In 2021 Tax Tips

The Australian Tax Office is notorious for being complex and confusing, especially if you’re not familiar with the country’s tax system. As an American living in Australia, it can be difficult to navigate your way through the complicated process of filing taxes. 

This blog post will break down all of the necessary steps so that you don’t have to worry about anything on April 30! 

Australia is an attractive country for U.S. ex-pats, with beautiful beaches, warm weather, and an English speaking, laid-back culture. With a residency system based on points and around 20% of the population born outside the country, it is a relatively accessible country for those with the desired education and skills.

But, when it is time for filing annual tax returns, don’t forget the country from which you came – they haven’t forgotten about you. This article will aid you in understanding your American ex-pat tax obligations while you live in Australia.

U.S. Expat Taxes – Australia

U.S. citizens and permanent residents are required to file expatriate tax returns with the government every year regardless of where they reside. 

Along with the typical tax return for income, many people are also required to submit a return disclosing assets held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).

The United States is among a few governments that international tax income earned by their citizens and permanent residents residing overseas. 

There are, however, some provisions that help protect from possible double taxation. Provisions include:

  • The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 104,100 (this amount is for 2018 taxes) in earned income from foreign sources.
  • A tax credit allows a tax on remaining income to be reduced based on the taxes paid to foreign governments.
  • An exclusion on foreign housing allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.

Following proper tax planning, preparing a quality tax return should allow one to use these and other strategies to minimize or possibly eliminate tax liability. Note that in most cases, filing a tax return is required, even if taxes are not owed.

Tax Rates for Australia

The Australian Tax Office (ATO) is the equivalent of the Internal Revenue Service and is the primary tax collection agency in Australia. To file taxes, you must first get a Tax File Number (TFN), similar to the Social Security Number in the United States. Like a Social Security number, it is unique to you and must be safeguarded to reduce the chance of identity theft. 

This number is assigned for life. People without a Tax File Number will have taxes withheld on both wage income and investment income. Temporary residents can obtain TFNs as well if they need to do so for tax reasons.

Joint returns are not allowed for married couples, but they must declare the other spouse on their tax filing.

As does the United States, Australia has a progressive tax system. Progressive tax systems increase the rate of taxation as income increases. Note that Australian tax rates are different for non-residents than for residents. 

And, the residency definition for tax reasons may be different than for basic residency. But, generally, you are considered an Australian resident when you are there and live there permanently. 

Once you have worked and lived in Australia continually for more than six months and continue to live there, you are considered a resident until you prove otherwise. 

There is additionally a Medicare tax of 2%. There is also a surcharge for people who don’t have adequate health insurance.

The temporary budget repair levy ceased applying from July 1 2017.

Tax rates for those who are not considered residents for tax reasons are below. In general, those with earned income in Australia who are not residents are classified as foreign residents.

Tax on Non-Residents Income
AUD 0.325 per dollar AUD 0 – AUD 90,000
AUD 29,250 + AUD 0.37 per dollar above AUD 87,000 AUD 90,001 – AUD 180,000
AUD 62,550 + AUD 0.45 per dollar above AUD 180,000 Over AUD 180,001

Non-residents are not required to pay Medicare taxes but also can’t claim Medicare benefits. 

The temporary budget repair levy ceased applying from July 1 2017.

Interest on bank accounts is not included as income, but the bank must have a foreign address on file to avoid required withholding.

Who Qualifies as a Resident of Australia?

As mentioned above, residency for taxes is different from residency for citizenship or immigration purposes. Therefore, meeting any of these criteria determines one to be an Australian resident for tax reasons.

  • Having always resided in Australia
  • I have moved into Australia permanently.
  • Having lived in Australia over half the tax year (except if your normal home is not in Australia, and there is no intention to live within Australia permanently)
  • Having lived in Australia for at least six months (continuously), living in a single place, and having a single job

Regardless of residency, income from Australian sources requires a person to file taxes with the Australian Tax Office.

Which Tax Status is Better?

Both non-residency and residency have benefits and drawbacks.

