Navigating the US Australia Tax Treaty as an American Expat

Mar 30, 2023

The US-Australia tax treaty has a significant impact on Americans living in Australia as it is designed to prevent double taxation and encourage cross-border investment and trade. The treaty provides important guidance on how their income will be taxed and how they can avoid paying taxes twice on the same income. Understanding the provisions of the US-Australia Tax Treaty is essential for US expats to properly plan their finances and minimize their tax liabilities. In this article, we will explore the key provisions of the treaty and how they affect US expats in Australia.

Do I have to pay US taxes if I live in Australia?

Most likely not, however, US citizens who are living in Australia are still required to file a US expat tax return with the Internal Revenue Service (IRS) each year, as long as they meet certain income and filing requirements. This is because the United States taxes its citizens on their worldwide income, regardless of where they live or work.

In addition to filing a US expat tax return, US citizens living in Australia may also need to report their foreign bank accounts and assets to the US government by filing the appropriate forms, such as the FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act) reporting requirements.

How can I avoid double tax in Australia?

One option is to take advantage of the foreign earned income exclusion (FEIE), which allows US expats to exclude up to a certain amount of their foreign earned income from US taxation. As of 2022, the maximum exclusion amount is $112,000 per year. This means that if you earn less than this amount in Australia, you may not have to pay any US income tax on that income. You simply exclude all of your foreign earned income from your taxable income on form 2555.

Another option is to claim a foreign tax credit (FTC) for the Australian taxes you paid. The FTC allows US expats to offset their US tax liability by the amount of taxes they have already paid to a foreign government on the same income. This means that if you have already paid taxes on your Australian income, you can use those taxes to reduce your US tax bill. Since Australian taxes are higher than what you would pay in the U.S., most of our clients don’t pay anything at all. 

What is the tax treaty between US and Australia?

The Australia-US tax treaty is a formal bilateral agreement that regulates taxation between the two countries. The treaty helps to allocate taxing rights and tax rules between two countries over different categories of income. The principal purposes of the treaty are to provide double taxation relief, deter evasion of taxes, and ensure fair tax treatment for individuals and businesses. The tax exemption and reduction, as well as other benefits provided by the treaty, are available only to a resident of one or both treaty countries.

The US-Australia tax treaty provides relief from Double Taxation

The treaty helps to ensure that Americans living in Australia are not subject to double taxation. This means that if an American earns income in Australia, they will only pay taxes on that income in Australia and will not be taxed on the same income by the US government as well.

Relief from Double Taxation
(1) Subject to paragraph (4) and in accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), in the case of the United States, double taxation shall be avoided as follows:
(a) the United States shall allow to a resident or citizen of the United States as a credit against United States tax the appropriate amount of income tax paid to Australia; and
(b) in the case of a United States corporation owning at least 10 percent of the voting stock of a company which is a resident of Australia from which it receives dividends in any taxable year, the United States shall also allow as a credit against United States tax the appropriate amount of income tax paid to Australia by that company with respect to the profits out of which such dividends are paid.

This article provides rules for determining which country has the primary right to tax specific types of income and ensures that Americans living in Australia are not taxed twice on the same income by both countries.

Article 22 also provides a mechanism for resolving disputes between the two countries over the application of the rules. This helps to ensure that any issues related to double taxation can be resolved in a timely and efficient manner.

Residence Rules Under the Australian-U.S. Tax Treaty

The US and Australia have an agreement about how they will tax people and companies that do business in both countries. This agreement says that if you live in Australia, you will be taxed there, and if you live in the US, you will be taxed there. But if you live in both countries, there are rules about which country will tax you. The rules say that you will be taxed in the country where you have your permanent home or where your personal and economic relationships are closer. This agreement helps people and companies know how much tax they will have to pay and in which country.

(2) Where by application of paragraph (1) an individual is a resident of both Contracting States, he shall be deemed to be a resident of the State:
(a) in which he maintain his permanent home;
(b) if the provisions of sub-paragraph (a) do not apply, in which he has an habitual abode if he has his permanent home in both Contracting States or in neither of the Contracting States; or
(c) if the provisions of sub-paragraphs (a) and (b) do not apply, with which his personal and economic relations are closer if he has an habitual abode in both Contracting States or in neither of the Contracting States

What is the tie-breaker rule under the US-Australia tax treaty?

The tie-breaker rule is used when an individual is considered a resident of both countries for tax purposes. In the case of dual residents, the tie-breaker rule provides a set of criteria to determine which country should be considered the individual’s country of residence for tax purposes.

Article 4 lays down the guidelines for determining the residency status of an individual, which are as follows:

  • First rule – If you have a permanent home in one country of residence, then you will be considered a resident of that country.
  • Second rule – If you have a habitual abode in one contracting state, you will be a resident of that state, which is where you spend most of your time during the tax year.
  • Third rule – If you have a permanent home in both countries of residence or in neither, and you have a habitual abode in both countries or neither, then you will be a resident of the contracting state with which you have closer personal and economic relations. An Australian person for tax purposes is someone who is an Australian resident for taxation purposes under Australian law.

