An Overview of the
U.S. Tax System
for Australian Expats
More than one million Australians lived and worked abroad by
2013, with the majority relocating to New Zealand, the U.K. and the
U.S.
1
Today, thousands of Australian citizens move to the U.S. each
year and are immediately subject to the U.S. tax system, yet many
Aussie expats either do not understand how the U.S. tax code will
affect their overall nancial holdings, or do not have an effective tax
strategy in place to gain the most advantageous tax position.
If you have recently arrived in the U.S. or are considering relocation,
you likely have a number of questions. For example, how will the
Internal Revenue Service (IRS) view your holdings in Australia—
especially your Superannuation funds? Are you aware of tax
reporting deadlines, and penalties for noncompliance?
By reading this book, you will better understand:
How relocating to the U.S. will affect your tax liability
Tax reporting requirements for worldwide assets, including
income from foreign accounts
Why Superannuation funds must be addressed
Elements of the U.S. tax reporting system that affect
Australian expats
While not intended to be a comprehensive review of every U.S.
tax requirement, this book highlights some of the most important
U.S. tax principles for Australian expats to understand. As you
will discover, the U.S tax system requires complex reporting with
signicant penalties for noncompliance. With advance preparation,
you can plan your move strategically and position yourself for
nancial success.
Introduction
1.
C ontents
U.S. Individual Income
Tax Principles
PAGE 02
The Australian – U.S.
Tax Treaty
PAGE 04
Sale of Assets and the
Capital Gains Tax
PAGE 06
Reporting Requirements:
Banks, Financial
Accounts and Assets
PAGE 07
The Superannuation
Tax Conundrum
PAGE 09
Conclusion
PAGE 12
2.
3.
4.
5.
6.
1
Advance Research
Please consult your tax advisor who may conrm the applicability of the U.S. tax law to your U.S. tax situation.
1 An Overview of the U.S. Tax System for Australian Expats
Please consult your tax advisor who may conrm the applicability of the U.S. tax law to your U.S. tax situation.
Generally speaking, if you are considered a tax
resident in the U.S., you will be subject to tax
on your worldwide income, including income
generated from a tax-deferred account in
another country. This can present challenges
for Australians moving to the U.S. who still have
assets that earn income in Australia, especially
when those assets don’t quite match up with
similar instruments in the U.S.
Taxes can be complex anywhere, so the best
place to start is with an understanding of the
various levels of taxation in the U.S.
Four Levels of U.S. Taxation
Australians working in the U.S. should be aware
of four levels of taxation in the U.S. Federal
Income Tax.
1. Federal Income Tax
The U.S. government imposes a federal income
tax that is based on income levels. The federal
government recently enacted tax reform, which
retained seven tax brackets but changed the
rates, ranging from 10% to 37%.
2. State Income Tax
It is important to determine how state taxation will
factor into where you decide to live. Most states
impose personal income tax, with the exception
of Alaska, Florida, Nevada, South Dakota, Texas,
Washington and Wyoming. State income taxes
vary, but are generally in the range of 0-12.3%.
3. Social Security Tax and Medicare/FICA
This tax is based on “earned” income such as
salary paid to an employee or a sole proprietor’s
earnings. The U.S. Social Security tax of 6.2%
is paid on wages up to a maximum of $142,800
(for 2021). The Medicare tax is 1.45% on wages
(in which there is no maximum). Combined, this
tax is commonly referred to as FICA, Social
Security or Self-employment tax. If you are an
employee, the employer pays FICA tax of 6.2%
and Medicare tax of 1.45% on wages. If you are
a sole proprietor, you pay both the employee and
employer portion which is 12.4% for FICA and
2.9% for Medicare.
4. Local Income Tax
Local income tax, which generally refers to
additional city or county tax, depends on your
work location. Generally speaking, local taxes
are not higher than 1-2%, with the exception of
New York City.
CHAPTER 1
U.S. Individual Income Tax Principles
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Income Tax Year for Filing
Purposes
The U.S. income tax year is based on the calendar
year. Tax returns and payment must generally
be led by April 15 of the following year. While
extensions may be led, interest and penalty may
be charged on any tax paid after April 15.
As previously mentioned, the U.S. taxes its
citizens and individuals, who are residents for
income tax purposes, on their worldwide income.
When income is sourced in a foreign country, the
U.S. generally allows a credit for the tax paid on
that same taxed income.
Tax Filing Options
In the U.S., married couples have the option to
le jointly or separately on their federal income
tax returns. By ling a joint tax return, you can
benet from several tax breaks compared to ling
separately. In some cases, it could make more
sense to le separate returns.
