Note from Lauren: This article was originally published by Tax for Expats. I asked for permission to republish this article because it directly applies to every US expat living in Australia.
At Taxes for Expats we have been preparing U.S. taxes for U.S. Citizens and Green Card holders living in Australia and New Zealand for over 15 years. We have been checked by the State Department and are listed on the list of approved Tax Preparers by the US Consulate in Canberra.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already paying taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly – avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself – not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
Our clients hail from all parts of Australia – Sydney and Melbourne, Brisbane and Perth. We are probably one of the busiest US tax preparers working with American citizens in Australia now. We know how to integrate your Australian taxes into the American Tax Return . Any income tax you pay in Australia will claimed as against the tax liability on your U.S. taxes on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Australian or New Zealand fiscal year for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. We can prepare all forms that deal with Foreign Corporation or Trust, you can find out details about these services here: Additional Filing Requirements for Shareholders of a Foreign Corporation. If you do not file these form or file them late the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
If you are self employed under the U.S.-Australian social security agreement (known as the Totalization Agreement) you must either pay U.S. social security or pay the social security equivalent in Australia if you are self employed. If you are a bona-fide employee you do not have to worry about paying U.S. social security on your wages either in New Zealand or Australia. If you are a self employed (an independent contractor) in New Zealand, unfortunately the U.S. has no social security agreement with it. Therefore, in New Zealand if you are self employed you must pay both U.S. Self Employment tax (social security) as well as the New Zealand equivalent as a sole proprietor.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This, in fact, is our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS. We perform this service for about 10 new clients every month.
Let us help you with your U.S. tax returns, U.S. tax planning and other U.S. tax and legal concerns. We look forward to solving your tax concerns.
Australian Tax System for American Expatriates
Below we include information on the Australian Tax System for American Expatriates.
Australia Income Tax Rates 2010 – 2011
Tax Rates for Residents
|AUD$ 1 to 6,000||Nil|
|AUD$ 6,001 to 37,000||15c for each AUD$ 1 over 6,000|
|AUD$ 37,001 to 80,000||AUD$ 4,650 plus 30c for each AUD$ 1 over AUD$ 37,000|
|AUD$ 80,001 to 180,000||AUD$ 17,550 plus 37c for each AUD$ 1 over AUD$ 80,000|
|AUD$ 180,001 and over||AUD$ 54,550 plus 45c for each AUD$ 1 over AUD$ 180,000|
Resident taxpayers are generally taxed on worldwide income, with an offset for foreign tax paid on foreign income up to the amount of Australian tax payable on that income. Australian residents in certain lines of work overseas (e.g. aid, charity or government work) for a continuous period of 91 days or longer are exempt from Australian tax on their foreign earnings from that continuous foreign service period if the earnings are generally taxable in the country where sourced and are not exempt from tax by reason of a tax treaty in the foreign country. Nonresidents in Australia are taxable only on Australia-source income. Temporary residents are taxable on their worldwide employment income and on Australian source investment income.
Residence - For tax purposes, an individual is resident if he/she ordinarily resides in Australia or satisfies 1 of the following statutory tests: is domiciled in Australia (unless the Commissioner of Taxation is satisfied that the individual’s permanent home is elsewhere); has spent more than half the tax year in Australia (unless the Commissioner of Taxation is satisfied that the individual’s home is elsewhere and he/she does not intend to take up residence in Australia); or is a contributing member (or the spouse or child younger than 16 years of such a member) to the superannuation fund for officers of the Commonwealth Government. A “temporary resident” for tax purposes is an individual who meets all of the following criteria: holds a temporary visa granted under the Migration Act 1958; is not an Australian resident within the meaning of the Social Security Act 1991; and does not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.
Filing status - Each taxpayer must file a return; joint returns are not permitted.
Taxable income - Taxable income for personal income tax purposes includes income from employment, business income, certain capital gains and passive income such as dividends, interest and rental income.
Capital gains - Capital gains derived from the disposal of assets acquired after 19 September 1985 are included in assessable income. For assets acquired after 1 October 1999 and held for more than 1 year, individuals are taxed on capital gains at their marginal rate on half the gain. For assets acquired before that date, individuals may choose between the new system and the old system, introduced in 1985, under which they are taxed at their marginal rate on the entire gain, indexed for inflation. Indexation of the cost base of existing assets was frozen at 30 September 1999. Capital gains tax applies only to taxable Australian property disposed of by foreign investors as from 12 December 2006.
Deductions and allowances - Business expenses may be taken as deductions if they are necessarily incurred in gaining or producing assessable income. Expenses of a capital, private or domestic nature are not deductible. Residents in Australia are allowed some tax rebates, including a rebate for dependents and certain personal expenses.
Tax Rates - Tax rates are progressive up to 45%. A “temporary resident” is granted a tax exemption for most foreign-source income and capital gains and for interest withholding tax obligations associated with foreign liabilities.
Australia Income Tax Rates for 2010 – 2011
Tax Rates for Non-Residents
|AUD$ 0 – 37,000||29c for each $1|
|AUD$ 37,001 – 80,000||AUD$ 10,730 plus 30c for each AUD$ 1 over AUD$ 35,000|
|AUD$ 80,001 – 180,000||AUD$ 23,630 plus 37c for each AUD$ 1 over AUD$ 80,000|
|AUD$ 180,001 and over||AUD$ 60,630 plus 45c for each AUD$ 1 over AUD$ 180,000|
Non-residents are not required to pay the Medicare levy of Australia. The Australian tax rates for 2010 – 2011 above apply from 1 July 2010 (The tax year in Australia begins July 1 and ends June 30 next year).