Non-Resident Resident
Higher taxes Lower taxes
Tax is only on Australian income Tax is on all income worldwide
No Medicare tax, but also no benefits Pays Medicare tax, but also has benefits
Bank interest is taxed at 10% Bank interest taxed at regular rates
Capital gains are taxed based on gains in ‘real property, but the bond and stock gains are not taxed. Capital gains are taxed

When Are Australian Taxes Due?

You are required to file (or “lodge” as it is known in Australia) your Australian return by October 31. If you use registered tax agents, you have to register as one of their clients by that same date. Once you are registered, you get an extension until June 5 of the next year. The Australian financial year is from July 1 through June 30.

Australian Social Security

Accounting-bill

Australia has a three-pillar pension system. The first pillar (Public Pensions) is comprised of a tax-financed Age Pension (state pension), which provides basic benefits (similar to social security) for men and women (age 65 and above). In addition to the Age Pension, the government established the Future Fund, financed by budget surpluses and the privatization of Telstra (telecommunications firm). The Future Fund was created to satisfy unfunded public sector superannuation liabilities.

The second pillar (Occupational Pensions) is a superannuation fund system financed by compulsory contributions from all employees aged 17 and 70. Although this defined contribution system requires a minimum contribution to a superannuation fund, employees may make voluntary contributions.

The third pillar (Personal Pensions) consists of retirement savings accounts (RSAs), which operate under the same tax rules as superannuation accounts. RSAs are low-cost pension schemes offered by deposit-taking institutions or life insurance companies.

Australian employees are not taxed for United States social security. Because of the Australia – U.S. tax treaty (called a Totalization Agreement), self-employed ex-pats in Australia can decide which system – either U.S. social security or the Australian system – they would rather contribute to. For the majority of Australian residents, participation in government-sponsored retirement plans is limited to superannuation described below.

Australian Superannuation

Superannuation is like a massive 401(k) program but mandatory. Contributions from employees are voluntary, although their employers are required to make a 9.5% contribution on base wages for employees making more than AUD 450 per month. 

Contributions by employees are deductible on their Australian taxes (allowable from July 1, 2017, subject to a cap of $25,000)-, although not on U.S. taxes. For 401(k)s, superannuation fund access is limited to retirement age people unless they fall into one of several special circumstances.

Does Australia Tax Foreign Income?

Non-residents do not need to report foreign earnings for purposes of Australian taxes. For example, temporary residents might need to report their earned income from foreign sources but not report investment or passive income earnings. Australian residents must report global income, but Australia provides some methods to avoid double taxation.

US-Australia Tax Treaty

The United States and Australia do have a tax treaty. The treaty defines terms used in the U.S. – Australia tax relationship and provides rules for deciding which country taxpayers are residents of. This is important mostly for people who are not sure about their residency. Most of the tax treaty is about property and commerce and includes provisions for granting rights to each of the governments to impose taxes on certain forms of income depending on the country from which the income was derived.

Article 22 in the tax treaty sets the rules about double taxation. The treaty has provisions that prevent double taxation on pensions, social security income, and income from annuities received by a resident while in their home country. For example, there may be tax relief for an Australian resident who lives in Australia but is a U.S. citizen on income from an Australian pension. In other examples, there may be taxes on Australian pensions.

Americans Who Are Self-Employed in Australia

For companies that have revenue under AUD 2 million, the tax rate is flat at 28.5%. These company taxes are required to be prepaid each quarter based on what is anticipated to be owed. Note that the corporation doesn’t necessarily need to have been incorporated within Australia to be classified as an Australian company. It only needs to conduct business within Australia and be owned or controlled by an Australian.

Just like in the U.S., different business structures have different tax responsibilities and legal obligations. For example, Australian businesses can be set up as partnerships, sole traders, companies, or trusts.

Australian GST

The GST (Goods & Services Tax) is a form of value-added tax applicable to almost all transactions involving goods & services, other than certain excluded items. The GST is flat at 10%. Business owners with over $75,000 of receipts have to register and collect goods & services taxes.

Tourists in Australia can get a refund for any GST they paid during the prior month if they present the items and receipts when leaving the country.

The U.S./Australia tax treaty summary

The U.S. has a tax treaty with Australia to define specific tax rules that apply between the countries. The main provisions cover how to prevent double-taxation and guide income taxes, capital gains taxes, and corporate tax. However, U.S. tax treaties have a Saving Clause, which effectively lets the U.S. tax its citizens as if the treaty never existed.

