Latest Update: 5th December 2019 – Unfortunately today the Federal Government passed the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Bill 2019 into law without amendment, resulting in the scrapping of the main residence exemption for non-resident Australian expats.
To read more about this disappointing turn of events click here: Death of the Main Residence Exemption for Australian expats
Original article below:
Are you an Australian expat or a US citizen who has been living in the United States? Are you feeling a little homesick or are you simply ready to begin moving to Australia from the US? Whether you want to return for the warm weather, laidback lifestyle, to reconnect with loved ones or anything in between, there are a few things to consider before moving to Australia from the US.
This article explores many of the tax implications involved in the move, including:
- How the US-Australian tax treaty affects you
- Property and capital gains taxes
- Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion (FHE)
- 401k plans and superannuation
- Any exit taxes you may face, and more.
USA – Australia Tax Treaty
The United States does have a tax treaty with Australia. It defines the terminology which sets the relationship between the two countries. It also sets out rules to determine an individual’s tax residency status for double taxation agreement purposes. Note that this does not change your tax residency status for each country under each country’s domestic tax rules. It only applies to your residency status for double tax agreement purposes. This proves particularly helpful for people who are unsure of their tax residency.
Primarily, the treaty relates to property, business/commerce and income, establishing the rights of the Australian and American governments to levy taxes on particular types of income, based on where it is earned.
Article 22 of the treaty provides relief from double taxation laws. It also excludes certain forms of income from taxation (i.e. annuity, pension and social security) you receive while in your country of residence. Put simply, if you are living in Australia but are considered a US resident, your Australian pension income is excluded from your US taxes.
However, there are certain instances where you may be required to pay tax on your US social security or investments. The reason for this is the US-Australian tax treaty also contains a savings clause which overrides Article 22.
Land tax
If you own property in Australia, you may be subject to the property or “land tax”. Charged to property owners annually, this tax applies to all real estate properties. However, there are exemptions to the land tax in some states (including New South Wales, Victoria and the Australian Capital Territory). This means, depending on where you live, you may not have to pay land tax on your principal place of residence, home office, or farm.
Currently, the rate of land tax charged depends on the value of your property. The tax is charged on a sliding scale, depending on what your property is worth.
0.2% for property valued at $250,000-$600,000
0.5% for property valued at $600,000-$1,000,000
0.8% for property valued at $1,000,000-$1,800,000
1.3% for property valued at $1,800,000-$3,000,000, and;
2.25% for property valued at $3,000,000 or more.
Capital Gains Tax
Any property is subject to the capital gains tax (CGT), including: shares, interests in trusts and real estate. While there is no flat capital gains tax rate, net capital gains are included as part of your assessable income. So, it is taxed at the marginal rate – this rate can be as high as 47% (includes the 2% Medicare levy).
If you possess an asset for at least 12 months, you may be entitled to 50% off the capital gains tax rate but only for the period of time that you were a tax resident of Australia (as a proportion of the total number of days that you owned the asset). This means that potentially, only half of your net capital gain may be assessable. If you are entitled to the full 50% discount, and assuming that you pay tax at the highest marginal tax rate, the effect of the discount is to reduce your capital gains tax rate to 23.5%.
Upon your return to Australia, you’ll be deemed an Australian resident for tax purposes. So, you will be subject to the country’s capital gains tax rules. Accordingly, any asset that own that is not ‘Taxable Australian Property’ will be deemed to have been acquired for Australian capital gains tax purposes at their market value at the date that you become an Australian tax resident. Examples of assets that are NOT ‘Taxable Australian Property’ include foreign property, foreign stocks and managed funds, and very interestingly, Australian shares that you have purchased whilst you were a non-resident in most (but not all) Australian Stock Exchange (ASX!
Yes, that’s correct!
If you’ve purchased shares (whilst you were a non-resident) in an ASX listed company and you don’t own more than 10% of that company, AND if the majority of the underlying assets of that company are NOT ‘Taxable Australian Property’, then your portfolio of ASX listed shares is not considered as Taxable Australian Property’.
As such, those shareholdings are generally exempt from capital gains tax whilst you remain a non-resident, and when you regain or become a tax resident of Australia, you’ll be deemed to have acquired those shares at their market value (meaning that the cost base is reset from the actual cost of those shareholdings to the market value on the date you become a tax resident of Australia). So, in effect, this means that the unrealised capital gain that you made whilst living and working overseas will never be taxed by Australia! Amazing right?
