The US has similar payroll tax requirements to Australia. From withholding taxes on wages, to payment of payroll taxes assessed on wages paid, and lodgement of employee forms, there is a range of compliance requirements that your company must fulfill.

There are a wide variety of payroll tax considerations, including tax withholding and taxes payable on the amount of wages. These taxes are levied to fund social security, Medicare, unemployment and disability benefits, and other State and Local requirements.

Withholding Taxes

• Employers are responsibility for withholding taxes from wages and paying this to the Federal government.
• Some States also require withholding taxes to be withheld in relation to the income taxes on employee wages.
• Employers must typically make regular payroll tax deposits and file quarterly payroll tax returns with the IRS.
• State and Local tax agencies often have their own reporting and payment requirements.
• Withholding taxes go towards the individual employee’s income tax obligations.

Payroll Tax Requirements

Federal Insurance Contributions Act (FICA) Taxes

• Funds social security and Medicare.
• Social security tax rate is 6.2% for the employee plus 6.2% for the employer.
• Medicare tax rate is 1.45% for the employee plus 1.45% for the employer.
• Additional Medicare is payable at 0.9% for the employee when their wages exceed $200,000 in a year.

Federal Unemployment Tax Act (FUTA) Taxes

• Funds state workforce agencies and unemployment insurance.
• FUTA is payable by the employer and is calculated at 6% on the first $7,000 paid to each employee.
• Payment of state unemployment taxes can often be used as a tax credit to bring the FUTA tax rate down to as low as 0.6%.

State Payroll Taxes

• State Payroll Taxes may apply depending on the location of your business.
• The most common State tax is State Unemployment Tax (SUTA), which is payable by the employer.

Local Payroll Taxes

• Additional payroll taxes may be payable based on the zip code, county or municipality where your business is located.

Employee Forms

• At commencement of employment, employees fill out a Form W-4. This guides employers on how much income tax to withhold.
• At the end of each year, employers must provide employees with Form W-2, which reports the employee’s annual wages and tax withholdings.
• On commencing employment, employers are required to verify an employee’s eligibility to work in the US. This is typically done through the I-9 Form.

Other Payroll Considerations

• Workers Compensation Insurance
• State Disability Insurance
• Paid Leave
• Health Care Costs for Employees
• Retirement Plan Contributions 
• Reimbursements and Stipends

Penalties For Missed Or Late Payments

The IRS may charge a late fee for employment taxes that are not paid on time. This is called a “Failure to Deposit Penalty”.

Payroll tax penalties are:

• 1-5 days late: 2% of the overdue payment
• 6-15 days late: 5% of the overdue payment
• Over 15 days late: 10% of the overdue payment
• More than 10 days from first notice: 15% of overdue payment

Other Employee Benefits

Other Employee Benefits you may be required, or choose, to pay, can include:

Retirement Plans

One of the tax advantageous retirement savings plans is known as a 401(k). Under this plan you would pay a percentage of each paycheck into your employee’s retirement savings account instead of directly to them.

Health Insurance

Employers must offer affordable health insurance that provides minimum value of 95% to full time employees (working 30hrs or more a week) and their children (until they turn 26).

Stock and Stock Options

Stock and stock options can be offered as a form of equity compensation.

The US has a complex tax system, with multiple taxes, including income taxes, often being imposed on a State level as well as a Federal level. Some types of taxes also apply locally, meaning that even within the same State you can pay very different taxes to other parts of the State.

• The US Corporate tax system operates on a Federal, State and Local system. This means taxes and other compliance costs may be charged from all three levels.
• Filing requirements, lodgement deadlines, and available deductions or credits often differ between locations.
• Due to the complexity of Local variances, compliance with the Local tax laws requires specialised Local knowledge for the area or areas in which your business operates.
• To optimise your corporate tax strategy, it is recommended that you consult with experienced tax professionals who have a Local understanding of US taxes, as well as international taxes.
• Tax returns are typically based on a calendar year.

Choosing Your State

Since every State has different laws, it can be important to select the right State for your business operations. You will be required to register in every State that you operate in, however if you have no particular business requirement for which State or States you operate in, then it can be advantageous to select a State that has more well known and simple tax laws.

For instance, Delaware has no state income tax, a fairly straight forward tax system, and well-known corporate laws across the US.

Types of Taxes

Income Taxes (Federal And State)

• The Federal tax rate for companies is 21% 
• 44 States levy corporate income taxes. These taxes vary from 0% to 11.5%, with some states assessing taxes on a flat rate and others using tax brackets in the same manner that individual income taxes are assessed.
• 43 States levy state income taxes, 41 tax wage and salary income, New Hampshire exclusively taxes dividend and interest income and Washington only taxes capital gains income. Seven states don’t impose any individual income taxes. Some states use a flat income tax rate, while others have a graduated tax rate depending on the individual’s income.