One final provision you should know is that the Australian government shares tax information on Americans living in Australia with the IRS. This includes tax returns and bank account info— which means if you fail to file your FBAR or FATCA reports (or if you file them incorrectly), you may be hit with fines and penalties. That’s why you must pick a U.S. tax preparer that understands the ins and outs of ex-pat taxes.

Five Key Expat Tax Principles

Principle #1 – Your Obligation Endures

Your U.S. Tax Filing Obligation Endures Even After Moving Abroad

Our first principle is of particular importance because U.S. ex-pats often mistakenly believe that their U.S. tax obligations cease to exist once they have moved abroad.

In fact, as a basic rule, U.S. citizens, even those residing outside the United States, are considered U.S. residents for tax purposes and are therefore subject to U.S. tax reporting on their worldwide income. 

Ex-pats must annually report all of their income to the IRS, just as they did before moving abroad, whether the income is a U.S. source or foreign source, and whether that foreign source is Australia (e.g., employment in Australia) or any other foreign country.

Principle #2 – New Filing Obligations

You’re Likely Subject to New Information Reporting Obligations

U.S. ex-pats who hold accounts or other assets overseas are subject to several specific filing requirements in informational forms. Some of these forms are submitted to the IRS as attachments to the personal income tax return (Form 1040), while others are submitted to other governmental departments. 

The failure to file any of these forms can result in severe civil penalties, such as a $10,000 penalty performed per year. Additionally, criminal penalties, including fines and incarceration, may apply in certain extreme cases if the reporting delinquency is shown to be willful.

Some of the more common forms include:

  • Foreign Bank and Financial Account Report (FBAR)

The FBAR is not a tax form, and it is not filed with the IRS. Instead, it is an informational form that is submitted to the U.S. Treasury Department. A U.S. account holder (person or entity) with a financial interest in or signature authority over one or more foreign financial accounts, with more than $10,000 in aggregate value in a calendar year, must file the FBAR annually with the Treasury  Department.

  • Form 8938, Statement of Specified Foreign Financial Assets (FATCA Reporting)

Suppose you reside outside the U.S. and have a bank or investment account in a foreign financial institution. In that case, you are generally required to include FATCA Form 8938 with your U.S. federal income tax return if you meet certain monetary thresholds.

Principle #3 – New US Tax Considerations

Savings-calculator

Your Activities in Australia Have Important U.S. Tax Implications

With each item of income that an ex-pat earns and each foreign asset that is owned or acquired, special considerations need to be addressed. The following are examples of common activities in Australia and their potential U.S. tax implications.

  • The Australian Trust Entity

While the registered company remains a very common and well-understood entity for carrying on a business in Australia, the trust entity has become an increasingly popular business vehicle because it combines business advantages (e.g., asset protection and limitation of liability) and tax benefits (e.g., capital gains on the sale of assets may be eligible for 50 per cent discount). 

The two main types of trusts that are utilized in Australia are unit trusts (where beneficiaries have a fixed entitlement to income and capital based on the proportion of units they hold in the trust) and discretionary trusts (where the trustee has the discretion to distribute income and capital to one or more beneficiaries of the trust as the trustee sees fit).

For all the advantages that the trust entity offers under Australian law, the U.S. ex-pat should be aware that utilizing this type of entity may not necessarily be sound planning from a U.S. tax perspective. For instance, an entity characterized as a trust for Australian tax purposes can be classified as a business entity for U.S. tax purposes that is akin to a corporation if the trust operates a business. 

Such characterization under U.S. tax law may trigger the U.S. anti-deferral regimes, such as the “controlled foreign corporation” regime, the new “global intangible low-taxed income” regime, or the “passive foreign investment company” regime, all of which are generally designed to prevent taxpayers from deferring U.S. tax by shifting income to foreign entities. 

Careful planning is often needed to ensure that these regimes do not subject your income to highly punitive U.S. federal tax rates.