Taxpayer Identication Numbers
All individuals ling tax returns must have a U.S.
Social Security number (SSN) or an individual tax
identication number (ITIN). ITINs are important
for selling residences, obtaining driver’s licenses,
opening certain bank accounts and more.
Differences Between Australian –
U.S. Business Structures
Australians planning to work in the U.S. should be
aware that the U.S. has different business entities.
Australia generally has six main structures: sole
trader, company, partnership, trust, unlimited
proprietary (Pty) and proprietary limited (Pty Ltd).
The U.S. business structures also include several
entities, including limited liability companies
(LLCs), partnerships, C corporations, S
corporations and single-member LLCs.
For U.S. tax purposes, a C corporation pays
income tax at the corporate level separate from
its owners. Conversely, the income of a pass-
through entity (S corporation, LLC, partnership,
and single-member LLC) ows through to its
individual owner’s personal income tax return.
A pass-through entity generally does not pay
federal income tax on its own.
Keep in mind that the business structure you have
in Australia may be treated differently in the U.S.
2021 U.S. Tax Brackets
Rate Individuals Married Filing Jointly
10%
Up to $9,875 Up to $19,750
12%
$9,875 – $40,125 $19,750 – $80,250
22%
$40,125 – $85,525 $80,250 – $171,050
24%
$85,525 – $163,300 $171,050 – $326,600
32%
$163,300 – $207,350 $326,600 – $414,700
35%
$207,350 – $518,400 $414,700 – $622,050
37%
Over $518,400 Over $622,050
Standard Deduction: $12,400
Personal Exemption: Eliminated
Standard Deduction: $24,800
Personal Exemption: Eliminated
3 An Overview of the U.S. Tax System for Australian Expats
Please consult your tax advisor who may conrm the applicability of the U.S. tax law to your U.S. tax situation.
A formal bilateral agreement between two
countries, a tax treaty — commonly known as a
double tax agreement (DTA) — exists mostly for
the purpose of preventing double taxation. A tax
treaty fosters cooperation between countries and
allows each to enforce its respective tax laws.
DTAs also exist to specify rules to resolve dual
claims in relation to the residential status of a
taxpayer and the source of income.
For Australians, tax treaties relate to their
residency status and how tax applies to the
income and business prots they earn, or tax
relief they receive, in the U.S. Of particular interest
for Australian individuals living in the U.S.:
If you are considered to be an Australian
resident for tax purposes (under Australian
domestic law) and a U.S. resident for U.S.
tax purposes (under U.S. domestic law), the
tax treaty provides rules to ensure you are
only a tax resident of one country.
If you are earning income from both
countries, the tax treaty allocates taxing
rights over certain categories of income
between Australia and the U.S.
Foreign Tax Credit Example
If you earned $140,000 of income in Australia
and pay $42,000 of income tax as a nonresident
Australian, you may qualify to claim a FTC of up
to $42,000. In this example, you would make a
claim for a Foreign Tax Credit (Form 1116) on your
U.S. tax return. A foreign tax credit is generally
offered by countries with income tax systems that
tax residents on worldwide income. These tax
credits mitigate double taxation.
Australian Dividend Income
A common question for Australian expats in the
U.S. is how to treat Australian dividend income for
U.S. tax purposes. The franked amount should
be reported as qualied dividends in the U.S.
The imputation credit is
not income and is not
considered a credit on
the U.S. tax return.
Treaty Tiebreaker
The treaty tiebreaker
is a provision meant to
prevent an individual
from being deemed a
resident in both treaty
countries. Typically, a
multistep procedure will be applied to resolve the
problem of dual residence. In most cases, the
location of a permanent home will be the critical
determinant in resolving residency.
The treaty tiebreaker only applies to the
calculation of U.S. income tax by treating the
taxpayer as a nonresident of the U.S., but only
CHAPTER 2
The Australian – U.S. Tax Treaty
Australia’s tax
treaty with the
U.S. dates back
to the 1950s, and
has been amended
through the years.
It was one of the
rst DTAs.
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for income tax purposes. Any informational forms
that would be required of a resident will still need
to be led.
The Substantial Presence Test
What happens when you leave Australia halfway
through the year? Are you a resident or a
nonresident for individual tax purposes? The
Substantial Presence Test (SPT) is a criterion
that the IRS uses to ensure that an individual
qualies as either a resident or nonresident for
tax purposes.