Sales Taxes (State And Local)

• Sales taxes are similar to GST or VAT in certain parts of the world. However, as sales taxes are only imposed on a State level, the rates vary between 0% and 7.25% depending on the State.
• There are also various Local governments within 35 States that impose an additional sales or use tax, which ranges from 1% to 5%.

Property Taxes (State And Local)

• Local authorities such as cities, counties, and school boards, typically impose property taxes on the value of the property, including the land and the structure on the land.
• Each State imposes different parameters on property taxes.
• Property taxes can also be payable on purchase and/or sale of property.
• Most States have a “homestead” exemption which reduces or eliminates the cost of property tax on your primary residence, subject to a variety of qualifications or limits, which vary State to State, or even within States.

Payroll Taxes (Federal, State And Local)

• Federal payroll tax is paid by both the employer and the employee.
• Some States and Local authorities also require some form of payroll tax to be paid. The most common type is State Unemployment Insurance (SUTA tax), which is payable by the employer.

Franchise Of Privilege Tax (For Doing Business In A State)

• Some States require certain business organisations to pay a franchise tax, otherwise known as a privilege tax, for doing business in the State.
• This tax is typically calculated on the net worth of capital held by the entity.
• Some States use an economic and physical presence test to determine whether a business is taxed, while others have no written interpretation of the basis of their test for determining who is required to pay the franchise tax.

Gross Receipts Tax (State)

• Some States apply a gross receipts tax on a company’s gross sales, without consideration of deductions for expenses.
• Gross receipts tax applies to businesses, regardless of whether sales relate to business-to-business transactions or business-to-consumer transactions.

Business Licenses (State, Local, With Some Federal Regulations)

• Business licences or permits may be required on a Federal, State, or Local level.
• Business licenses can take some time to be processed, and they should be completed prior to commencing operations. The complexity of the application depends on your industry, as well as the locality managing the license.
• Licences and permits typically need to be renewed on a regular basis.

Due to the complexity of the wide variety of Local, State, and Federal taxes, it is important that you obtain qualified advice regarding your business. If your business expands into additional locations you will need to get updated advice regarding the new location in which you are operating.

Expanding to the US means you are entering a complex tax system. From international tax concerns, to different Local, State, and Federal requirements, there are many factors to consider. The type of legal structure you choose will impact your compliance and tax considerations obligations.

Type Of Entities

C Corporation (C Corp)

• Separate Legal Entity that works like an Australian private company does.
• Offers some asset protection due to legal structure.
• Taxed at the corporate level and when profits are distributed as dividends, these are taxed in the hands of shareholders.
• Has Directors, shareholders (stockholders) and a separate tax identity to the shareholders.
• Federal income tax rate is currently 21%. State income taxes may also apply.
• In some instances dividends may have a reduced withholding rate of 5% when paid to foreign shareholders.
• Allows for capital raising, new shareholders or selling the business completely by selling shareholdings to new investors.
• High compliance requirements including meetings, quorums, minutes, and other management formalities.

Limited Liability Company (LLC)

• This is a simplified form of a company. In operation it is similar to an Australian partnership where control is in the hands of the members and profits flow through to the owners rather than being taxed at the entity level.
• Provides similar protection, and more flexibility than a C Corp.
• LLCs are not managed by Directors. They are managed by the members or an appointed Manager.
• It is possible for an LLC to have a sole member.
• Members do not need to be US residents.
• Tax returns need to be filed if there are two or more members, however the profits are distributed to the members who pay tax on their share of the profits.
• Can elect to be taxed as a C Corporation instead of being taxed in the hands of the members.
• Can elect how profits are distributed to members. For instance, profits may be split equally between members, based on capital contributions, or in other agreed ways.
• If foreign tax is paid on the profits to an Australian member, they can claim the foreign tax paid as a tax credit on their own assessment of profit distribution received.

Branch (No New Entity)

• No separate legal entity, meaning Australian entity is directly responsible for tax and compliance requirements.
• Branch profits may be subject to US tax as well as Australian tax, depending how the branch is established in the US. In this instance the Australian company can typically claim the foreign tax paid as credits to reduce the impact of double taxation.
• As there is no additional entity there may be less compliance issues to consider with transferring profits from the US to Australia. 
• Whether you need to establish a US entity or not, will depend on the nature of the business you are operating.

Taxation Issues To Consider With Your Chosen Legal Structure

Both Australian and US tax laws need to be considered regardless of the legal structure used to establish the US business operations. International tax issues will also need to be considered where members, Directors or owners remain residents of Australia.