  • Australian Pension Plans

Foreign pension plans, including Australian pension plans, generally do not qualify for the beneficial tax-deferral treatment of certain U.S. pension plans under Section 401 of the U.S. Internal Revenue Code (e.g., a 401(k) plan). As such, employer contributions and plan earnings may be subject to U.S. tax on a current basis and required to be reported on the individual’s U.S. income tax return, even though these items may not be currently subject to Australian tax. In the case of a foreign pension plan that qualifies as an “employees’ trust” within the meaning of Section 402(b) of the Internal Revenue Code, employer contributions are taxed currently but plan earnings may be tax-deferred until retirement assuming certain conditions are met.

In this regard, over 90 per cent of employed Australians currently have savings in a superannuation pension account – employment contributions to these accounts may be tax-deferred in Australia but are generally currently taxable in the U.S. Further U.S. tax and reporting implications may arise depending on whether the superannuation fund is a super public or a self-funded super fund.  In some instances, a self-funded super fund may be viewed as a “foreign grantor trust” for U.S. tax purposes, which may trigger additional reporting obligations, such as the requirement to file a foreign trust form (IRS Form 3520). 

For these and many other reasons, it is essential that U.S. ex-pats participating in a superannuation or other pension fund understand the full U.S. tax and reporting implications of plan participation.

  • U.S. Tax Reporting Considerations

It is important to keep in mind that in addition to the substantive U.S. tax implications associated with the above activities, additional tax reporting obligations may also arise due to such activities. Some of the common forms associated with investment or other financial activities abroad include:

  • Form 3520: must be filed to report transactions with foreign trusts and receipt of certain foreign gifts
  • Form 5471: must be filed by certain shareholders of foreign corporations
  • Form 8621: must be filed by certain shareholders of passive foreign investment companies (such as foreign mutual funds)
  • Form 8865: must be filed for each controlled foreign partnership in which the taxpayer is a 10% or more partner

Principle #4 – U.S. Tax Benefits

U.S. Tax Benefits Are Available to You

The good news for ex-pats living in Australia is that both U.S. domestic tax law and U.S.-Australia bilateral agreements contain several provisions designed to prevent “double taxation,” or taxation on the same income in both countries.

These provisions, in many cases, can reduce or even eliminate the U.S. federal income tax that would otherwise be due by the ex-pat taxpayer. However, keep in mind that even if no U.S. tax is owed, a U.S. tax return still generally must be filed, and the failure to do so can result in severe penalties.

Domestic law provisions, such as the foreign earned income exclusion (“FEIE”), the foreign housing exclusion (“FHE”), and foreign tax credit (“FTC”), are designed specifically for taxpayers living abroad.

  • Foreign Earned Income Exclusion

Provided an individual can establish that his tax home is outside the U.S. (by satisfying either the “bona fide residence” test or the “physical presence” test), such individual can exclude from income a portion of their income earned overseas. The FEIE amount is adjusted annually for inflation. For the tax year 2020, the maximum foreign earned income exclusion is $107,600 ($215,200 for a married ex-pat couple).

To claim this exclusion, an individual must file a U.S. federal income tax return (Form 1040). To claim the FEIE, an individual must file Form 2555 with their U.S. federal income tax return.

  • Foreign Housing Exclusion/Deduction

In addition to the FEIE, a U.S. ex-pat can also exclude or deduct from their gross income their housing cost amount in a foreign country provided they qualify under the bona fide residence or physical presence tests.  The exclusion is applicable whenever an individual has waged.  The deduction is applicable whenever the individual is self-employed.  To claim the foreign house exclusion/deduction, an individual must file Form 2555.

However, the housing cost amount is subject to certain limitations that are adjusted based on geographical location.  Without any adjustments to the limitations, the maximum foreign housing exclusion for 2020 is $15,064. Adjustments vary from city to city and are based on the cost of living in each city.  Such adjustments apply specifically to the following Australian cities: Darwin, Northern Country, Melbourne, Perth, and Sydney.

  • Foreign Tax Credits

As an alternative to (and for higher-income earners, in complement to) the FEIE and foreign housing exclusion/deduction, a U.S. ex-pat can claim a foreign tax credit (“FTC”) for foreign income taxes paid. However, the amount of foreign tax credits taken is limited to foreign source taxable income and cannot be used to offset U.S. source income.