To meet this test, you must be physically present
in the U.S. on at least:
31 days during the current year, and
183 days during the three-year period that
includes the current year and the two years
immediately before that, counting:
3 All the days you were present in the
current year, and
3 1/3 of the days you were present in the
rst year before the current year, and
3 1/6 of the days you were present in the
second year before the current year
Under the U.S. tax code, a First-Year Election can
be used by nonresident individuals who arrive in
the U.S. after the midway point of the tax year
and do not obtain a green card in that year, but
do qualify as a resident individual in the following
year under the SPT.
Therefore, an individual who makes the First-Year
Election will be treated as a nonresident individual
for part of the tax year and a resident individual
for the other part of the tax year. To make the
First-Year Election, the individual generally must
satisfy ve requirements:
1. Must have been a nonresident in the
prior year
2. Must not meet the SPT or Green Card Test
in the current year
3. Must satisfy the 31-consecutive-day
requirement
4. Must satisfy the period of continuous
presence requirement
5. Must meet the SPT in the subsequent year
There are also additional elections for individuals
who are married and want to le jointly.
The Substanal Presence Test (SPT) is a
criterion that the IRS uses to ensure that
an individual qualies as either a resident
or nonresident for tax purposes.
5 An Overview of the U.S. Tax System for Australian Expats
Please consult your tax advisor who may conrm the applicability of the U.S. tax law to your U.S. tax situation.
Australian residents receive a full exemption
from capital gains tax on the sale of a home that
has served as their main residence throughout
ownership. Until recently, they beneted from an
“absence rule,” which allowed them to treat a
dwelling as their main residence for capital gains
tax (CGT) purposes for an unlimited period of time,
as long as they kept it empty and didn’t rent it out.
Under recent reform, Australian homeowners who
sell their main residence while they’re working
overseas will lose the CGT exemption. The new
law was specically intended to exclude foreigners
from obtaining the capital gains exemption, and
expats were included in this measure. This means
Australian homeowners had until June 30, 2019,
to sell their homes without being subject to the
capital gains tax.
Sale of Principal Residence
Because the U.S. taxes worldwide income, some
of the proceeds from the sale of your home may
be included in that amount. As earlier stated, there
is no tax in the U.S. if you resided in the Australian
residence for two of the past ve years. The capital
gain exclusion is $250,000 for a single person and
$500,000 for married persons ling jointly.
If you pay tax on the transaction in Australia, those
taxes can potentially be claimed as a Foreign Tax
Credit on your U.S. return. However, if you sell your
Australian home before the June 2019 deadline,
you will need to include the income from the sale
on your U.S. tax return, as part of your worldwide
income, even though there is no capital gains tax
prior to June 2019 in Australia. You may or may not
owe taxes on this overall sale in the U.S.
Also, if you own rental property in Australia, you
must report any income on that property in the
U.S. You are entitled to the same deductions you
would normally receive in Australia, plus you are
entitled to depreciation over a 40-year period—an
added benet that the IRS allows in its tax code.
Sale of Other Assets
You’ll also want to give careful consideration to
the disposal of your Australian assets and the
potential tax ramications of doing so. As a U.S.
resident for tax purposes, any sale of Australian
assets would be subject to U.S. taxation. Any
Australian taxes paid would be subject to the
foreign tax credit calculations.
You will want to be strategic about the timing of
paying off a mortgage as it could trigger ordinary
income from a mortgage disposition exchange
gain. Other considerations include managed fund
or other trust distributions.
You will want to work with your tax advisor to
ensure that your Australian investment assets are
managed and structured in the most advantageous
way. The income generated from those assets will
affect your U.S. taxes and must be reported on the
appropriate forms to avoid any penalties.
CHAPTER 3
Sale of Assets and the Capital Gains Tax
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As we addressed in Chapter 2, Australia has an
international tax law treaty with the U.S. and has
signed a FATCA (Foreign Asset Tax Compliance
Act) agreement. The type of assets, investments
and income you maintain overseas will dictate
the layers of complexity for the reporting
requirements you will have in the U.S. The
information in this chapter provides a guide
to what these reports are, and how they may
apply to you.
FinCEN 114 (FBAR)
FBAR is a “Report of Foreign Bank and
Financial Accounts,” or more simply, a foreign
bank account report. The FBAR form is
led electronically with the Financial Crimes
Enforcement Network, a division of the U.S.
Department of Treasury, when a person owns or
has signature authority of an account or accounts
with an annual aggregate balance that exceeds
$10,000 in foreign and overseas accounts on any
given day during the calendar year.