Australian Taxation

• If the US entity is controlled in Australia it may be treated as an Australian tax resident.
• The Australian parent company will need to consider how the fees paid between the US and the Australian entities are taxed in Australia.
• US generally imposes a 30% withholding tax on payments to foreign entities.

US Taxation

• The US may tax income earned from any business established in the US, regardless of whether the operating company is a US or Australian resident.
• Australian resident members or Directors may be subject to US taxes before considering Australian taxes on income generated from the US branch or entity.

Fees Between Entities

1. US transfer pricing rules require transactions between related parties to be at arm’s length. This means that the value of fees may be adjusted where it is not arm’s length.
2. Proper documentation is essential for consulting or management services between entities, including basis for fees charged. This can assist in ensuring that fees paid between the US and Australian entities are treated as required for tax purposes.
3. Fees must be ordinary and necessary business expenses in order to be tax deductible to the paying entity.

If you or any of your key employees will be moving to the US when expanding your business, they may have unique tax considerations.

With both Australia and the US taxing their residents on their worldwide income, and taxing non-residents on income that is sourced within the respective country, it is important to be aware of double taxation provisions that help ensure an individual isn’t taxed twice on the same income.

Tax Residency

It is important to determine which country an individual is a tax resident of, as this will impact how that individual is taxed in each country.

When an Australian resident moves to the US for work purposes they will typically become a US tax resident if they establish a home in the US and reside there on a “permanent” basis. Factors that will be considered in determining whether residency changes include whether family is brought overseas with them, if they buy or rent a home to live in, and if they disconnect with ties back in Australia. 

Conversely an individual who lives in the US on a short-term basis, staying in temporary accommodation, and leaving their family back home in Australia, is more likely to remain an Australian tax resident.

A US resident who moves to Australia will face a similar situation. However, the US is fairly unique in taxing citizens on their worldwide income, even if they change their country of residency for tax purposes.

Expatriate Taxation Rules

It is important that you familiarise yourself with both the Australian and US tax rules related to expatriates, so that your key employees who travel from one country to the other have the right information to manage expatriate taxation concerns.

Foreign Earned Income Exclusion

When certain conditions are met, individuals from the US may qualify for the foreign income exclusion. This applies for individuals who reside in a foreign country and earn foreign income. As US citizens are typically taxed on their worldwide income, regardless of their tax residency status, this allows eligible individuals to exclude certain income from their US federal income tax return.

Foreign Tax Credit

Both Australian and the US allow provision for foreign tax credits to be claimed in their resident tax return.

This ensures they are not taxed twice for the same income from both the source country and their country of residence.

Tax Equalisation Policies

Tax equalisation policies are policies that aim to neutralize the impact of an individual’s tax liability when they are working on a global assignment. The objective of these policies is to ensure that the tax burden on an individual is similar to what the individual would have faced if they had merely remained living in their home country.

Australian Help Debts

In the event that you move an Australian employee to the US on a permanent basis, they may become a US tax resident. Ordinarily this would mean that they only need to lodge an Australian tax return to declare any Australian sourced income.

However, if the individual has an outstanding HELP, TSL or VSL debt, they will need to declare their worldwide income. While a foreign resident is not liable for Australian taxes on foreign sourced income, they are still liable for HELP debt repayments based on the value of their worldwide income.

Individual Tax Obligations In The US

As the employer you should be prepared to provide guidance to any key employees that you relocate from Australia to the US. This helps ensure that they aren’t caught unaware of their obligations and tax requirements while residing in the US.

Familiarise your employees with US filing requirements, which are not only different, but can be significantly more complex than Australian requirements.

• The US tax return is based on the calendar year and the filing deadline is mid-April.
• In the US, Individual tax brackets vary from 10% to 37%. The US does have a tax withholding system, that is similar to Australia, to help individuals manage their tax obligations.
• Unlike Australia, where each individual must always file their own return, individuals in the US can file as a single person or jointly as a married couple, or separately as a married couple.
• The US requires individuals to lodge a Federal Tax Return. However, depending on the State in which the individual resides, they may need to file a State income tax return as well.
• Non-residents who receive US income are also required to file a tax return. This means that any employee who is only in the US on a temporary basis will need to file a US return as a non-resident.
• Local Income Taxes may also need to be considered.

Employee Benefits

The US has similar benefits and options for employees as Australia does, however there are some key differences that an individual employee should be aware of so that they can make appropriate plans and decisions for their individual care.

Retirement Plans

US employers are not obligated to contribute towards retirement in the way that Australian employers are required to pay the Superannuation Guarantee. Most employers voluntarily provide retirement benefits through a 401(k) plan (similar to Superannuation).

