As a US expat, you may be familiar with requirements of filing a US tax return and reporting your worldwide income no matter where you live in the world. But what about filing tax returns for the country you are living in? If you are an American living in Australia, you may need to file an Australian tax return and possibly pay taxes on your income to the Australian Government. Here are some basic guidelines on the process and the requirements for filing a tax return in Australia.
Australian Tax System Basics
The Australian equivalent to the IRS is the Australian Tax Office (ATO). The ATO is the principal revenue collection agency of the Australian government. They collect revenue, administer the goods and services tax for all Australian territories and states and administer the major aspects of the Superannuation system.
The Australian tax year is July 1 – June 30. The Australian tax system is much like the US tax system, where tax is levied as you earn your salary, wages, business income, and investment income. The tax rates are progressive, meaning the more you earn, the higher your rate of tax for each additional dollar of income.
Your Australian tax return is required to be filed by October 31st each year, unless you file an extension through a professional tax preparer. If you file (or “lodge” as they say in Australia) your return late, you could be subject to penalties.
In order to file a tax return you must obtain a Tax File Number (TFN). The TFN is the equivalent to the US Social Security Number and can be obtained from the ATO. The TFN is a unique number, associated only with you and should be kept safe to avoid identity theft. You will keep the TFN for life, even if you leave and then return to Australia. Those without a TFN will have mandatory taxes withheld from their income, both wage and investment income. Even if you are not staying in Australia permanently, you can still obtain a TFN. This is usually done if there is a tax need, such as income or temporary business visas.
Married couples cannot file a joint tax return, but each spouse must be declared on the other’s tax filings.
Are You Required to File an Australian Tax Return?
The basis of whether or not you will need to file an Australian tax return with the ATO is your residency. The ATO uses “resident for tax purposes” to determine your filing requirement. This type of residency determination is different than that used for immigration or citizenship purposes. The ATO determines that you are a resident of Australia for tax purposes if you meet any of the following criteria:
- You have always lived in Australia
- You have moved to Australia to live permanently
- You have been living in Australia for more than half the Australian tax year – unless your usual home is outside Australia and you don’t intend to live in Australia permanently
- You have been in Australia continuously for six months (or more) and have been living in the one place, and on the one job
No matter your residency though, if you have Australian sourced income you will need to file a tax return with the ATO.
Who Qualifies as a Tax Resident in Australia?
If you are considered a resident for tax purposes, you must declare all the income you earned anywhere in the world. There is a threshold amount that allows you to reduce the amount of income you are taxed on, for the 2019-2020 tax year the amount is $18,200 (AUD). Once your income has surpassed the tax free threshold, you will be subject to progressively higher tax rates as your income climbs.
Australian Tax Rates for Residents
If you qualify as a resident, expect to pay the following rates for your tax return in Australia:
|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 to the income tax, there is also a Medicare levy of 2% assessed on income. For those who do not maintain proper private health insurance, an additional Medicare levy surcharge may be assessed.
There are some tax reliefs only available to Australian tax residents, helping to reduce the taxable income or tax liability for the year. These benefits include family allowances (similar to the US’s Earned Income Credit), childcare rebates, education offsets, first home savers, environmental offsets and more.
Australian Tax Rates for Non-Residents
Those considered non-residents for tax purposes have different tax rules regarding their income. Non-residents do not have a tax free threshold for their income, but are only taxed on the income from Australian sources.
Here are the ATO tax rates for non-residents for 2019-20:
|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|
Non-residents do not have to pay the Medicare levy on their income, and cannot claim any Medicare benefits. Bank interest is also not included in any income, but a foreign address must be supplied to the bank in order to avoid mandatory withholdings.
Which is Better Resident or Non-Resident Status?
There are benefits and disadvantages to claiming resident or non-resident status on your Australian tax return. If you have the option, it’s advisable to consider the tax implications of each situation:
What is Australian Superannuation?
Superannuation is a mandatory retirement savings program, contributed to by both the employee and the employer. Employee contributions are voluntary, but employers must make a minimum contribution of 9.5% of the employee’s base wage if they earn more than $450 a month.
On Australian tax returns, employee contributions are tax-deductible, but not on US tax returns. US citizens must include the contributions in their worldwide income when filing a US tax return. Superannuation accounts are similar to US 401(k) plans, where income going into the account is tax deferred until they withdraw the funds (and hopefully the earnings).
The drawback to this account is that funds cannot be withdrawn until retirement age has been reached or special circumstances have been met.
Social Security Agreement with the USA
The US and Australia have a Social Security Agreement – known formally as a Totalization Agreement – in effect that dictates which country is allowed to assess Social Security taxes on income of US and Australian citizens. US employees in Australia are generally not assessed US social security taxes, but must pay the Australian taxes.
The Totalization Agreement also covers self-employed expats living in Australia. Normally, no matter where you earn it, self-employment income is subject to US Social Security and Medicare taxes—known as self-employment tax. If you’re self-employed, you’ll need to pay self-employment tax in addition to your regular income taxes. Unlike earned income taxes, you cannot reduce the amount of self-employment tax using exclusions or credits. Thankfully, with a Totalization Agreement in place, the taxpayer only needs to pay the Social Security and Medicare taxes to the resident country—in this case, Australia.
US-Australia Tax Treaty
A tax treaty is different than a Social Security agreement. The US-Australia tax treaty (find it here) dictates the terms of taxes between the US and Australia, providing tie-breaker rules and determining which country a taxpayer is considered a resident. While the individual income tax issues are included in the tax treaty, the bulk of the treaty relates to commerce, property, and governmental rights to tax income based on jurisdictions.
One of the major factors in the treaty sets out the guidelines for relief from double taxation. It allows a credit on your US tax return of taxes paid to Australia and vice versa. Note: While the treaty allows for double taxation relief, it is also a legal document and as such could be interpreted in many ways. For example: income from pensions, retirement accounts and social security is excluded from double taxation in article 22 of the treaty, but is included in income in the savings clause.
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