It is important to note that taxpayers who must
le this report in the U.S. include legal permanent
residents (green card holders), individuals
claiming a treaty tie breaker and U.S. part-year
tax residents. Foreign accounts include bank,
investment and nancial accounts and insurance
policies with a combined value of more than
$10,000. Note: Superannuation funds, which we
will address in Chapter 5, must be reported on an
FBAR form each year.
The penalty for failing to le an FBAR is $10,000
and can be levied in cases of willful violation.
FATCA
FATCA is intended to prevent tax evasion by
U.S. taxpayers using offshore accounts. FATCA
requires certain U.S. taxpayers who hold foreign
nancial assets with an aggregate value of more
than the reporting threshold (at least $50,000) to
report information about those assets on Form
8938, which must be attached to the taxpayer’s
annual income tax return.
CHAPTER 4
Reporting Requirements:
Banks, Financial Accounts and Assets
IMPORTANT: The penalty for not ling
each one of these informaon returns
is $10,000.
7 An Overview of the U.S. Tax System for Australian Expats
Please consult your tax advisor who may conrm the applicability of the U.S. tax law to your U.S. tax situation.
The type of assets, investments and income you maintain
overseas will dictate the layers of complexity for the reporng
requirements you will have in the U.S.
Statement of Foreign Financial Assets
(FATCA Form 8938)
As mentioned above, this form is used to report
specied foreign nancial assets if the total value
of all the specied foreign assets in which you
have an interest is more than the appropriate
reporting threshold.
Passive Foreign Investment Company
(PFIC) – Form 8621
Generally, if a Australian citizen who becomes a
tax resident of the U.S. and owns a mutual fund in
a non-U.S. account, this would be considered a
PFIC. The IRS requires that anyone with an interest
in a PFIC le an annual disclosure and indicate
any growth in this investment and any income
generated. It is important to disclose PFICs in your
initial year of U.S. residency as certain elections
can only be made in the rst year.
Other Asset Filing Requirements
Do you own an Australian mutual fund and plan
to live in the U.S.? What about foreign trusts,
partnership or a Pty Ltd?
Disposal of any Australian assets must be
carefully planned with regard to both Australian
and U.S. capital gains laws. Of course, any of
these assets will be factored into the worldwide
income calculations with regard to U.S. taxation
and ling requirements.
For example, there are a host of international
reporting requirements, which include, but are not
limited to:
Foreign Gift Form (3520)
Foreign Corporation or Foreign Partnership
(5471 or 8865)
Foreign Trust (3520-A)
Passive Foreign Investment Companies
(Form 8621)
Your requirement to le certain forms will depend
on what percentage of ownership you have in
a business.
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As you know, Superannuation funds (“Supers”)
are required of most individuals working in
Australia. In most cases, both the employer
and employee deposit funds into the Super,
which offers preferential tax rates on future
investment earnings.
More specically, the Super is funded by
mandatory employer contributions, which are
generally tax-deductible contributions made by
the employer as a percentage of the employee’s
salary. They can also contain concessional
voluntary employee pretax contributions and
nonconcessional voluntary pretax contributions,
which are not tax-deductible but can include
contributions from take-home pay, inheritances
and proceeds from asset sales.
In our earlier discussion about tax treaties, we
addressed how the U.S. and Australia resolve tax
conicts in a cooperative fashion to avoid double
taxation. That works well when dealing with
similar nancial instruments. Supers, which are
generally run as trusts, do not have an exact U.S.
counterpart and are more of a hybrid of several
U.S. savings and retirement accounts.
Currently there is no denitive guidance from the
IRS on how to treat these accounts for U.S. tax
purposes. As a result, opinions vary on how the
income from these accounts should be taxed on
your U.S. income tax return. Typically, a Super is
treated as an employee benets trust or a foreign
grantor trust.
The IRS looks at the contributions made into
the Super to determine grantor trust status. If an
employee’s contribution is equal or less than the
employer’s, then
it’s an employee
trust considered
owned by the foreign
employer. If the
individual personally
funded more than
50% of the Super, it
is more likely to be a
grantor trust.
Foreign
Grantor Trust
The Super may
be considered a grantor trust in the U.S. under
certain conditions, such as when the relevant
grantor individual directly or indirectly made a
transfer to the trust within ve years of becoming
a U.S. resident. This matters from a U.S. tax
perspective because the grantor will be taxed on
their income and capital gains from trust assets
regardless of whether those amounts are actually
distributed.
If the Super is treated as a “foreign grantor
trust”, additional reporting is required. Account
ownership and annual income from the account
is required to be reported on Forms 3520 and
3520A. Contributions and any other growth in the
CHAPTER 5
The Superannuation Tax Conundrum
Supers, which
are generally run
as trusts, do not
have an exact
U.S. counterpart
and are more of a
hybrid of several
U.S. savings
and rerement
accounts.
