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The Savings Clause

What is the Savings Clause?

Another question that we are frequently asked, is “what is the savings clause?”. While most people are aware that the US has a double taxation treaty (DTA) in place between both Australia and New Zealand, few people are aware that there is a specific clause in each treaty which essentially means it can be disregarded.

This comes as a shock to many, and case law has proved that the IRS are able to use this to disregard the treaty provisions.

This is the savings clause.

While the DTAs in place between the US and many countries are designed to avoid double taxation of citizens of either state, the US has retained its right to tax its citizens.

The offending clause is as follows:

US - Australia Treaty:

Article 1(3)

Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a

Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals

electing under its domestic law to be taxed as residents of that state, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term "citizen" shall, with respect to United States source income according to United States law relating to United States tax, include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.

Then, in the US – New Zealand Treaty, an almost identical section exists:

 Article 1(3)

Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and the United States may tax its citizens and United States companies, as if the Convention had not come into effect. For this purpose, the term “citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.

 So, now we know what the “Savings Clause” is, the question to ask is now of your US accountant. Do they know how to apply this correctly on your tax return? If not, call us today for prompt, friendly assistance.