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Mail Bag #3 – W8-Ben/RRSP/Selling Personal Residence/Retirement Distributions/Incorporating Abroad/Job offer in the U.S.

1. Capital Gains/W8-BEN/1040NR

I work for an Australian Stockbroker and we provide access to US markets for our clients via our US entity. One of our clients was charged a non-resident withholding tax (“NRWT”) at the rate of 28% on a sale transaction valued at approximately USD 132,000. Consequently approximately USD 37,000 was deducted in NRWT.

The clients W-8BEN form that had been provided by the client in September 2012 was voided by the US broker in early 2013 and the Australian entity had not become aware of this. We understand that had a valid W-8BEN form been in place at the time of the sale, the treaty rate of 15% (approximately USD 20,000) would have been applied to the NRWT rather than 28%.

Our client is a trustee of a superannuation account in the pension phase (I believe this is similar to 401(k) plans in the US).Under Australian taxation law, such entities do not pay tax. We are not sure whether the 15% treaty rate should apply or zero. Could you please confirm? Additionally, we are puzzled as to why the NRWT was applied to the whole of the sale proceeds instead of the profit on the transactions (i.e. the difference between the purchase and sale prices). Could you please confirm?

The capital gain from disposition of US stocks is exempt from US tax for nonresident aliens. If a correct form W8-BEN was filed, the entire amount of sale proceeds would be tax exempt, not on the net gain.

In order to get a refund, the account holder has to file a US tax return and claim the excess of tax withheld. Now – if the taxpayer is a US person (which the US brokerage does not know without the form W8-BEN), then the taxpayer would report the cost basis (i.e – purchase price of the securities) to the IRS and pay tax only on net proceeds, getting the refund for the excess.

If the taxpayer is a non-US person then they can claim treaty benefits directly on their non-resident US tax return form 1040NR and receive a full refund of tax withheld on capital gains. In either scenario, we can assist.

Regarding the superannuation account: it does not matter whether the funds were included in the Superannuation portfolio (which, by the way, is not identical to the US 401K) or if it was just an investment account.

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