How am I taxed if I work between the US and Australia? A detailed breakdown.

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Many Australians have business or employment between The United States and Australia, given the steady relationship between the two countries and specific visas extended to Aussies such as the E-3 professional working visa.

Earning foreign income while based in Australia raises tax complexities such as tax residency status, foreign exchange rates and the practical application of the double taxation agreement between Australia and the United States.

Below we will explore how a 'dual resident' employee living or working between the US and Australia will be taxed by the ATO and IRS.

I have been living/working between Australia and the US during the same financial year. How do I do my taxes?

In the instance that you where based between Australia and the US for employment whether this be physically or remotely in the one financial year the main issue to tackle is tax residency. Determining tax residency (which is totally different to immigration residency) dictates which authorities tax you and how.

How to determine tax residency in Australia

You will be considered a tax resident of Australia if you pass the 'resides' test, this means having the following: Physical presence, business & employment ties, family, intent to stay and upkeep of social and living arrangements.

Failing the resides test you will still be considered an Australian tax resident if you pass the domicile test, which means you have a permanent home in Australia or the 183 day test which is when you have arrived in Australia and spent at least half of the financial year here.

If you are considered an Australian resident for tax purposes you will have to pay Australian tax on all income you have earned from both Australia and abroad. You will however be entitled to a foreign income tax offset for tax you paid in the United States.

How to determine tax residency in the US

The United States tax authority, Internal revenue Service (IRS) has a much larger net when considering tax residency. Off the bat, any US citizen even if they are living or traveling abroad will be considered a resident for tax purposes. Also any foreigners who are 'engaged in trade or business' in the US which includes employment, will be considered a 'non-resident alien' and required to file a US tax return.

If you are a greencard holder or were in the US for at least 31 days out of the fiscal year you will be considered a 'resident Alien' and again will be required to file a tax return.

Because the IRS considers all American citizens as residents for tax purposes it is easy to see that many individuals will satisfy the criteria of tax residency for both the US and Australia at the same time, thus becoming 'Dual residents'.

The tiebreaker test.

To counter this risk of double taxation the Australian and US governments came together and issued a double tax agreement between the two countries in 1982. This tax treaty provides a tie breaker test to ensure that dual residents are ultimately assigned tax residency to only one country.

The tie breaker is simply the location of the permanent home.

If it is determined that you are an Australian resident for tax purposes:

You will need to lodge an Australian tax return and will be taxed by the Australian taxation office on both Australian and US sourced income. Your US income must be converted to AUD in your tax return using the Foreign income conversion calculator. You will be entitled to a tax offset for any amounts already paid or withheld from your US based income.

This offset is called the Foreign income tax offset and is limited to the amount of Australian tax you would have paid if you had earned all your income in Australia instead of abroad.

See details on how to calculate the tax offset here.

You will also need to lodge a US income tax return (Form 1040) with the IRS, due April 15th. If eligible the foreign earned income exclusion will allow you to pay no US tax on Australian income up to $107,600 in the 2020FY. If you do not elect to exclude your foreign income you can instead claim the foreign tax credit on form 1116

You may also be eligible for the foreign housing exclusion or deduction with the IRS which will allow you to deduct housing expenses from gross income so long as you satisfy the bona fide residence test or the physical presence test (Basically as long as you have lived in the foreign country for at least one tax year).

US and Australian financial years are different with the US financial year falling between Jan-Dec and Australia's between Jul-Jun. Therefore you must only include the foreign income earned which falls between the time period of the tax return you are lodging.

If it is determined that you are a United States resident for tax purposes:

You will have to lodge a US income tax return form 1040 with the IRS.

Just like the Australian situation mentioned previously you will be able to claim either the Foreign earned income exclusion on the first $107,600 of Aussie income earned (2020FY) - if you have lived in Australia for at least one whole tax year (Jul-Jun) consecutively or alternatively you can claim the foreign tax offset so you are not double taxed. You may also be eligible for the Foreign housing exclusion or deduction.

Foreign tax credits gained from paying Australian tax can also be utilised to offset any tax liabilities owed even after the foreign earned income exclusion has been used.

You will also have to lodge an Australian tax return with the ATO unless you were a working holiday maker 417 or 462 who made under $37,001.

You will only need to report your income earned in Australia on your Australian tax return not your worldwide income.

Example scenario of when United States and Australian tax treaty DOES NOT apply.

Jacqueline is a US citizen who has moved to Australia on 1st Jan 2021. Jacqueline is on a partner visa and is living at her Australian partners house, she intends to stay permanently and does not own a house in the US. Jacqueline earned $30,000 in the US from Jan 2020-Dec 2020 and $50,000 in Australia from July 2020 - June 2021.

- Jacqueline will be considered an Australian resident for tax purposes from Jan 1st as she now resides in Australia and her permanent house is in Australia.

- She will lodge an Australian tax return for 2021 and report the $50,000 she made in Australia, she will not report the American income as this was earned before she became an Australian tax resident and is excluded from Australian taxation.

- She would lodge a US tax return and report the $30,000 earned in the US and the portion of the Australian income earned in the US tax year which in this case would be $0.

In the above case the double taxation agreement does not need to be referred to because there is no crossover between residency status.

Example scenario of when United States and Australian tax treaty DOES apply.

Jacqueline is a US citizen who now has a permanent home in Australia and works for an Australian company, she works from her laptop and spends about 4 months out of each year in the US on work assignments and the rest of the time in Australia.

In this case Jacqueline would be considered a dual resident for tax purposes. The tiebreaker test on the tax treaty would confirm that she is an Australian resident due to her permanent home being in Australia.

Jacqueline would report all her income and pay Australian resident tax rates on her Australian tax return.

Jacqueline would report her worldwide income to the IRS but would get a foreign tax offset for the Australian tax paid on her foreign income to put towards her federal income taxes in the US.

It is important to note that the foreign tax offset can only be claimed on your return if the tax has actually been paid. If foreign tax is paid in the next financial year you will have to amend your return to claim the credit or wait until it has been paid to lodge your return, see example 1.

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Need help with taxation between the US and Australia?

For help with cross border US and Australian taxation issues contact CTK Accounting.

CTK Accounting is a CPA and tax agent firm practicing in Wollongong Australia and servicing clients with business between US and Australia.