Since the Australian tax rate on an ex-pat’s income will generally be higher than the U.S. tax rate, it will often be the case that there is no residual income tax to pay in the U.S. after claiming a foreign tax credit for the Australian tax paid. However, a foreign tax credit cannot be used to reduce the U.S. net investment income tax. As such, residual U.S. tax may result even if the foreign tax credit can otherwise be fully utilized against the earned income tax. 

The foreign tax credit rules are particularly complex and, as such, require a thorough analysis by a tax expert.

Aside from specific situations, to claim a foreign tax credit, an individual must file Form 1116 with their U.S. federal income tax return.

  • Bilateral Agreements

Many countries have signed treaties and other international agreements with the U.S. whereby certain benefits are available to U.S. ex-pats residing in a particular foreign country, for instance, to protect them from double taxation, both in the U.S. and in their country of residence. U.S.-Australia agreements include:

  • U.S.-Australia Income Tax Treaty – This treaty is designed to mitigate the effects of double income taxation. Generally, under an income tax treaty with the U.S., U.S. ex-pats may be entitled to certain credits, deductions, exemptions and reductions in the rate of income taxes of the foreign country in which they reside.
  • U.S.­-Australia Totalization Agreement – This agreement affects tax payments and benefits under the respective social security systems. It is designed to eliminate dual social security taxation. This situation occurs when a worker from one country works in another country and must pay social security taxes to both countries on the same earnings. It also helps fill gaps in benefit protection for workers who have divided their careers between the United States and Australia.

Principle #5 – Reach of U.S. Government

Due to FATCA and its Supporting International Agreements, the U.S. Income Tax Reach Has Become Wider Than Ever Before

FATCA stands for the “Foreign Account Tax Compliance Act.”  FATCA is a relatively new law that was enacted in 2010 as part of the HIRE Act. The objective behind FATCA is to combat offshore tax evasion by requiring U.S. citizens to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS. As part of the implementation of FATCA, starting with the 2011 tax season, the IRS requires certain U.S. citizens to report (on Form 8938) the total value of their “foreign financial assets.”

To further enforce FATCA reporting, starting on January 1, 2014, foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) became required to report the balances in the accounts held by customers who are U.S. citizens. 

To date, we have seen several large foreign banks require that all U.S. citizens who maintain accounts with them provide a Form W-9 (declaring their status as U.S. citizens) and sign a waiver of confidentiality agreement whereby they allow the bank to provide information about their account to the IRS.  

In some cases, foreign banks have closed the accounts of U.S. ex-pats who refuse to cooperate with these requests.

This renewed effort by the U.S. government to combat offshore tax evasion through FATCA has led to a recent surge in tax compliance efforts by U.S. ex-pats.

Recently, the IRS announced that the United States had signed a so-called competent authority arrangement (“CAA”) with Australia in furtherance of a previously signed intergovernmental agreement (“IGA”) with Australia. This agreement is designed to promote the implementation of the FATCA law requiring financial institutions (mainly banks and investment houses) outside the U.S. to report information on financial accounts held by their U.S. customers to the IRS.

The CAA with Australia, along with a simultaneously signed CAA with the U.K., is the very first of its kind. These arrangements contain specific provisions regarding the exchange of information protocols. For example, under the arrangements, financial institutions and host country tax authorities must utilize the International Data Exchange Service (IDES) to exchange FATCA data with the IRS.

This IRS announcement came on the heels of an earlier press release by the Australian Taxation Office (ATO), which stated that it had, for the first time, transmitted FATCA data to the IRS by its IGA. According to the ATO, more than 30,000 financial accounts valued at more than $5 billion (Australian dollars) were provided to the IRS. In return, the U.S. agreed to provide Australia with information on Australian-owned accounts located in the United States.

These latest developments further signify that efforts by the U.S. to combat offshore tax evasion are being met with support and cooperation by Australia and other jurisdictions. We believe this will lead to a further surge in tax compliance efforts by U.S. ex-pats.

If you are a U.S. ex-pat living in Australia, you must remain compliant with your continuing U.S. tax obligations. Our experts at Expat Tax Professionals are available to help you understand your U.S. tax filing requirements and to assist you with all of your U.S. tax compliance needs.

Recent Posts

Start typing and press Enter to search

laptop-tax-calculatorBusiness-calculator