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
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Relief of Double Taxation
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.
The Savings Clause
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.
Permanent Home Test: The first consideration is whether the individual has a permanent home available to them in one of the countries. If a permanent home is available in only one country, that country is generally considered the individual's country of residence for tax purposes.
Habitual Abode Test: If the individual has a permanent home in both countries or in neither country, the treaty looks at where the individual has a habitual abode; in other words, where they live regularly. This could be where they spend more time or where they have a regular presence.
Center of Vital Interests Test: If the individual has a habitual abode in both countries or in neither, the next factor considered is where their personal and economic relations are closer. This is often referred to as the individual's center of vital interests and can include factors like family, social, professional, and economic ties.
Taxation of US-Sourced Passive 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 |
​Interest | 10% | 11(2) / P7 |
​Dividends - Paid by U.S. Corporations | 15% | 10(2) / P6 |
Dividends - Qualifying for Direct Dividend Rate | 5% | 10(2) / P6 |
Pensions and Annuities | 0%* | ​18(1) |
Social Security | 30%** | 18(2) |
*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.
Personal Service Income Earned While Temporarily Present in the US
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 |
​Employee | 183 days | Any foreign resident | No limit | 14 |
Contractor | 183 days | Any contractor | No limit | 15 |
​Public entertainment | No limit | Any U.S. or foreign resident | $10,000 | 17 |
Superannuation
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.
Totalization Agreement
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.
State Taxes and Tax Treaties
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. |
Need Help Navigating the US Australian Tax Treaty?
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Frequently Asked Questions
Does Australia have a tax treaty with the US?
Does Australia have a totalization agreement with the US?
Do Australian citizens pay tax on US capital gains?
Authored by Lewis Grunfeld, CPA
Lewis is a seasoned expert in international and U.S. expatriate taxation. With over 10 years of international tax experience, he specializes in applying tax treaties to benefit expats, handling complex tax scenarios and ensuring significant tax savings for his clients. Lewis's expertise in international compliance and U.S. expat tax returns has made him a trusted advisor in the expatriate community.
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