Tax guide for Americans in Australia

Australia, with its beautiful beaches, warm weather, and English-speaking culture, is an attractive destination for US expats.

However, depending on whether or not you are an Australian resident, the tax obligations of Americans living in Australia may be different.

Overview of the Australia

Resident vs nonresident of Australia: which is better?

Choosing a more favorable tax status depends on individual circumstances, so let's take a closer look at the benefits of each.

Advantages of being a non-resident in Australia

1. Taxation: Non-residents are generally taxed only on their Australian-sourced income and not on their worldwide income. This can be advantageous for US citizens who have significant income outside of Australia.
2. Investment opportunities: Australia offers various investment opportunities for non-residents, especially in sectors like real estate and business.
3. Flexible living: Non-residents can live in Australia for a part of the year and in the US (or elsewhere) for the rest, enjoying the best of both worlds.
4. Educational pursuits: Australia is home to several world-renowned universities. US citizens can pursue higher education in Australia on student visas without becoming residents.

Australian residency benefits

1. Healthcare: Australia has a robust public healthcare system known as Medicare. As a resident, a US citizen can access many medical services either for free or at a subsidized rate.
2. Education: Residents have access to Australia's public education system, which is known for its high standards. This can be especially beneficial if the US citizen has children.
3. Employment opportunities: Being a resident opens up a wider range of job opportunities in Australia without the need for employer sponsorship.
4. Social services: Residents can access various social services, including unemployment benefits, family tax benefits, and other welfare programs.
5. Property ownership: Residents face fewer restrictions when buying property in Australia compared to non-residents.
6. Voting rights: After becoming a citizen, one can participate in Australia's democratic process by voting in federal, state, and local elections.
7. Permanent stay: As a resident, there's no need to renew visas frequently, allowing for long-term planning and stability.

Who qualifies as a resident of Australia?

In Australia, tax residency is determined by several tests, and meeting the criteria of any one of these tests qualifies an individual as a tax resident:

1. Resides test: If you live permanently or for a significant duration in Australia and have a settled or usual home in the country, you are considered a resident.
2. Domicile test: You are deemed a resident if your primary permanent domicile or home is in Australia.
3. 183-day test: Being in Australia for at least 183 days qualifies you as a resident. However, an exception exists if you can prove that your usual place of residence is outside Australia and you have no intention of settling in Australia.
4. Commonwealth Superannuation Fund Test: If you are employed by the Australian government or an Australian company and are eligible to contribute to specific superannuation schemes, you are considered a resident.

If you don't meet any of these criteria, you are generally considered a non-resident for tax purposes.

Types of taxation in Australia

Australia has a progressive tax system for individuals, meaning the tax rate increases as the taxable income increases. Both residents and non-residents are subject to different tax rates.

Personal Income Tax (PIT) rates

The income tax rates for Australian residents are as follows (all amounts in AUD).
The following table applies to fiscal years 2024/25, i.e. until June 30, 2025.

*It's important to note that these rates do not include the 2% Medicare levy.

For foreign residents, the tax rates are:

Capital gains tax

Capital gains tax (CGT) in Australia applies to the sale of a capital asset, such as real estate or shares. It's the difference between what it cost you to acquire the asset and what you received when you disposed of it. These gains are taxed as part of your income tax and not as a separate tax, meaning the rate will depend on your overall taxable income.

Residents are subject to CGT on their worldwide assets, while non-residents are only subject to CGT on Australian assets. It's worth noting that certain assets are exempt from CGT, including your main residence.

Dividend income tax

In Australia, dividends paid to shareholders by Australian companies are often accompanied by franking credits. These credits represent the tax the company has already paid.

This system prevents double taxation, as shareholders can use these credits to offset their personal tax liabilities. For Australian tax residents, franked dividends are added to their taxable income, and the franking credits are applied against their tax liabilities.

Non-residents are not taxed on franked dividends, but unfranked dividends are subject to withholding tax.

Interest income tax

Interest income, such as that earned from bank accounts or bonds, is considered taxable income in Australia. For tax residents, this income is taxed at their marginal tax rate.

Non-residents, however, are subject to a final withholding tax on their Australian-sourced interest income. The rate is typically 10%, but this can vary depending on any applicable tax treaty between Australia and the non-resident's home country.

Rental income tax

Rental income derived from property located in Australia is taxable.

Expenses related to the property, such as mortgage interest, repairs, and maintenance, can be deducted from the rental income to reduce the taxable amount.

Non-residents earning rental income from Australian property are also required to declare this income and are taxed at non-resident rates.

Foreign income tax

Australia taxes its residents on their worldwide income.

This means that any income earned outside of Australia, including employment income, business income, and investment income, must be declared on the Australian tax return.

To prevent double taxation, Australia offers a foreign income tax offset for any foreign tax paid on this income.

Exempt income tax

Certain types of income are exempt from tax in Australia. Common examples include certain government pensions and payments, some scholarships, and payments from specific disability trusts for care and accommodation.

It's essential to check the Australian Taxation Office (ATO) guidelines or consult with a tax professional to determine if any income is tax-exempt.

Other australian taxes

Australia has a comprehensive taxation system that encompasses various taxes, duties, and levies. Here's a detailed look into specific Australian taxes.

Australian GST

The federal government in Australia levies a Goods and Services Tax (GST) at a rate of 10%.

This GST is a value-added tax (VAT) applied at each level in the manufacturing and marketing chain. It covers most goods and services, with registered suppliers receiving credits for GST on inputs acquired to make taxable supplies.

Some supplies, such as food (with exceptions), exports, health, and educational supplies, are 'GST-free'.

Residential rents and the second or subsequent supply of residential premises are 'input-taxed', meaning they are not subject to GST.