Health Insurance

While the US has a federal health medical system, Medicaid, to provide free or low-cost health coverage, this is typically limited to low income and disadvantaged individuals. Without a universal healthcare system it is important to consider health insurance, which is commonly provided as an employee benefit.

As an Australian business expanding into the US you will need to consider US, Australian and international taxation issues. Depending on how your business is structured it may be required to pay taxes in both the US and in Australia. As a shareholder, you may also face tax obligations in both the US and Australia.

Residency

The first issue to address with International Taxation is the issue of residency. Your residency, and the residency of your company, is the primary factor in determining which tax jurisdiction has taxation rights over your income.

Both Australian and US residents are taxed on their worldwide income, which means it is important to understand the ways in which double taxation is mitigated.

If you set up a US structure to operate in the US, you will face Australian taxation consequences if the owners and/or managers of the business are Australian residents, and for any interactions you have between your US company and your Australian company.

Conversely, if you use your Australian company to operate a business within the US, you will need to consider the US taxation consequences due to the source of that branch income being in the US.

Tax Treaty

The primary way that double taxation issues are mitigated is through the International Tax Treaty between Australia and the US. When it comes to an Australian business operating in the US, some of the key factors that this Tax Treaty covers include:

• Business profits of an Australian enterprise are only taxable in Australia unless the enterprise carries on business in the US through a permanent establishment there. This means if you establish a permanent presence in the US, your business will be taxed under US regulations. A permanent place of business can be a broad term and may include:

1. A physical place of business including offices, factories, branches, workshops, stores, a place of management, or other physical presence for business operations. 
2. A sales representative of your business who has a permanent establishment who conducts business deals for your business.
3. A permanent provision of services in a specified location, even without a physical presence in that location.

• Transfer Pricing Rules mean that if you have a US entity and an Australian entity, any fees paid between these two entities must be paid on an arm’s length basis. This means there must be a business reason for the fees and a market value basis for calculation of these fees.
• Double taxation is mitigated by both countries typically allowing foreign tax credits to be applied against local taxes.
• The treaty also includes provisions for exchange of information and mutual agreement procedures to resolve disputes.
• A non-discrimination clause ensures that nationals of one country are not subject to taxation in the other country that is more burdensome than that imposed on nationals in the same circumstances.

Withholding Taxes

The Tax Treaty also deals with withholding tax requirements for certain types of income. In some cases, these withholding requirements limit the amount of foreign tax that can be paid on the specified income types.

Dividends

If a US corporation pays dividends to an Australian company that owns 10% or more of the voting stock of the corporation, the rate of US tax on the gross amount of the dividend generally cannot exceed 5%. For other dividends, the rate generally cannot exceed 15%.

For any Australian resident shareholders, this means you will pay either 5% or 15% in US taxes on any dividends distributed to you from your US company. This income is then included in your Australian tax return and you claim the tax paid as a foreign tax credit to offset the Australian tax assessed on this income.

Interest

Interest arising in one of the countries and paid to a resident of the other country generally may be taxed in both countries. However, the rate of tax imposed by the source country generally cannot exceed 10% of the gross amount of the interest.

As an Australian resident any interest income you receive from a US source will be taxed in the US at 10%. The US sourced income then needs to be included in your Australian tax return and you can claim the 10% tax paid as a foreign tax credit to offset the Australian tax assessed on this income.

Royalties

Royalties arising in one of the countries and paid to a resident of the other country generally may be taxed in both countries. However, the rate of tax imposed by the source country generally cannot exceed 5% of the gross amount of the royalties.

As an Australian resident any royalties you receive from a US source will be taxed in the US at 5%. The US sourced income then needs to be included in your Australian tax return and you can claim the 5% tax paid as a foreign tax credit to offset the Australian tax assessed on this income.

International Tax Planning Strategies

Due to the potential complexities involved in dealing with taxes from multiple countries, and the rules and regulations of managing income from multiple countries, it is important to seek appropriate tax advice. International tax planning strategies allow you to optimise your global tax position by factoring in your options around the types of structure, business, and interactions that your business has in the US and in Australia.

As an Australian expat living in the USA you may have to contend with the impact of taxes on property that you own in Australia or in the USA.

The types of taxes relating to property that you may need to consider include:

• Income taxes
• Capital gains tax (CGT)
• Local taxes such as land tax in Australia or Property Taxes in the USA
• If you inherit property in the USA you may also be subject to inheritance taxes

Since your country of residence will have an impact on how you are taxed for income and capital gains purposes, this article assumes you are a USA tax resident. You can read more about US tax residency in our article ‘Managing Dual Tax Residency as an Expat‘.

