Tax considerations for American citizens living in Australia

The United States is among very few governments that enforces taxation on worldwide income on their citizens (and permanent residents), regardless of where they live. The idea of managing two separate tax seasons can sound daunting and confusing, but there are certain provisions put in place to help protect from potential double-taxations. This article will help aid you in understanding your tax obligations as an American citizen or permanent resident, while residing in Australia.

Failure to correctly file your taxes in the US can result in significant penalties (potentially sometimes tens of thousands of dollars). However, it might also be possible to legally exclude some income earned from your US tax filing and reduce your US tax liability.

Ultimately, getting it right could save you thousands of dollars, and is therefore worth getting professional advice to ensure you fully understand your tax obligations as a US expat.

It is important to remember that the information found in this article is only a guide and before making any decisions or submitting any tax returns in the US or Australia, especially when unsure, you should seek independent advice (which you can do by entering your details using the form).

We can then arrange for an expert in US/Australian tax to provide a free consultation.

Who pays tax in Australia?

Australian residents are subject to Australian tax on worldwide income. Non-residents are subject to Australian tax on Australian-source income only.

An exemption from Australian tax on certain income is available for individuals, potentially expats, who qualify as a temporary resident. Temporary residents are generally exempt from Australian tax on foreign-source investment income (but not foreign employment income) and capital gains realised on assets that are not taxable Australian property (TAP).

How will my tax responsibilities change when residing in Australia?

In short, they will not really change in regards to existing responsibilities. US citizens and permanent residents are required to file tax returns with the US government yearly, regardless of where they are residing, on their world-wide income.

Any work carried out whilst in Australia (even very short-term basis work and non-contractual agreements) will need to be reported on your US tax return.

How does working in Australia as an American affect my taxes?

This may mean needing to file Australian taxes based on both your residency and on the source of your income.

(Under different countries’ domestic tax laws, you are able to be a tax resident in more than one country at a time.

Australian tax residents are taxed on worldwide that exceeds the tax free-threshold (which is $18,200 for a full-year resident.  Some pro-rata of this $18,200 amount applies for individuals who are not tax residents of Australia for a full Australian tax year (which is a 30 June year-end).

Non-Australian tax residents will be taxed only on Australian sourced income.

The income tax rates for residents and non-residents are different, and just like the US progressive system, rates increase as your annual income increases.

How do I know if I qualify as an Australian tax resident?

Australia has complicated rules regarding tax residency.  There are multiple different tests that can apply to make you a tax resident of Australia under Australian domestic tax law.

Where you are a US citizen (or permanent resident) moving to Australia or working there temporarily, generally speaking you will qualify as an Australian tax resident (under Australian domestic tax law) if you spend more than half of the tax year there (i.e 183 days).

It must also be noted that under the Australia/US Double tax agreement, tie breaker rules apply where an individual is considered a tax resident of both Australia and the US, under each country’s domestic tax laws. 

US/Australia Tax Treaty

The United States and Australia do have a tax treaty.

The tax treaty defines the specific terms to be followed in regards to US/Australian tax crossover, and provides clear rules for deciding exactly which country the individual is a resident of.

The treaty evolves mainly around buying/selling and property and provides granting rights to both the US and Australian government to be able to impose taxation on certain forms of income, dependent on the country of origin that the income was earned.

The treaty sets provisions to prevent double taxation on things such as social security income, pensions and annuities income received by an individual whilst in their home country.

Certain other tax strategies can allow you to lower your US tax return and avoid dual taxation. These include:

• Foreign Tax Credit (allows you to claim a credit for any income taxes that were paid to a foreign government)
• Foreign Earned Income Exclusion (available to individuals that meet particular time-frame residency requirements. This allows you to exclude a portion your wage from US tax.)

Both the above are important for US citizens and Permanent Residents living and working in Australia.

Could I give up my US citizenship before going to Australia to avoid US tax?

It is possible to renounce your US Citizenship, however there are implications of doing so and your main motive for renouncing must not be to avoid paying UK tax.

If you are considering renouncing your citizenship you will need specialist advice from a qualified US tax adviser.

Introduction to a US/Australian tax expert for American expats

We can connect you with a hand-selected US/Australian tax specialist who will provide you with tailored help, helping you understand your tax responsibilities whilst living in Australia.