Inheritance, estate, and gift tax

Australia does not impose inheritance, estate, or gift taxes. However, there are special tax rules for the transfer of assets to a beneficiary from a deceased estate for capital gains tax purposes and the transfer of superannuation entitlements to beneficiaries of a deceased person.

Property taxes

All states and territories in Australia impose land taxes based on the unimproved value of the land, with certain exemptions. Municipal councils also levy rates and charges on land within their jurisdictions.

Some Australian states also impose a duty or land tax surcharge on certain Australian real estate holdings of a 'foreign person'.

Additionally, there's an annual vacancy fee at the Federal level for foreign owners of Australian residential property that remains vacant for at least half a year.

Stamp duty

All states and territories in Australia impose stamp duty on various transactions or documents, such as real property conveyances, motor vehicles, and insurance policies.

The imposition of duty on share transfers involving unlisted entities varies from state to state. For instance, the New South Wales government has exempted purchases of new or used battery electric and hydrogen fuel cell vehicles that cost up to AUD 78,000 from stamp duty.

When are Australian taxes due?

You are required to file (or “lodge” as it is known in Australia) your Australian return by the 31st of October.

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 the 5th of June of the next year.

The Australian financial year is from July 1 through June 30.

US-Australia tax treaty

The United States and Australia have established a tax treaty to streamline the tax obligations of their citizens and prevent double taxation.

This treaty defines specific terms used in the tax relationship between the two countries and provides guidelines for determining the tax residency of individuals.

The treaty primarily addresses property and commerce and includes provisions that grant rights to each government to tax certain forms of income based on its origin.

Article 22 of the tax treaty specifically addresses the issue of double taxation. The treaty includes provisions that prevent double taxation on pensions, social security income, and annuity income received by a resident while in their home country.

For instance, an Australian resident who is also a US citizen might receive tax relief on income from an Australian pension. Conversely, there could be tax implications on Australian pensions in other scenarios.

Americans who are self-employed in Australia

Self-employed Americans in Australia need to be aware of the tax implications of their business activities. Companies with revenue under AUD 2 million are taxed at a flat rate of 28.5%.

These corporate taxes must be prepaid quarterly based on anticipated liabilities. It's important to note that a corporation doesn't necessarily need to be incorporated within Australia to be classified as an Australian company.

If it conducts business in Australia and is owned or controlled by an Australian, it falls under this category. Different business structures, such as partnerships, sole traders, companies, or trusts, have varying tax responsibilities and legal obligations.

Australian Social Security for US expats

Australia has a social security system in place, similar to the US, to provide for its citizens and residents. For US expats living in Australia, there might be confusion regarding which social security system they should contribute to. To address this, the US-Australia totalization agreement has been established to set rules for social security contributions:

1. If a US company assigns an individual to work in Australia for less than five years, the individual will contribute to the US Social Security.
2. If the assignment in Australia exceeds five years, the individual will contribute to the Australian social security system.
3. If a US expat is employed by an Australian employer in Australia, they will contribute to the Australian social security system.
4. Self-employed Americans residing in Australia have the option to contribute to either the US or Australian social security system.

This agreement ensures that US expats are clear about their social security contributions and don't face issues related to double contributions or missing out on benefits.

Australian pension system

Australia's pension system consists of three pillars:

1. Public Pensions include a tax-financed Age Pension for men and women aged 65 and above. The government also established the Future Fund, financed by budget surpluses and the privatization of certain entities, to address unfunded public sector superannuation liabilities.
2. Occupational Pensions is a superannuation fund system financed by compulsory contributions from employees between ages 17 and 70. Employees can also make voluntary contributions.
3. Personal Pensions comprise retirement savings accounts (RSAs) that operate under the same tax rules as superannuation accounts. RSAs are low-cost pension schemes offered by financial institutions or insurance companies.

Superannuation and retirement taxation

Superannuation in Australia is akin to a mandatory 401(k) program. While employee contributions are voluntary, employers are required to contribute 9.5% of base wages for employees earning more than AUD 450 per month.

Employee contributions are deductible on their Australian taxes, but not on US taxes. Access to superannuation funds is limited to individuals of retirement age, barring a few special circumstances.

Tax deductions for expats living in Australia

Expatriates residing in Australia have the opportunity to claim various tax deductions, which can significantly reduce their taxable income. Here's a brief overview:

1. Work-related expenses: Expats can deduct costs directly related to earning their income, such as uniforms, travel, and home office expenses.
2. Self-education: If the education directly relates to one's current job, expenses like course fees, books, and travel can be deducted.
3. Income protection insurance: Premiums paid for insurance against the loss of income are deductible.
4. Tax agent fees: Costs incurred for managing tax affairs, including fees paid to tax agents for preparing and lodging tax returns, are deductible.
5. Charitable donations: Donations to registered charities in Australia can be claimed as deductions.

US tax forms for expats

For US expatriates residing in Australia, staying compliant with the IRS requires the submission of specific forms. Here's a brief rundown of the essential forms:

• Form 1040: The standard US tax return form for all US citizens, regardless of their residence.
• Form 2555: Used to claim the Foreign Earned Income Exclusion, this form helps expats exclude a portion of their foreign-earned income from US taxation.
• Form 1116: For those opting to claim the Foreign Tax Credit, this form allows expats to offset US taxes with taxes paid in Australia.
• FinCEN Form 114 (FBAR): Expats with foreign financial accounts exceeding $10,000 at any time during the year must report them using this form.
• Form 8938: This Statement of Specified Foreign Financial Assets is required for expats with significant financial assets abroad.
• Form 3520: For those who receive gifts or bequests from non-US persons, this form is essential for reporting purposes.