Australian Property Taxes

Once you cease to be an Australian resident for tax purposes the taxes you pay on income generated from Australian owned property changes, in potentially significant ways.

Income Generated From Your Property

As a non-resident for Australian tax purposes, any income generated from Australian real property will need to be declared and taxed in your annual tax return on a non-resident basis. This means there is no tax free threshold and your income is taxed at foreign tax rates.

When you lodge your Australian tax return, any tax paid to the Australian Taxation Office (ATO), can be claimed as a tax credit in your USA tax return.

This will apply to any property you retain in Australia as an investment property, or any new property you invest in that is located within Australia.

Changes To The Way CGT Applies When You Move To The USA

Your Main Residence

As an Australian tax resident your main residence is exempt from capital gains tax (CGT).  However, when you move overseas and become a non-resident, this exemption ceases to apply, except in limited circumstances. 

If you have already moved to the US, but intend to return to Australia at some point, your main residence exemption will again be accessible, but only on a pro-rata basis, as long as you are once again an Australian resident at the time you sell your former main residence.

CGT Discount

Australian residents are ordinarily given a 50% CGT discount on assets that are sold after 12 months of ownership. This discount is not available to foreign residents for assets acquired after 8 May 2012. For any property that you acquired after this date you will only be able to utilise the 50% CGT discount on a pro-rata basis for any period that you were an Australian resident.

Note that the discount cannot be applied for any period of ownership where you are or were a non-resident. This means that even if you return to Australia as an Australian tax resident, you will be unable to apply the CGT discount for your time as a non-resident.

Land Taxes

As land tax is applied on a state-by-state basis, the rules and calculations for this tax will vary depending on the location of your property.

It is important to note that some states apply a foreign surcharge on the taxable value of land. This means that your land tax costs may be more expensive while you are a non-resident of Australia.

Transfer Of Property (Stamp Duty)

When you purchase property in Australia you are subject to stamp duty on the value of the property. Stamp duty is applicable on a state level which means that the assessment criteria and rate of calculation, including any exemptions or reductions, varies between states.

Declaring Australian Sourced Property Income

You will need to declare any income you earn from your Australian investment property on your US tax return. You can also claim a credit for any tax paid on the income to the ATO. 

USA Property Taxes

The USA has a lengthier range of taxes and a generally more complex tax system. This is because taxes may be applied on a Local government level, as well as State and Federal levels. With the USA being a much larger country than Australia, taxes can be quite complicated.

Income Taxes

If you hold investment property in the USA you will be taxed on the income generated from renting the property. Unlike Australia, income is taxed on both a Federal and a State level in the USA. This means you are required to lodge both a Federal and a State tax return, unless you are in a state that does not apply income tax.

Capital Gains Tax

The US has a Capital Gains Tax regime that is similar to Australia’s Capital Gains Tax regime.

There are exemptions for primary residences, provided certain conditions are met, and long-term capital gains, defined as assets that are owned for more than a year, are taxed at a preferential rate.

Whereas Australia gives a flat 50% discount after 12 months of ownership, the US applies a progressive, preferential rate of tax which depends on your total taxable income. The rate of tax that is applied to long-term capital gains may be 0%, 15% or 20%.

Local Property Taxes

Property Taxes are imposed by Local governments, which means they vary widely depending on the location of your property. The Local governments that impose these taxes includes counties, cities, and school districts.

The closest comparison in Australia would be land tax. However, while land tax in Australia is assessed on just the value of the land, Property Tax in the USA is assessed on the overall value of the home, including both the land and the property structure. Also, while Australians typically find that their main residence is exempt from Land Tax, US property owners are usually subject to Property Tax, even on their main residence.

The assessed value of your property will determine how much property tax you are required to pay, and this assessment is periodically reviewed, including when there are significant changes made to the property. Assessment is based on a unit known as “a mill”, which is the equivalent of one-thousandth of a dollar.

Some jurisdictions offer exemptions or deductions that can reduce your property tax liability. Exemptions and reductions may cover factors such as the property being your primary residence, or personal factors, such as age, disability, or veteran’s status.

For states that have a “homestead exemption”, Property Taxes are reduced on your main residence. Most states allow between $5,000 and $500,000 of your main residence to be exempt from Property Tax, with larger exemptions for married couples or joint owners. Conversely, some states do not have this exemption at all.

These taxes are ordinarily due annually or semi-annually, depending on the jurisdiction. Penalties and interest can apply for late payments, so it is important to be aware of your local property tax requirements.

