Contact us
Thanks for your submission! We will be in touch shortly.
Oops! Something went wrong while submitting the form.
We're an award-winning boutique tax accounting firm committed to proactive and personalised financial solutions.
Get a Free Consultation
This article is for the expats, E3, J1 and O1 visa holders and any other Australians who are living temporarily in The U.S with plans to eventually return to their permanent base in Australia.
As a practicing CPA who has personally lived and worked as an accountant between Los Angeles and Sydney, with clients in both jurisdictions; I have seen first hand how difficult it can be for Australians living in the U.S to sort out their tax affairs properly.
This is because accountants and tax agents are generally only registered in one country and have limited knowledge of tax laws in foreign countries. It's one thing to know how to handle foreign income on an Australian tax return, it's another to also know how the IRS is handling taxes on the U.S side to ensure tax minimization and compliance across the board.
It all starts with tax residency.
Australia will consider you a resident for tax purposes if you pass the resides, domicile or 183 day test. AKA if you are physically present, have work and family ties and intent to stay, a permanent home or have been here for 183 days out of the financial year.
The U.S will consider you a resident for tax purposes if you are an American citizen, greencard holder or pass the substantial presence test, which means you have spent at least 31 days out of the calendar year in the U.S.
As you can see it is very easy to pass the tax residency tests for both countries which could open you up to both the IRS and ATO each taxing your worldwide income. It is for this reason that when considered a tax resident for both countries, we must resort to the Double taxation agreement signed in 1982.
If you are considered a dual resident for tax purposes, meaning that you satisfy the respective residency tests for both the U.S and Australia then the most reliable way out of being double taxed is by utilizing the the provisions of the U.S / Australia tax treaty. This treaty contains multiple articles which ultimately mitigate or eliminate double taxation. In particular article 5 of the treaty allows for a tiebreaker test which allocates tax residency to the individual based on where their 'Permanent establishment' is located.
If after passing both residency tests and having to resort to the tax treaty, you determine that your primary residence or permanent home is in Australia, you will have to file U.S tax return form 1040-NR which is a non-resident alien tax return.
On this return only your U.S sourced income such as your W-2 and 1099 will be disclosed and taxed by the IRS along with form 1040-NR you will also have to file form 8833 'Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)'
On the Australian side of things, you will have to file an Australian tax return as an Australian tax resident and record your Australian sourced income plus worldwide income converted to AUD - You can use the ATO's conversion calculator for this. You will then calculate and claim a foreign income tax offset for the amount of U.S federal and state income tax paid or withheld during the Australian Financial Year by the U.S.
You can only claim an offset in your Australian return for the amount of U.S taxes which relate to income earned in the Australian financial year. These taxes must already be withheld or paid before you can claim them. If you lodged your Australian tax return and then paid the U.S taxes that you owed after the fact, you would have to then Amend your Australian return to claim the offset for these taxes.
Note 1: If you pass the tax residency tests for the U.S, regardless of what the tax treaty articles override, It is advisable to file an FBAR report with FinCEN. This is a report which makes known to the U.S your foreign bank account balances. You must file this if you have an Australian or other foreign bank account which had a balance of $10,000, or more during the calendar year. The FinCEN stands for 'Financial crimes enforcement network' and has nothing to do with the IRS. The penalties for not filing this when necessary can result in fines of up to 50% of the balance of the account .
Note 2: Fixed income such as rent, interest or any other determinable, recurring or annual income originating from the U.S will incur a 30% withholding unless form W-8BEN is filed to notify the withholder of your foreign/non-resident alien status. Filing form W-8BEN will allow the withholding tax rate to be reduced according to treaty articles. Other wise you can simply pay the 30% and then claim back the overpaid withholding in your 1040-NR tax return.
CTK Accounting is a registered CPA and tax agent firm based in Wollongong Australia with cross boarder tax knowledge.
Please reach out to us at ctkaccounting.com.au for your cross border tax enquiries.
