Understanding the US Australia tax treaty is crucial for American living in Australia and Australians who have US source income. This comprehensive guide breaks down the treaty's provisions, offering clarity on how it affects personal taxation and helps avoid double taxation.
Executive Summary
The US Australia tax treaty provides mechanisms for relief from double taxation, ensuring that income earned in one country by residents or citizens of the other is not taxed twice. Specifically, the treaty allows U.S. citizens and residents to credit the income tax they pay to Australia against their U.S. tax obligations. Conversely, Australia offers a credit for U.S. taxes paid against the Australian tax liabilities of its residents.
Every tax treaty of the United States, including the one with Australia, includes a provision known as a "Savings Clause." This clause ensures that the U.S. retains the ability to tax its citizens as per its domestic tax laws, irrespective of the stipulations outlined in the treaty. As a result of this clause, for U.S. citizen expats, the majority of the benefits and reductions offered by the treaty do not apply.
Expert Tip : It's crucial for U.S. citizens to familiarize themselves with the Savings Clause exclusions in the US Australia Tax Treaty to accurately determine which tax benefits they can utilize.
Tax Residency and the Tie-Breaker Rules
The United States and Australia each have their own criteria for determining who is a resident for tax purposes. It's possible for someone to meet the residency requirements of both countries simultaneously. To prevent the problems that dual residency could cause, the U.S. Australia Tax Treaty provides a series of tie-breaker rules. These rules help to decide which country has the primary right to tax the individual's income.
Passive income from U.S. sources, which is not tied to a U.S. trade or business, is taxed at a flat rate of 30% if earned by a non-resident alien. However, the US Australian tax treaty may lower this rate or totally exempt it from US taxation for certain types of income. We've summarized some of the tax treaty rates in the table below. It's important to note that that these rates generally do not apply to U.S. citizens due to the savings clause mentioned earlier.
Tax Rate
Treaty Article Citation
Dividends - Paid by U.S. Corporations
Dividends - Qualifying for Direct Dividend Rate
Pensions and Annuities
*The rate applies to both periodic and lump-sum payments
**Tax rate applies to 85% of the social security payments you receive from the U.S. Government. Therefore, the actual tax rate you pay on your total social security payments is 85% of the rate listed in the table.
Generally, income received from work performed in the US would be considered US source income and would be subject to US taxation. However, the US Australian tax treaty lists certain exemptions where taxes rates are reduced or even eliminated. It's important to note that these exceptions generally do not apply to US citizens because of the savings clause mentioned earlier. We've summarized some of these exceptions in the table below:
Income Type
Maximum Presence in U.S
Required Employer or Payer
Maximum Amount of Compensation
Treaty Article Citation
Any foreign resident
Any U.S. or foreign resident
The Australia US Tax Treaty doesn't cover superannuation, which is an important part of saving for retirement in Australia. This omission has led to significant confusion about how to report superannuation on U.S. tax returns, affecting U.S. citizens and green-card holders in Australia, as well as Australians in the U.S. with superannuation funds. This lack of clarity hampers labor mobility and could impact Australian residents' retirement savings. In the absence of clear guidance, taxpayers and tax professionals must navigate complex regulations to determine the U.S. tax treatment of various types of superannuation funds.
The United States and Australia have a Totalization Agreement in place, which is designed to avoid double taxation of their income with respect to social security taxes. It establishes clear rules about which country's social security system covers the employee. As a result, employees and their employers can only be taxed by one country's social security system at a time. This bilateral understanding ensures that workers' rights are protected and that they receive the benefits to which they are entitled, regardless of where they choose to live and work between the two nations.
Numerous states within the United States impose income taxes on their residents. The adherence to U.S. tax treaty provisions varies by state—some may recognize them, while others may not.
Expert Insight: Always check with a tax professional about how state tax laws interact with the treaty, as this can vary significantly from state to state.
At CPAs for Expats , we specialize in helping US expats stay compliant with their US taxes. Our low fees and 4.9/5 rating on independent review platforms attests to our commitment to excellence and client satisfaction. Contact us today, and let our experts simplify your tax management process, providing peace of mind and significant savings!