US Expat Taxes for Americans Living in Australia – A Guide
There are an estimated 105,000 Americans living in Australia.
Australia is an incredible place to live for a variety of reasons – the laid back culture, the warm climate, and the beaches to name just three. As an American expatriate living in Australia though, what exactly do you need to know regarding filing US expat (and Australian) taxes?
All US citizens and green card holders whose worldwide income exceeds IRS minimum thresholds are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is that there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If you earned over US$12,550 (per individual) in 2021 ($12,400 in 2020), or $400 of self-employment income, or just $5 of any income if you are married to but filing separrately from a foreigner, then you are required to file Form 1040. While taxes owed are still due by April 15, expats get an automatic filing extension until June 15. This can be extended still further online until October 15 on request.
If you have foreign assets worth over US$200,000 (per person), excluding your home if it is owned in your own name, you must also file a form 8938 to declare them.
If you had a total of over US$10,000 in one or in mulitple foreign bank accounts at any time during the tax year, you are also required to file FinCEN form 114, otherwise known as an FBAR (Foreign Bank Account Report).
“A non-resident company is taxed on its Australian source income at the same rate as a resident company.” – The Australian Trade and Investment Commission.
If you are paying income tax in Australia, there are several IRS provisions that allow you to avoid paying tax on the same income to the IRS too. The two primary ones are the Foreign Earned Income Exclusion, which lets you exclude the first around US$110,000 of your earned income from US tax if you can demonstrate that you are an Australian resident, and the Foreign Tax Credit, which gives you a US tax credits to offset tax you’ve already paid in Australia. The Foreign Tax Credit is typically a better option for American expats who pay more tax in Australia than they would to the US, and they can carry any excess US tax credits forward for future use. Even if you don’t owe any tax in the US though, if your income is above the IRS minimum theshholds, you still have to file.
The US – Australia Tax Treaty
There’s a US-Australia Tax Treaty, however it doesn’t prevent Americans living in Australia from having to file US taxes. It does contain provisions that can benefit some Americans in the Australia though, such as students and those who receive retirement income.
For most types of income, the solution set out in the Treaty for US expats to avoid double taxation of their income arising in Australia is to claim US tax credits to the same value as Australian taxes that they’ve already paid on their income by claiming the IRS Foreign Tax Credit.
If they have income arising in the US, Americans in Australia can claim Australian tax credits against US income taxes paid to the IRS when they file their Australian tax return.
The United States – Australia Tax Treaty also covers corporation taxation, stating that a company will be taxed in the country where it is registered, unless it has a ‘permanent establishment’ (meaning an office, factory, or branch, etc.) in the other country, in which case the permanent establishment’s profits will be taxed in the country where it is located.
It’s also worth mentioning that the United States – Australia Tax Treaty has a clause allowing the two countries to share tax information, meaning the IRS can see what Australian taxes American expats living in Australia are paying, and vice versa. Australian banks also share their US account holders’ contact and balance info with the US Treasury, so it’s never worth being economical with the truth or ducking your responsibilities, as the IRS has global reach and penalties can be steep.
To claim a provision in the United States – Ausralia Tax Treaty (besides claiming US tax credits), expats should use IRS form 8833.
The US-Australia Totalization Agreement
A separate agreement called a Totalization Agreement allows US expats in Australia not to pay social security taxes to both the US and Australian governments. Instead, contributions made while in Austrlalia can be credited to either system. Which country they pay to depends on how long they will be living in Australia.
Australian taxes – what you need to know
The Australian tax year runs from July 1st to June 30th. Australian tax returns are due by October 31st following the end of the tax year. The Australian equivalent of the IRS is called ATO (the Australian Taxation Office).
Americans are considered resident for tax purposes in Australia if they are domiciled there (i.e. have permanent residence or Australia is the center of their economic, social, or business interests), or if they spend at least 183 days in Australia in a year.
Australian income tax rates are relatively high compared to the US, at 0% – 45%, so for many people it will make sense to claim the Foreign Tax Credit. You can more find information on Australian income tax rates here.
If you’re a US citizen, green card holder, or dual citizen and you have lived in Australia for a while but didn’t know you needed to file a US tax return, don’t worry: there’s a program called the IRS Streamlined Procedure that allows you to catch up on your filing without facing any penalties. It’s better not to put this off though, lest the IRS finds you first.
We strongly recommend that if you have any doubts or questions about your tax filing situation as a US expat living in Australia, you contact an expat tax specialist.