To determine if you’re an Australian resident for tax purposes, refer to International tax for individuals. Figuring out where someone is officially considered a resident can be challenging, but generally, the country where an individual earns taxable income and has their day-to-day life is deemed their country of residence.

Taxation of Real Property Income under the Australian-U.S. Tax Treaty

The Australian-U.S. Tax Treaty states that income from real property may be taxed by the country where the property is located. For example, if an Australian resident earns income from real property in the U.S., the U.S. can tax them. The same applies if an Australian resident earns income from real property in Australia while living in the U.S. However, if a U.S. person earns income from property in Australia, they may be taxed by both countries but can use a Foreign Tax Credit to avoid double taxation.

Understanding Dividend Income and Taxation

Dividends paid to a resident of one contracting state by a company in the other contracting state may be taxed by both contracting states. However, the tax charged by the state of the company paying the dividends is subject to limitations based on the percentage of voting power held by the recipient company. Exceptions and limitations apply, and the contracting states must consult each other if relevant laws change.

Taxation of Interest Income for Residents of Contracting States

Interest Income

(1) Interest arising in one of the Contracting States, being interest to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State.

(2) However, that interest may also be taxed in the Contracting State in which it arises, and according to the law of that State, but the tax so charged shall not exceed 10 percent of the gross amount of the interest.

If an Australian resident earns interest income from Australian financial institutions but is a resident of the U.S., the U.S. may tax the income, but Australia is not prevented from taxing the same income, subject to limitations. There are also exceptions, such as when a person has a permanent establishment in the other Contracting State or performs independent personal services.

Pensions, annuities, alimony, and child support provisions and how are they taxed under US-Australia tax treaty

Article 18, Paragraph 1 explains that pensions and similar remuneration paid to an individual resident of one of the Contracting States for past employment shall only be taxable in that State, except for government pensions.

Article 18, Paragraph 2 states that social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State shall only be taxable in the first-mentioned State.

Article 18, Paragraph 3 explains that annuities paid to an individual who is a resident of one of the Contracting States shall only be taxable in that State.

However, the tax treatment of superannuation is not explicitly covered in the treaty, which has caused some controversy and debate. Some argue that it is similar to social security and not taxable in the US, while others argue that it should be treated as a pension or trust and taxed accordingly. Given the complexity and lack of good guidance in the area, you should work with your tax advisor to determine the proper tax treatment.

US Taxation of Australian Superannuation Funds

As a general rule, US citizens and resident aliens who have a superannuation account in Australia are required to report their account on their US tax return, regardless of the amount contributed or earned. This reporting obligation applies even if the taxpayer does not receive any distributions from the account during the tax year.

US expats with a superannuation account may also be required to file additional forms with their US tax return, such as Form 8938 (Statement of Specified Foreign Financial Assets) or Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts).

If an employee contributes more than their employer to their superannuation account, the excess contributions may be subject to additional taxes and penalties in both Australia and the United States.

What is the Saving Clause?

The Savings Clause is a part of the US-Australia treaty that says the United States can still tax its citizens and residents, even if they live in Australia and earn money there. This means that if you are a US citizen living in Australia and you earn income, you still have to pay taxes to the United States on that income.

The Savings Clause is in place to make sure that the United States can still collect taxes from its citizens and residents, even if they live in another country. It’s important to understand this clause and seek professional tax advice to ensure compliance with both US and Australian tax laws.

However, certain provisions of the treaty are not affected by the Saving Clause:

  • Pensions, Annuities, Alimony and Child Support (Article 18, paragraphs 2 and 6)
  • Relief from Double Taxation (Article 22)
  • Non-Discrimination (Article 23)
  • Mutual Agreement Procedure (Article 24)
  • Miscellaneous (Article 27, paragraph 1)
  • Individuals who are not citizens, nor have immigrant status (in the case of the US), or individuals who are not ordinary residents in the contracting state (in the case of Australia).

Australian Citizens Living In the United States And Taxation On Australian Source Income

Non-Australian residents are required to report and pay Australian taxes solely on the income earned within Australia. Your Australian source income may include:

  • employment income
  • rental income
  • Australian pensions and annuities, unless an exemption is available under Australian tax law or a tax treaty
  • capital gains on Australian assets.

You generally don’t need to declare income you receive from outside Australia in your Australian tax return. But keep in mind – if you possess a Higher Education Loan Program (HELP), Trade Support Loan (TSL) or VET Student Loan (VSL) debt, you might have to declare your worldwide income.

If you are a foreign resident, you also don’t need to declare any interest, dividends, or royalties obtained from Australian sources, as long as the Australian company that pays you has already withheld tax.

As discussed above, due to the savings clause, this benefit might not be available to US citizens.

The US Australia Totalization Agreement and self-employed US Expats

The US-Australia Totalization Agreement is a social security agreement between the United States and Australia that coordinates social security coverage and benefits for workers who have lived or worked in both countries.

For self-employed US expats who are subject to both US and Australian social security taxes, the totalization agreement can help them avoid double taxation and ensure that they receive the social security benefits to which they are entitled. It is important to note that the totalization agreement only applies to social security taxes and benefits, and does not affect the tax treatment of other types of income, such as wages or investment income.

U.S. Taxes For American Expats E-book

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