Australia has always had a comprehensive capital gains tax system for citizens and expats. However, in May 2017, the Federal Government announced that they intended to stop both foreign tax residents and non-resident Australian expats from accessing the CGT main residence exemption. With the calling of the 2019 Federal Election, the legislation brought before parliament and seeking to scrap the main residence exemption for non-resident Australian expats lapsed. Although the government have expressed that they intend to maintain this policy, as at the date of writing this article (12th Aug 2019), the government has not yet reintroduced this legislation into parliament to be read and debated.
Stay tuned though as this could change at any moment unfortunately!
Foreign Earned Income Exclusion (FEIE)
If you are registered as a US citizen or green card holder, living and working in Australia, you WILL continue to have US tax obligations, meaning that you will still be required to lodge annual taxation returns to the Internal Revenue Services (IRS).
However, you may be eligible for a foreign earned income exclusion (or FEIE). With the FEIE, a portion or even all of your foreign-earned income (i.e. wages or self-employment) could be exempt from taxation.
Earned income refers to salaries, professional fees or wages received for services as an employee or independent contractor. But note however, that any other types of income (i.e. investments, rental income, etc.) are not eligible for exemption under the FEIE.
Thus the FEIE cannot be claimed for “passive incomes”, such as: investments, pensions, dividends, interest or capital gains.
The current FEIE limit is USD$102,100. So, if you earn $202,100 in the income year, you may subtract the USD$102,100 limit, resulting in a taxable income of USD$100,000.
The FEIE is subject to the “stacking rule”. This rule stipulates that your FEIE adjusted income is taxable according to the rate applying to the original gross amount. Using the above example, with an income of $202,100, you would only be taxed for the first $100,000.
In order to qualify, you need to live and work outside of the United States and satisfy either the Bona Fide Resident test or the Physical Presence test.
Foreign Income Tax
Whether you are required to pay foreign income tax can be complex as it depends upon your residency status for each country, upon your residency status for double taxation agreement purposes and upon where your income is sourced. If you are a non-resident, you do not have to report your foreign earnings on your Australian tax return. Temporary residents may be required to report foreign-sourced earnings. And, while Australian residents must report their foreign income, there are safeguards to avoid double taxation (such as allowing a Foreign Income Tax Offset in respect of foreign taxes paid).
From a US tax perspective the rules are similar in that if yoou are not a US resident alien, then your foreign income will not be assessable in your US return. If you are a resident alien for US tax purposes, then you will be required to report your foreign income, but similar to Australia, there are safeguards in place (foreign tax credits) to avoid double taxation.
Foreign Tax Credits
For Aussie expats who have lived in the US, double taxation has always been a concern. If you have been living abroad, you are obligated to report your total worldwide income to the IRS. In addition, you are required to pay income tax in Australia.
If you are paying tax in the US and Australia on the same income, you are paying “juridical double taxation”. There is a simple way to avoid this, however – foreign tax credits. This system equals the tax you have paid in Australia for the current income year (matching your contribution dollar for dollar).
Taxes paid in the US qualify for foreign tax credits if:
- They’re levied on your income
- You were legally obliged to pay them
- You have paid the required tax, and;
- You made no personal gain by paying them.
You are eligible to claim foreign tax credits on any income tax paid to local and state governments. However, there are certain categories of tax which are ineligible. These include: VAT, sales tax, real estate or luxury taxes. You can claim foreign tax credits by simply filing Form 1116.
Foreign Bank Accounts
While wealth is not strictly taxed in the US, the IRS still requires information about any foreign bank accounts. The IRS is particularly interested in how you earned the money in your non-US bank accounts (i.e. income, investments, dividends, etc.) and whether it has generated any income.
To report your foreign bank account(s) to the IRS, there are two forms you need to fill out – Form 114: Foreign Bank Account Report (FBAR) and Form 8938: Foreign Account Tax Compliance Act (FATCA).
If at any point in the US tax year your foreign accounts exceed more than $10,000 cumulatively (i.e. the total of all your accounts added together, not $10,000 per account), then you will be required to file the FBAR electronically, to the Department of Treasury by April 15th. As you are outside of the US, however, there is an automatic extension until October 15th.
If your assets total over $200,000 by December 31st, or $300,000 during the tax year, you must file the FACTA. And, if you are filing taxes with your spouse, the thresholds increase to $400,000 and $600,000.
Foreign Housing Exclusion or Deduction
Along with the FEIE, US expats living and working in Australia may also be able to claim a foreign housing exclusion (FHE) or deduction, by lodging Form 2555. It can help you cover housing expenses, minus the base amount. The exclusion may be used for housing which is paid for by finances provided by your employer (i.e. salary, bonuses, etc.). Whilst the deduction may be used for housing paid for through proceeds from self-employment.
