PFICs for Australian Expats: What Aussies in the US Need to Know

If you’re an Australian Expat living in the United States (US), understanding the intricacies of the US tax system is essential, especially when it comes to your investments back home. One area that often catches Australians off guard is the issue of Passive Foreign Investment Companies (PFICs). PFICs are a US designation, referring to certain passive investments held outside the US (i.e. foreign) by a US tax resident. These investments, while common in Australia, are treated very differently under US tax law.

What Australian Expats in the US need to know about PFICs is that these types of investments, including popular Australian mutual funds or ETFs, can lead to complicated tax filings and significant financial penalties if not handled properly. This guide breaks down PFICs for Australian Expats.

What Is a PFIC?

A PFIC, or Passive Foreign Investment Company, is any non-US corporation that meets one of the following conditions:

1. Income Test: 75% or more of its gross income is considered “passive” (e.g., interest, dividends, capital gains). 

2. Asset Test: At least 50% of its assets produce or are held to produce passive income.

Common examples of PFICs for Australian Expats include:

• Australian mutual funds (managed funds); 

• Exchange-traded funds (ETFs) listed on the ASX; 

• Stapled Securities listed on the ASX; and   

• Investment trusts and insurance bonds.

  
  

While these investments are efficient and popular in Australia, they can become tax liabilities under US law due to their classification as PFICs.

Why PFICs are a problem for US Tax Residents

The United States taxes its residents on worldwide income, and PFICs are subject to highly punitive tax treatment if not handled correctly. Here’s what happens if a PFIC is not reported correctly:

Excess Distribution Rule: If you sell a PFIC or receive “excess” distributions, the gains are taxed at the highest marginal rate, not your regular tax rate.

Interest Charges: On top of that, the IRS applies interest charges on the tax due, as if the gains had been earned evenly over each year you held the investment.

Form 8621: Every PFIC must be reported on Form 8621 each year, a complicated and time-consuming disclosure. A US tax Accountant may charge in the range of USD 250 – 350 per PFIC held. Even if no income is distributed, just owning a PFIC usually triggers the filing requirement.

Common Pitfalls for Australian Expats

Many Australians unknowingly fall into PFIC-related trouble. Some typical scenarios include:

• Continuing to hold Australian mutual funds or ETFs after relocating to the US;

• Investing through Australian platforms or robo-advisers that allocate to non-US ETFs; and

• Assuming Australian investments are treated the same by the IRS as by the ATO.

  
  

These seemingly innocent investment choices can lead to IRS scrutiny and higher tax bills if not properly addressed.

Strategies to avoid PFIC Tax Issues

Here are some ways to avoid the most common PFIC traps:

1. Avoid Australian Managed Funds and ETFs: Choose investments that do not meet the definition of a PFIC. While this excludes Australian managed funds and ETFs, there are alternative options in Australia that you can invest in while remaining tax compliant in the US. These include direct shares, US-listed ETFs, or US-domiciled ETFs, which can be accessed through many Australian platforms.

2. Work with a Cross-Border Financial Adviser: US-Australia tax issues are highly specialised. An Australian Expat Financial Adviser experienced in the tax laws faced by Australian Expats can help you structure your investments to minimise PFIC exposure.

3. Explore Mark-to-Market or QEF Elections: If you're already invested in a PFIC, you may be able to make special elections (via Form 8621) to treat gains more favourably. These elections must be made early and have strict criteria.

4. Review Superannuation Accounts: Depending on how your Australian superannuation fund is reported in your US tax return, the underlying investments held in your super fund could also be treated as PFICS. It is therefore encouraged to seek advice on your Australian super investments.

Learn more about Australian Expat Superannuation. 

Conclusion

PFICs for Australian Expats are one of the most complex and punitive areas of the US tax code, and unfortunately, many Australian Expats find themselves caught off guard. What’s perfectly normal and tax-efficient in Australia can turn into a costly trap in the US.

The key for Australian Expats is awareness and proactive planning. If you’re planning to move to the US or have already, review your investment portfolio now. Identify potential PFICs, understand the reporting requirements, and work with a knowledgeable Financial and Tax professional who understands both Australian and US tax systems. By getting ahead of these challenges, you can avoid costly tax problems and manage your finances with confidence.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the below link:

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General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.