Transfer Taxes (Conveyance or Deed Taxes)

When you transfer property between one person or entity, to another, you will also be assessed for transfer taxes, otherwise known as conveyance or deed taxes. Since transfer taxes are administered by the Local government, who pays these taxes, and how much they are, varies significantly between States, and sometimes even between counties within a State. Transfer taxes may be payable by the seller, the buyer, or both.

Estate and Inheritance Taxes

Unlike Australia, most States of the USA have a specific estate and inheritance tax.

Estate taxes are levied on the total value of a deceased person’s estate, before it is distributed to the beneficiaries of the estate. Conversely, inheritance taxes are imposed on the heirs who take ownership of the assets.

These taxes are also applied on a State level, which means the rules and tax rates can vary significantly, and not all States impose them.

Australian Tax Resident

Note that there may be different outcomes if you only are living in the USA on a short-term basis and remain an Australian tax resident instead of becoming a US resident.

It would also mean that you are required to lodge a US tax return as a non-resident. You would then lodge an Australian tax return as a resident, declaring worldwide income, including the foreign income and foreign tax credits from the US.

Understand Your Property Tax Obligations

Taxes on Property, from Property Taxes imposed on ongoing ownership of property, through to taxes on rental income from investment property and CGT, can be extensive. When you are contending with holding property overseas and required to deal with international taxes, it can be even more complex.

Since tax legislation can vary significantly, even between States within the same country, and laws are often adjusted and updated, it is important that you always seek the most up to date tax advice for your situation. 

As an Australian moving to the United States, it’s important to understand what this means for your tax residency status. This is because your tax residency status will determine how your income will be treated for tax purposes.

Moving to the US on a Permanent Basis

If you move to the US on a permanent basis then it would usually be the case that you would be  considered a non-resident for Australian tax purposes from the day you leave. Note that a move can be considered permanent from an Australian tax perspective, even if you only expect to live in the US for a few years.

As someone making a permanent move to the US it is likely that you will be cutting most of your ties with Australia. Typically you may do things such as sell your Australian assets, close Australian bank accounts, resign from Australian clubs, remove yourself from the electoral roll, surrender your lease or sell your family home, all as part of and parcel of your move to the United States. In such cases usually you would become a non-resident of Australia.

However, there are exceptions and sometimes a person can become dual resident of Australia and the United States. Often this occurs because a person is living in the United States for long enough to be considered US resident but has not quite departed Australia for whatever reason. Sometimes it is because a person has employment or runs a business in the two countries and actually keeps two homes.

If you become a US tax resident and an Australian non-resident

If you leave Australia and become a US tax resident, then you will be subject to all the taxation rules that a US tax resident is subject to. We always recommend that clients obtain US tax advice before moving to the United States so that they are fully aware of how Australian assets would be treated by the IRS. 

As an Australian non-resident you would be subject to non-resident tax withholding rates on certain Australian sourced income, such as any Australian bank or unfranked dividends paid to you from Australian investments. For example this means that banks would withhold 10% of your interest income on your Australian accounts and Australian companies will deduct 15% withholding tax on unfranked dividends paid to you. BUt you will need to advise your bank and various share registrars that you have moved to the United States.

If you continue to earn any income from Australian sources (other than income that is specifically covered by non-resident withholding rates), then you would have to lodge an Australian tax return. A common example of this is rental income from an Australian property.

You would only be required to include any Australian sourced income, and this would be assessed at non-resident taxation rates. This income also needs to be declared in your US tax return as foreign income. You should also be able to claim a tax credit for any Australian tax already paid on the Australian sourced income in your US tax return.

If you have assets such as investment properties, a main residence, shares and managed funds it will also be vital for you to understand how Australia’s capital gains tax laws applied to you on your departure from Australia. Unless you make a specific choice to the contrary, becoming a non-resident of Australia gives rise to a deemed capital gain or loss arising on your assets and so obtaining income tax advice specific to your circumstances is important. At CST we can provide you with our Departing Australia Tax Review service and can also help you obtain US tax advice.

Dual tax residency?

Sometimes determining your tax residency status is not straightforward. This can happen when you meet the requirements for tax residency in both countries.

If this happens then you would first turn to the tax treaty between Australia and the US, for guidance on which country takes priority. Most of the time the tax treaty will provide sufficient rules to determine which country would be considered the country in which you have tax residency. 

In some cases, where an individual is genuinely living in both countries, regularly interchanging between locations, or having equal connections in both countries, a tax ruling may need to be sought and in some cases a treaty-based tax return is required to arrive at the correct result.

Final Words on Tax Residency

Your personal tax residency forms the basis of how all your income tax obligations are calculated, which makes the correct understanding of your tax residency vital, particularly for clients who may be travelling or moving between Australia and the United States, two high taxing countries with complicated tax systems.

