Taxes for Expats – The US – Australia Tax Treaty
The US – Australia tax treaty was signed in 1982, with an additional protocol added in 2001. The purpose of the treaty is to prevent double taxation for Americans living in Australia and Australians living in the US, however it doesn’t prevent US citizens living in Australia from having to file US taxes.
US taxes for expats in Australia
The US taxes based on citizenship, meaning that all US citizens and green card holders, including US expats living in Australia, with worldwide income of over $12,200 a year (in 2019), or just $400 of self-employment income, or just $5 of income if they’re married filing separately with a foreigner, are required to file a US tax return each year.
Australia on the other hand requires Americans to file Australian taxes if they spend at least 183 days in Australia in a year, or if they have a permanent residence visa, or if Australia is the center of their social, economic or business interests.
This leaves many US expats living in Australia having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th (July 15th in 2020), and they can request a further extension until October 15th if they need to. The Australian tax year finished on June 30th, with returns due by October 31st.
US expats in Australia may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank, investment, and other financial accounts at any time during the year (and including any accounts that they have signatory authority or control over, even if not in their name).
The United States – Australia Tax Treaty
“Moving to Australia can be an amazing experience. Although it is the sixth largest country in the world at over 3 million square miles, it is only home to 21 million people.” – Expat info Desk
The United States – Australia Tax Treaty covers double taxation with regards to income tax, corporation tax, and capital gains tax, however, a clause called a savings clause in Article 1 section (3) states that the US can still tax its citizens living in Australia as if the rest of the treaty didn’t exist!
However, the treaty allows US expats to avoid double taxation on their income taxed in Australia by letting them claim US tax credits when they file their US tax return to the same value as Australian income taxes that they’ve already paid, when they file their US tax return.
For income arising in the US, Americans in Australia can claim Australian tax credits against income US taxes paid to the IRS.
To claim US tax credits against Australian taxes paid, expats must file Form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in Australia won’t end up owing any US income tax.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing Form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation. Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US – Australia Tax Treaty also allows the Australian government to share US expats’ Australian tax information with the IRS, as well as their Australian bank and investment account details and balances.
Some Americans in Australia, for example students and retired expats, may be able to claim a provision in the United States – Australia Tax Treaty (besides claiming US tax credits). Expats should consult a US expat tax specialist to check. Expats who can claim a provision in the treaty can do so by filing IRS Form 8833.
The US-Australia Totalization Agreement
A separate agreement called a Totalization Agreement helps US expats in Australia not to pay social security taxes to both the US and Australian governments. Expats’ contributions made while in Australia can be credited to either system. Which country they pay depends on how long they will be living in Australia.
Expats in Australia who are behind with their US tax filing because they were unaware that they had to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.