security Tax) is the following:
- For the USA, the totalisation agreement covers Social Security contributions (including the U.S. Medicare portion) and Social Security retirement, disability and survivors insurance benefits
- The Totalisation Agreement provide that persons who are subject to the social security legislation in a Treaty country (such as Australia) are therefore exempt from U.S. Social Security taxation
- While NIIT falls under Chapter 2A and the Foreign Tax Credits (FTC) only covers items under Chapter 1, NIIT is a Social Security related payment that is designed to pay for an expanded Medicare, where in this stature, it is called a 'Medicare contribution" that supports the healthcare system in the United States
- Since NIIT is considered a Social Security related payment, U.S. citizen expatriates covered under the social security legislation in a Treaty country (such as Australia) would be exempt from the NIIT
- While the Totalisation Agreement came into force in 2002 (prior to NIIT), the agreement states that it also applies to future laws which amend or supplement the laws in scope of the agreement; those being covered under Chapters 2 (self-employment tax) and 21 (FICA tax) of the IRC
- The Totalisation Agreement is designed to ensure that people are NOT required to pay Social Security ("type") taxes twice
Few additional links on the matter:
- https://www.castroandco.com/blog/2019/february/the-net-investment-income-tax-is-eliminated-by-t/
- https://www.thetaxadviser.com/issues/2014/apr/nightingale-april2014.html
- http://citizenshipsolutions.ca/2016/08/18/does-article-22-the-u-s-australia-tax-treaty-require-the-united-states-to-allow-u-s-citizens-a-foreign-tax-credit-against-the-3-8-obamacare-surtax/
Could you please advise?
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