9 An Overview of the U.S. Tax System for Australian Expats
Please consult your tax advisor who may conrm the applicability of the U.S. tax law to your U.S. tax situation.
account are taxed on the U.S. Form 1040. PFIC investments within the account also require the ling of
Form 8621 each year. As with the employee benet trusts, Form 8938 and the FinCEN 114 form may also
be required if you meet the reporting requirements.
Those are the general parameters in the U.S. taxation of Supers, but given the complexity and lack of good
guidance in the area, you should work with your tax advisor to determine the proper tax treatment.
Employee Benets Trust
If the account is categorized as an “employee benets trust,” where the foreign employer is considered the
owner, any contributions to the account are taxable in the U.S. in the year of contribution even if Australian
tax is deferred. Income deemed to be taxable in the U.S. needs to be reported on your U.S. tax return and
the account ownership is required to be reported on Form 8938 if you meet the ling requirements.
Examples
U.S. treatment of Supers vary on a case-by-case basis. Here are two examples of how contributions and
fund growth would be treated under the U.S. tax system.
EXAMPLE A
Background:
An Australian/U.S. citizen is living and working in Australia. They are self-employed and operate a
self-directed and self-funded Super.
Likely U.S. Tax Filings:
The Super would be considered a grantor trust
and would face the following U.S tax treatment:
Employer contributions, made on behalf of the
employee, are 100 percent taxable
Employee contributions are not considered
tax deferred in the U.S.
Growth attributable to the employer is fully
taxable as ordinary income.
Growth attributable to the employee is taxed as a grantor trust on form 3520-A
Distributions are tax-free in the U.S. to the extent of basis
PFIC reporting is required if the fund holds mutual fund-type investments
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EXAMPLE B
Background:
An Australian individual and spouse relocate to the U.S. on a three-year assignment, arriving on
March 1, 2017. Later that year, the spouse acquires a U.S. job. Their children remain at home in
Australia attending university.
The couple has joint ownership over a non-U.S. bank checking account, and each has a
Superannuation fund in their name. The combined growth in value of the funds is $4,000 during
the U.S. tax year with no fund distributions. The majority of contributions were funded by each
individual’s employer throughout their careers so far.
Likely U.S. Tax Filings:
The couple elect to le as full-year U.S. tax residents on a joint tax return as it results in a
lower overall U.S. federal and state tax liability
Their children are not eligible to be claimed as dependents as they are not considered
residents in the U.S.
Both spouses are not considered “highly compensated” individuals under U.S. tax law
(i.e., earned less than $120,000 in the preceding year)
Both spouses report their share of interest income earned on their non-U.S. savings account
Both spouses report their interest in non-U.S. bank accounts and the Superannuation
accounts on Form 8938
Both spouses report their interest in non-U.S. bank accounts and the Superannuation
accounts on FinCEN 114 (FBAR)
The $4,000 growth in value of the
Superannuation fund is not reported as
income during the tax year
The Super funds are considered non-
U.S. trusts “owned” by the Australian
employers — so there is no additional U.S.
information reporting (i.e., Form 3520-A)
Neither individual is considered a “highly
compensated” individual resulting in
deferred taxation of the unrealized gains
(i.e., subject to tax upon distribution)
11 An Overview of the U.S. Tax System for Australian Expats
Please consult your tax advisor who may conrm the applicability of the U.S. tax law to your U.S. tax situation.
The last thing you want when you relocate from Australia to the U.S. is to pay extra taxes or penalties that
could be avoided with pre-departure planning. The information presented in our book provides you with an
overview of the issues you should be aware of and raises questions that could merit further discussion.
As we discussed, tax treaties are useful instruments for two countries to determine fair taxation of an
individual. However, given complexities that don’t neatly t the tax treaty framework, it is best to learn how
to prociently navigate the process and ensure that you comply with all required ling rules.
The International Tax team at EFPR Group works closely with their clients to arrive at the best approaches
for your particular set of circumstances. Ideally, we work with individuals and businesses pre-departure
and upon arrival—advanced planning is critical to attain maximum tax savings for you.
CONCLUSION
Helping You Navigate the Process
585.340.5121
iTax@EFPRgroup.com
EFPRgroup.com
Richele Emich-Sharn, CPA, Partner
Kevin C. Hill, CPA, Partner
Scott Buckley, CPA, EA, Manager
Richard Mather, EA, MSA, CAA, Manager
EFPR Group
International Tax Team
12 EFPRgroup.com 800.546.7556
