Over 100,000 Americans live in Australia, many of them in Sydney or Melbourne. While it may feel far away from the United States, don’t forget about US taxes. American expats in Australia may need to file tax returns both in Australia and the US. The Australian tax year differs from the US, which makes it even more complex.
In this guide to US taxes for Americans in Australia, we cover the key taxation considerations:
- US Filing Requirements For American Expats In Australia
- Foreign Earned Income Exclusion (FEIE) When Living In Australia
- Foreign Housing Exclusion Or Deduction
- Australian Tax Overview
- When A US Expat Must File Taxes In Australia
- Reporting Australian Bank Accounts And Other Financial Assets
- US – Australia Tax Treaty
- Totalization Agreement Between US And Australia
- Superannuation – The Australian Retirement Savings System
- Business Taxation For American Entrepreneurs In Australia
- How To File Taxes As American In Australia
Let’s get started.
US Filing Requirements For American Expats In Australia
US citizens and green card holders must file a US tax return when they meet the income thresholds. It doesn’t matter if you earn the income in Australia or receive it from elsewhere in the world.
Even if you don’t owe any tax, you still need to file. Many expats have the mistaken belief that they don’t need to file a US return if their income is below about $100,000, which is the Foreign Earned Income Exclusion (more about that in a moment). But in reality, the filing thresholds are much lower, even just $5 in certain cases.
Check out our Expat Tax Guide for income thresholds. Our guide also explains other expat-specific tax provisions.
Keep in mind that many US-based tax accountants are not familiar with those provisions. They often don’t know which return to file first, where to claim tax credits, how to leverage the tax treaty between the countries, and so on. Tax software has similar shortcomings, as it is typically made for US-based taxpayers. So, you might miss out on significant savings or make costly mistakes.
If you don’t have a good US tax accountant yet, check us out or use this checklist to find one. We have helped many clients in Australia and are familiar with the local documentation. Our entire process is done securely online, and we have accountants in your time zone.
Foreign Earned Income Exclusion (FEIE) When Living In Australia
Many expats have heard about the Foreign Earned Income Exclusion (FEIE). It allows you to exclude up to $120,000 (2023 tax year) from federal income taxes. However, with Australia’s high tax rates it is often more beneficial for expats to use the Foreign Tax Credit instead.
The Foreign Tax Credit (FTC) gives you a dollar-for-dollar credit for taxes you already paid in a foreign country. Any unused tax credit carries over into future years.
Let’s say, your income tax bill in Australia is $15,000. If your income tax in the US would be $13,000, the amount paid in Australia will be applied. This zeros out your US income tax, and you can carry over $2,000 unused tax credit to future years.
Using the Foreign Tax Credit instead of the FEIE has other advantages as well. You can still contribute to retirement accounts and potentially claim a child tax credit, which you couldn’t do if you excluded all your income under the FEIE.
If you use the Foreign Tax Credit and not the FEIE, you also have more flexibility with traveling back to the US.
Our accountants always look at both scenarios, FEIE and Foreign Tax Credit, and tell you which one is more beneficial for your situation.
Foreign Housing Exclusion Or Deduction
The housing cost is quite high in most Australian cities with significant expat populations. The Foreign Housing Exclusion allows expats that are employed abroad to exclude certain housing expenses. To use the Foreign Housing Exclusion, you must qualify for the FEIE though. (This doesn’t mean that you have to use the FEIE. You can elect to only use the housing exclusion.)
For 2023 you can exclude housing expenses over $19,200 (16% of FEIE) annually up to a limit that depends on the location. The general limit is $36,000 (30% of FEIE), but some high-cost cities have higher upper limits. The yearly cap for Sydney is $66,500 in 2023 (it was $70,800 in 2022).
Self-employed expats can deduct certain housing expenses from their gross income. While the Foreign Housing Deduction will lower your overall tax liability, it will not reduce the self-employment tax liability burden. Read more about being self-employed abroad in this US tax guide for self-employed expats.
Qualifying expenses for both the Housing Exclusion and Deduction include:
- Rent
- Utilities (other than telephone charges)
- Real and personal property insurance
- Rental of furniture and accessories
- Repairs
- Residential parking
If your employer pays for housing, this is generally a taxable benefit, unless the housing is a requirement of a job (such as in a dangerous area or a university administrator required to be on campus).
Australian Tax Overview
The tax collection agency of Australia is called ATO (Australian Taxation Office). You must have a Tax File Number (TFN) to file the taxes in Australia. Temporary residents can also obtain the TFN if they need to file a tax return with the ATO.
A big difference between the United States and Australia is the tax year. The Australian tax year is July 1st to June 30th. Australian tax returns are due by October 31st the year the tax year ends. This creates extra complexity for US expats, both in timing and calculations for their US tax return.