When it comes to determining your tax residency it is always important to realise that tax residency is a matter of fact. Often a careful analysis of various facts will be required. Tax residency is not something that can be chosen, and therefore it is important to obtain timely advice so that income tax consequences arising either in Australia or the United States are well understood and budgeted for.

If you’re moving to the United States then you’ll need to understand how tax laws apply to your current and future superannuation account.  You should also obtain financial advice from a qualified financial planner before seeking access to your super.

Moving to the US on a Permanent Basis

If you are an Australian moving to the United States on a permanent basis then you are likely to be considered a non-resident for Australian tax purposes. This means that you will, by and large, be considered a tax resident of the US. 

In this situation Australia’s tax laws will continue to apply to your Australian superannuation in terms of how your superannuation earnings are taxed. However you should seek US tax advice in relation to how the IRS would seek to tax your Australian superannuation account or fund. CST Tax Advisors in the US can assist you with that. 

If you have an Australian self managed superannuation fund you should seek advice in Australia before you leave to avoid your SMSF being deemed non-complying, as generally the SMSF cannot be run by non-residents and should usually not accept contributions from foreign members. If your SMSF becomes non-complying because of your move, substantial additional tax may be levied by the ATO on your SMSF.

Accessing your Superannuation

Basically this means that your superannuation will continue to remain preserved in your Australian superannuation fund until you reach retirement age. If you continue to work for an Australian employer, they may continue to be required to contribute to your superannuation fund. 

When you are eligible to withdraw your Superannuation, if you are still living in the US, then you may find that these payments count as taxable income in the US. 

Contributing to your Superannuation

If you are eligible, and choose to continue to make contributions into your Australian superannuation fund to support your retirement, then you will likely find that these contributions do not count as tax deductions against your US assessable income. You should obtain specific tax advice from a US tax advisor or CPA.

While these payments may count as tax deductions in your Australian tax return to reduce any Australian sourced taxable income, superannuation contributions cannot be used to create a tax loss. This means that contributions that you choose to claim as a tax deduction may be wasted if you don’t have other Australian income to offset.

Since making superannuation contributions may not be a tax effective option, it is important to understand the full financial impact of your choice by talking to an appropriately experienced US tax agent, as well as an Australian tax agent. 

Talk to your tax agent about the tax consequences on your Superannuation plan before you move

Moving overseas can create a large number of potentially complex taxation issues to consider, particularly for those who have self managed superannuation funds. 

It is important to speak to an appropriately qualified and experienced tax agent about your specific situation. Planning ahead ensures you have the information necessary to make informed choices, and prevents you from being surprised with unexpected tax costs. 

It may also be advisable to speak to a financial planner so as to make the most appropriate plan in relation to investing for your future.

Like any overseas move, moving from Australia to the United States will mean that you will encounter a brand new taxation system. 

If you’re used to the Australian tax system, the US system may seem a lot more complicated. For a brief overview of the differences see this comparison table:

As you can see, there are a number of key differences in the way taxes are levied and collected in the US. Much of this is due to the additional authority of the states to impose both income and sales taxes for their own jurisdictions. This means that the exact amount of taxes you will be faced with will, ultimately, depend exactly where in the states you are moving to.

If you’re an Australian who is moving to the United States, there are many tax issues to be aware of. Here’s a basic overview of what you need to know before considering the move. 

You can also download our guide: Moving to USA, here.

Tax Residency

When moving to another country, the first consideration should be your tax residency. From an Australian perspective, you will be taxed very differently depending on whether:

 i) you remain an Australian tax resident, 

ii) you remain an Australian tax resident, but also become tax resident of the United States, or 

iii) you become a non-resident of Australia and become tax resident of the United States.

As an Australian tax resident you are taxed on your worldwide income, whereas a non-resident is only taxed on Australian sourced income.

For Australian tax purposes, there are a number of tests that determine whether you are treated as a tax resident. Just simply moving to the US does not automatically mean you become a non-resident of Australia. Usually an Australian citizen, or permanent resident, will remain an Australian tax resident unless they move overseas on a permanent basis. While there is no one specific factor that will determine what makes a move permanent, factors that will be considered include the length of time living overseas (minimum 2 years), purchasing or leasing a home overseas, selling Australian assets, and where your personal family ties and business ties lie.

The US, on the other hand, has its own set of rules to determine whether an individual is considered a tax resident in the US. Foreign nationals that are Greencard holders, and those that have been in the USA for over 183 days are generally regarded as ‘resident aliens’ and taxed like US citizens on their worldwide income. Non-resident aliens in the US are only taxed on their US-sourced income.