There are only certain housing-related expenses you can claim using the foreign housing deduction or exclusion. These expenses are any “reasonable expenses” you incur. Such expenses are limited to 16% of your maximum FEIE amount, however. Although, in higher-cost cities such as Sydney, Melbourne or Perth, a higher limit may be permitted. This limit is specified on Form 2555.
Generally, the base housing amount constitutes 16% of your FEIE. In most cases, though, your housing deduction or exclusion will equate to 14% of the FEIE.
Claimable housing expenses do not include the following: the cost of purchasing your property, performing renovations or any other expenses incurred to increase its value.
401k and Superannuation
When transferring your US 401(k) to an Australian superannuation fund, there are numerous tax implications to consider.
Firstly, you need to determine if the lump sum you’ve received includes ‘applicable fund earnings’ or an assessable foreign fund amount. Applicable fund earnings are how much your fund has earned since you became a resident for Australian taxation purposes. The assessable foreign fund amount is any more money than was vested to you (your legal entitlement when you leave the fund) when the amount was paid.
There are also some tax concessions available, however. To access these, your pension fund must qualify as a “foreign superannuation fund”. You can determine this by figuring out whether your pension fund complies with Australian Superannuation regulations.
Foreign income tax offset
From an Australian tax perspective, if you are an Australian tax resident, you’ll be required to report and declare your foreign income, but you’ll be entitled to a Foreign Income Tax Offset (FITO).
You can claim this tax credit when tax on your foreign income is paid or withheld at source. If the foreign tax amounts to $1,000 or less, you can make a full claim. If the tax is over $1,000, the claim is subject to the foreign income tax offset limit. The FITO limit is generally equal to the lower of the average rate of Australian tax on your foreign income OR the foreign tax paid.
Note however, taxes or compulsory levies paid overseas are eligible to be claimed as a Foreign Income Tax Offset. Only taxes that are ‘substantially similar’ to Australian taxes levied are eligible to be included in the calculation to determine your maximum claimable foreign income tax offset.
Note as a general rule, social security charges or any other charges paid where there is a direct connection between the levy and the individual benefits that you may be entitled to receive (regardless of whether you receive any such benefits) are not generally regarded as ‘taxes on the total amount of income’ earned by you.
Thus it your US social security and Medicare levies will NOT be eligible to be included in the calculation on your Foreign Income Tax Offset sadly! To see what taxes are eligible for inclusion in the calculation of your Foreign Income Tax Offset in your Australian tax return take a look at IT 2507 Income tax: foreign tax credit system – foreign taxes eligible for credit against Australian income tax.
Exit Taxes
A record number of people are leaving the US permanently, to settle in welcoming countries like Australia. And, the key reason may surprise you. For many, the pressure of America’s global tax reporting and Foreign Account Tax Compliance Act (FATCA) is simply too much.
However, giving up your US passport comes with another expense – an exit tax. Put simply, the exit tax is like an estate tax on any gains made through your assets (i.e. home, investments, shares, etc.).
It is calculated as though you sold all assets the day before repatriating to Australia. Currently, capital gains are taxed up to 23.8% (including net investment income tax).
You are required to pay an exit tax if you are a “covered expatriate”. A “covered expatriate” is defined as those who either relinquish US citizenship or terminate their legal permanent resident (green-card) status after holding that status for 8 of the prior 15 years AND whom meet at least one of the three criteria below:
- Your average net income for the past five years exceeds USD$160,000
- You have a net worth over USD$2 million on the day you depart for Australia, or;
- You have failed to certify your compliance with US tax law during the five years prior to your expatriation (i.e. You do not state on Form 8854 that you’ve complied with US federal tax requirements for each of the previous five years).
If you are moving to Australia from the US
Are you ready to relocate to live and work in Australia, or perhaps to retire here? If so, to make the transition as easy as possible, contact any of our expert expatriate tax team here at Expat Tax Services today. We’ll help you navigate the various tax issues including income tax, capital gains tax, superannuation, preparation of your Australian tax returns and more.
Sources:
https://www.irs.gov/individuals/international-taxpayers/expatriation-tax
https://www.taxtalks.com.au/us-tax-while-living-in-australia/
https://brighttax.com/blog/the-foreign-earned-income-exclusion-everything-you-need-to-know/
https://brighttax.com/blog/the-american-foreign-tax-credit-everything-you-need-to-know/
https://www.globalpropertyguide.com/Pacific/Australia/Taxes-and-Costs
https://www.taxesforexpats.com/australia/us-tax-preparation-in-australia.html
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