On a high level, you must file your Australian taxes first and get an extension in the US. You also need to make sure that you claim any credits and exclusions correctly. An experienced expat tax accountant can help.
Another difference is that Australia doesn’t have a ‘married filing jointly’ option. Each spouse files separately but declares their spouse’s name and TFN.
In Australia, residents and non-residents are taxed differently. You are considered a tax resident if you are residing or domiciled there. That means if your permanent residence is Down Under, if the center of your economic, social, or business interests is there, you are an Australian tax resident.
Also, if you spend 183 or more days in Australia, the ATO typically considers you a tax resident.
In addition, eligibility for Commonwealth or public sector superannuation schemes can make you, and your spouse and children, a tax resident.
Like the US, Australia has a progressive tax rate system. Australian income tax rates go up to 45%, thus are relatively high compared to the US. You can find detailed current Australian income tax rates on the government website. In addition, ATO levies a 2% Medicare tax.
When A US Expat Must File Taxes In Australia
Whether or not Americans living in Australia have to file a tax return there depends on their income and their residence status.
As a non-resident, you must declare any income sourced in Australia.
Residents must file when they are over the filing threshold and report their worldwide income.
Fortunately, there is a tax treaty between Australia and the US. It helps to avoid double taxation and specifies where and how some types of income are taxed. More about the tax treaty in a moment.
Please note, we have a great understanding of how the tax system in Australia affects the US taxes of expats. Our main expertise is US taxation though. We cannot advise on or prepare Australian tax returns. But we have a great network of local tax professionals in many countries, including Australia, that have experience working with US expats on their Australian taxes.
Reporting Australian Bank Accounts And Other Financial Assets
Just as any US taxpayers, American expats in Australia must disclose their foreign bank accounts and potentially other foreign assets if the value exceeds certain thresholds.
You must file a FinCEN Form 114 to report foreign bank accounts if the combined value of your foreign accounts exceeds $10,000 during any time of the tax year. The thresholds for reporting other financial assets are higher and depend on your marital status and where you reside. Those are reported on Form 8938.
US – Australia Tax Treaty
The United States has a tax treaty with Australia. It has provisions to prevent double taxation and other potential benefits for taxpayers.
The most recent update of the US – Australia tax treaty also includes provisions on the taxation of capital gains, pensions, and social security payments.
Keep in mind that the United States and Australia also share tax information. Make sure that you disclose all relevant income correctly.
Totalization Agreement Between US And Australia
The United States also has a totalization agreement with Australia, which governs social security taxes and distributions. With a totalization agreement in place, expats avoid having to pay into two systems at the same time.
Basically, when a US expat pays social security taxes in Australia, they are exempt from paying social security taxes on the same income in US.
The US – Australia totalization agreement states that when a US company sends an expat to Australia for work for less than five years, they will continue to pay into the US system. If the assignment is for over five years, the expat pays into the Australian system. When the US expat works for an Australian company, they pay into the Australian social security system.
Superannuation – The Australian Retirement Savings System
A Superannuation, or Super, is an employer-sponsored retirement account, where money earned by the employee is placed in an investment fund. Upon retirement, the retiree receives a set amount, based on a variety of factors.
Although a Super operates similar to a 401(k), the IRS does not treat it as qualified retirement plan. Instead, it treats the funds as either employee benefit or grantor trust without clear guidelines at the time of this writing.
Business Taxation For American Entrepreneurs In Australia
A company doesn’t have to be registered in Australia to be taxed there. If a company has an office, branch, production facilities, or the like in Australia, it creates a “permanent establishment” and tax obligations there.
So, when an American expat with a US company carries out business operations in Australia, where he lives, the business could have tax obligations in Australia. Of course, the company also must file a US tax return.
When an Australian company has greater than 50% American ownership, it must file the onerous and complex IRS Form 5471, in addition to any filings in Australia.
Having a non-resident spouse that owns or co-owns a non-US company adds even more complexity to Form 5471. Consult with an experienced tax accountant.
How To File Taxes As American In Australia
As you can see, filing taxes correctly in two countries is not as straightforward as having your old US accountant (or DYI software) file your US return, and dealing with Australian taxes separately. You have to file in the right order, which is not easy because the US and the Australian tax year are not the same.
Fortunately, there are special tax provisions for expats, like the Foreign Tax Credit, and tax treaty benefits to reduce your tax burden and avoid double taxation. A tax accountant who has experience with this situation can save you money and headaches.
We have many clients in Australia and are familiar with Australian tax documents, superannuation, and other typical tax situations. Book a consultation with us to see how we can help.
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