It is possible that you could be considered a tax resident of Australia under Australia’s rules, and a tax resident of the US under the US rules. In this case, the Double Taxation Agreement (DTA) between Australia and the US will need to be referred to. This tax treaty exists to help avoid double taxation in both countries.

As the rules and tax treaties in both Australia and the US can be quite complex, it is important to talk to a tax advisor who is experienced in cross border residency issues in order to understand your tax residency status, and to be aware of when your residency status may change.

Living In The US Temporarily – Taxation As An Australian Resident For Tax Purposes

If you remain an Australian tax resident after moving to the United States, then you will continue to be required to lodge an Australian tax return each year. As an Australian tax resident, you are required to declare income from worldwide sources in your Australian tax return. 

The Australia – US DTA will need to be referred to,  to see which country has the taxing rights over certain income categories. The DTA also explains circumstances when foreign income tax offsets are available to offset Australian tax. 

US Tax Return

You will also need to lodge a US tax return as a US non-resident, for any US sourced income. The US has the right to tax non-residents on US sourced income. However, thanks to the Australia – US DTA, Australia will generally treat any US income tax paid as foreign tax credits against the Australian tax liability. This means you will only need to pay Australian tax on any difference between the amount of US tax paid and the amount of Australian tax assessed. If the US tax is higher, then you will not be refunded the excess above the Australian assessment.

Living In The US Permanently – Becoming A Non-Resident Of Australia

If you are moving to the US on a permanent basis you will become a non-resident of Australia for tax purposes. You will need to still lodge Australian tax returns on any income generated from sources in Australia.

Capital Gains Tax Payable When You First Move To The US

One of the first taxation issues to understand when moving to the US is that Australia will treat you as having disposed of your capital assets (excluding Australian real property) at the market value prevalent on the date of your departure, unless you elect to defer the deemed disposal (explained further below). A deemed capital gain or loss will need to be calculated and included in your tax return, as if you had actually sold those assets. Once those assets are sold at a later date whilst you are in the US, there will be no further tax payable in Australia (tax will be payable in the US). 

However, you do have the option not to include the deemed capital gain if you instead choose to report it as a capital gain when you eventually sell the assets. However, the DTA will need to be referred to, to see whether the gain would be taxable only in the US.

In summary, your options are:

Option 1- Declare a “deemed” capital gain in your Australian tax return for your foreign investments when you leave the country. As long as you don’t return to Australia you will have no more Australian tax to consider when you eventually sell those foreign assets.

Option 2- Choose not to declare a deemed capital gain, but wait until you actually sell the foreign investment. If you are still living in the US (or another country that has a similar clause that gives them taxation rights over Australia in this situation), then you won’t need to declare the capital gain in an Australian tax return. If you are living in a country that doesn’t have this clause when you sell the foreign investment, then you would have to declare the capital gain in an Australian tax return at that time.

Australian Sourced Income

As a non-resident for Australian tax purposes you would only be required to lodge an Australian tax return to declare any Australian sourced income that was not already fully taxed under the Double Taxation Agreement. For instance, interest income for non-residents is subject to special withholding rates that are considered to be the full and final tax. This means that the tax withheld is the tax paid for this income. You can’t claim deductions against this income to reduce the tax you have to pay on it, and you can’t claim the tax as a credit against other income being reported in an Australian tax return. As long as your bank has been notified that you are a non-resident they should withhold the correct amount of tax.

Fully franked dividends from Australian sourced companies are also considered to be the full and final tax for the Australian sourced income.

Other Australian sourced income is required to be included in your Australian tax return to be assessed for tax at non-resident rates.

Australian Superannuation

While contributions that you make to your Australia superannuation fund may be deductible against your Australian income, they will generally not be deductible against your US income.

Australian superannuation funds are not subject to the same tax deferral rules in the US. Further advice will need to be sought on whether Australian superannuation fund earnings will be taxable in the US.

Talk To Your Tax Advisor Before Making The Move

Moving overseas can create a large number of potentially complex taxation issues to consider. This article contains a brief introduction to some of the tax issues that may be encountered when considering a move to the US and does not consider your personal situation or circumstance. It is important to speak to a qualified and experienced tax advisor, both in Australia and in the USA, about how the various laws and tax treaties apply to your specific situation.

Please note that the general information provided is accurate at the time of publication, however tax laws do change frequently. To ensure you have reliable information it is therefore important that you seek specialist advice at the time of your potential or intended move, to ensure you have up to date, and personally relevant advice on hand.

Planning ahead ensures you have the information necessary to make informed choices, and prevents you from being surprised with unexpected tax costs.

CST Tax Advisors in Sydney can provide you with advice regarding your Australian tax when it comes to moving, or considering a move overseas. Our US office will be able to assist you with tax advice regarding your US tax.