With its warm weather, beautiful beaches, and laid-back, English-speaking culture, it is no wonder that Australia is such an attractive destination for American expatriates. Also, one-fifth of the Australian population was born outside the country, and Australia has a points-based residency system that makes it fairly accessible to those with the desired skills and education. However, as an American, don’t forget that you’ll be on the hook for US expat taxes. This guide will help you understand your tax responsibilities as an American expatriate living in Australia.
US Expat Taxes
If you are a citizen or permanent resident of the US, then you are obligated to file a tax return with the federal government each year whether you reside in Seattle or Sydney. In addition to the regular income tax return, you may be required to file an informational return on your assets held in foreign bank accounts. While the US is one of the few governments that taxes the international income of its citizens and permanent residents, it does have special provisions to help protect us from double taxation including:
- The Foreign Earned Income Exclusion, which allows you to decrease your 2019 taxable income by the first $105,900 earned as a result of your labors while a resident of a foreign country (and $107,600 on your 2020 taxable income),
- The Foreign Tax Credit that could allow you to lower your tax bill on your remaining income by certain amounts paid to a foreign government, and
- A Foreign Housing Exclusion that allows an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.
With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate the amount of US expat taxes owed. Note that, even if you do not believe that you owe any US income taxes, you will likely still be required to file a return.
Australian Income Tax Rates
Australia, like the US, has a tax system that is both graduated and progressive. This means that as your income goes up, the tax rate on every additional dollar of income rises with it.
Who Is a Tax Resident of Australia?
In Australia, the tax tables for residents and non-residents are different. The definition of a resident for tax purposes could be different from the definition for residency purposes. In general, you are a resident if you reside in Australia and are living there permanently. If you have lived and worked continually in Australia for more than six months and continue to live in the country, then you will be considered a resident unless you can prove otherwise.
Tax Rates for Australian Residents
The rates for residents for the 2019-2020 financial year, as taken from the Australian Taxation Office, are as follows:
|Taxable income||Tax on this income|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $90,000||$3,572 plus 32.5c for each $1 over $37,000|
|$90,001 – $180,000||$20,797 plus 37c for each $1 over $90,000|
|$180,001 and over||$54,097 plus 45c for each $1 over $180,000|
In addition, there is a 2% Medicare levy.
How Foreign Residents of Australia Are Taxed
If you are not an Australian resident for tax purposes, then you are subject to the special rates below. Generally, if you have earned income (from employment or self-employment) in Australia and did not qualify as a resident, then you are considered a foreign resident.
Non-resident tax rates for 2019-2020 are as follows:
|Taxable Income||Tax on this Income|
|0 – $90,000||32.5c for each $1|
|$90,001 – $180,000||$29,250 plus 37c for each $1 over $90,000|
|$180,001 and over||$62,550 plus 45c for each $1 over $180,000|
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Australian Tax Due Date
You must file (“lodge”) your Australian tax return by October 31. If you hire a registered tax agent, then you must have registered as a client with them by that date. When you register with a tax agent, you earn an extension until June 5 of the following year. Australia has a financial year that begins July 1 and ends June 30 the following year.
Australia’s Social Security Agreement with the US
Employees in Australia are not subject to US Social Security taxes. Due to the US-Australia tax treaty (Totalization Agreement, in government-speak) self-employed expatriates in Australia can choose whether they would prefer to contribute to social security in the US or Australia. For most Australian residents, participation in a state-sponsored retirement plan will be limited to the Superannuation Guarantee described below.
Superannuation in Australia
Superannuation is sort of like a mandatory 401(k) plan on a gargantuan scale. Employee contributions are voluntary, but employers must make a compulsory contribution of 9.5% of employees’ base wages if they earn over $450 in a month. Employee contributions are tax-deductible for Australian taxes but not for US expat taxes. Similar to a 401(k), access to superannuation funds are restricted to those who have reached retirement age or one of a number of special circumstances.
Is Foreign Income Taxed Within Australia?
Non-residents are not obligated to report their foreign earnings to Australia. Temporary residents may have to report foreign earned income but will not have to report earnings from investments or other passive income sources. Residents of Australia are required to report their global income. However, as in the US, Australia has provided mechanisms to help alleviate double taxation.
US Tax Treaty with Australia
The US tax treaty with Australia defines the terms that set the relationship between the US and Australia and provides “tie-breaker” rules for determining in which country a taxpayer is considered a resident. It is primarily of use to those who have doubts or want clarification as to their residency status. The bulk of the treaty relates to commerce and property and establishes the right of the respective governments to tax certain kinds of income based upon the jurisdiction in which it was earned.
Article 22 of the treaty sets out the rules for relief from double taxation, most of which are summarized in this article. Also of note, the treaty excludes the pension, social security, and annuity income that a resident receives while in their country of residency from taxation by the other country. This means that, in some cases, if you are living in and considered a resident of Australia but are also citizen of the US, the income you receive from your Australian pension is excluded from your US expat taxes. In other cases, the savings clause of the treaty overrides Article 22, requiring you to pay taxes on your Australian pension income.
Corporate tax rates in Australia are a flat 27.5% for base rate entity companies, which are those with:
- Turnover less than $50 million
- 80% or less of their assessable income is passive income
Companies that do now qualify for the base rate will need to pay the full company tax rate of 30%.
Company taxes must be pre-paid quarterly based upon your anticipated annual fee. Note that your corporation does not necessarily have to be incorporated in Australia for it to be considered an Australian corporation, but must only carry out business in Australia and have Australian ownership or control.
In Australia, businesses may be structured as sole traders, partnerships, trusts, or companies, and as in the US, all have different legal obligations and tax responsibilities.
Goods and Services Tax in Australia
The Goods and Services Tax (GST) is a value-added tax that applies to most transactions involving goods and services, but excluding certain items. The GST is a flat 10%. If you are a business owner with more than AUD 75,000 in receipts, then you will have to register with the government and collect the taxes.
Tourists to Australia are eligible to receive a refund of the GST that they have paid over the previous 60 days upon the presentation of the items and receipts upon exiting the country.
Questions About Your US Expat Taxes?
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