If you are a non-resident of Australia for tax purposes, Australian tax is only payable on income that is earned in Australia. The main effects of being a non-resident are as follows:
- There is no tax free threshold; i.e. all salary and wage income earned in Australia is taxable.
- No requirement to pay the Medicare levy (non-residents do not receive the benefits of Medicare).
- There is a requirement to show Australian rental income in your tax return.
- Tax is withheld from unfranked dividends.
Australia Corporate Tax
Australia corporate tax rate is 30%.
Australian resident companies are subject to company income tax on their income derived from all sources. Non-resident companies are required to pay income tax only on Australian-sourced income.
Resident companies are those that are incorporated in Australia or those that carry on business in Australia and either have their central management and control in Australia or their voting power controlled by shareholders who are Australian residents.
The tax year runs from 1 July to 30 June. Companies’ financial years usually coincide with the tax year. A taxpayer can choose to have an accounting period different to the tax year if they wish but this will require additional costs of preparing another set of accounts based on the tax year. Alternatively, if a taxpayer has a good reason for having a financial year other than 1 July to 30 June they can apply to the Australian Tax Office to have a substituted accounting period (SAP) and align the tax year with their financial year. The Australian Tax Office will generally accept applications for an SAP where an Australian subsidiary wants to align its tax year with its foreign parent company’s financial year.
The company tax rate for the 2009/2010 tax year is 30% of the company’s taxable income. Companies are generally required to ‘self-assess’ their likely tax liability in a financial year and pay the tax by quarterly instalments with the final tax liability being reconciled in an annual tax return. ‘Likely tax’ is the latest estimate of tax payable made by the company in a current financial year. If no estimate is made, ‘likely tax’ is the tax assessed in the preceding year.
Company tax is payable on a quarterly basis. Companies that are not required to report their goods and services tax (GST) on a monthly basis and with income tax payable of less than AUD $8,000 for the most recent income year can elect to pay an annual instalment of tax rather than quarterly instalments. Generally the annual payment date is 21 October when the income year ends on 30 June.
Quarterly company tax is payable within 21 days after the end of each quarter of the financial year. However, where taxpayers are eligible to pay other quarterly obligations on a deferred basis, the due date is the 28th day after the end of the quarter (except for the December quarter in which case payment date is 28 February).
There are two methods of working out the quarterly payment amount as follows:
- Instalment Income Option the quarterly payment amount is the amount of gross assessable income earned for that quarter (less capital gains) multiplied by the instalment rate. The instalment rate is advised by the Tax Office and based on the company tax paid on the most recent tax assessment divided by the company’s turnover (less capital gains). This method is available to all taxpayers.
- GDP adjustment notional tax option the quarterly payment income amount is based on the assessable income figure from the most recent tax return multiplied by a GDP factor. The income amount is advised by the Tax Office. This method is available for individual taxpayers or other entities where their most recent assessed taxable income was under AUD $1 million. Certain categories of taxpayers such as farmers, sportspeople and artists may meet their liability for these four instalments by making two payments per year.
Residence - A company is resident in Australia if it is incorporated in Australia or, if not incorporated in Australia, it carries on business in Australia and either exercises central management and control there or has its voting power controlled by shareholders that are residents of Australia.
Basis - Resident companies are taxed on worldwide income. A nonresident company generally pays taxes only on income derived from Australian sources. As a general rule, tax rates and treatment are the same for all companies, including branches of foreign companies; however, there are exceptions for special types of companies such as cooperative firms, mutual and other life insurance companies, and non-profit organisations, which are taxed at slightly different rates.
Taxable income - To calculate taxable income, a company generally computes assessable income and subtracts allowable deductions. Assessable income derived by a company carrying on business would usually include gross income from the sale of goods, provision of services, dividends, interest, royalties and rent. Assessable income excludes exempt income (e.g. some dividends received from pooled development funds, income derived by certain entities such as charities, etc). Income characterised as non-assessable non-exempt income is also excluded from assessable income (e.g. income derived by certain foreign branches and non-portfolio dividends received by Australian resident companies from foreign companies).
Taxation of dividends - Australia operates a full imputation system for the avoidance of economic double taxation on dividends.
Under this system, the payment of company tax is imputed to shareholders in that shareholders are relieved of their tax liability to the extent profits have been taxed at the corporate level. Dividends paid out of profits on which corporate tax has been paid are said to be “franked” and generally entitle shareholders to an offset for the corporate tax paid. A simplified imputation regime applied from 1 July 2002.
Capital gains - Assessable income may include capital gains after offsetting capital losses. Net capital gains derived by companies are taxed at the 30% corporate rate. Australian residents are liable for tax on worldwide capital gains (subject to double tax relief). Where a company holds a direct voting interest of 10% or more in a foreign company for a certain period, any capital gain or loss on sale of the shares in the foreign company may be reduced (see under “Participation exemption”). Tax on capital gains was abolished for most foreign investors as from 12 December 2006; from that date, foreign investors include capital gains in assessable income only from assets that are “taxable Australian property” (e.g. direct and indirect interests in Australian real property and the business assets of Australian branches of nonresidents).
Losses - Tax losses may be deducted and carried forward indefinitely to offset against future assessable income provided a “continuity of ownership” (more than 50% of voting, dividend and capital rights) or a “same business” test is satisfied. However, capital losses can only be offset against capital gains. The carryback of losses is not permitted.
Alternative minimum tax No
Foreign income tax offset - Under the foreign income tax offset (FITO) rules, taxpayers are not required to quarantine assessable foreign income amounts into separate classes. The rules allow both Australian and nonresident taxpayers to claim a tax offset for assessable income on which they have paid foreign income tax. The amount of the offset is equal to the foreign income tax paid, subject to a cap. The offset may only be used in the income year to which the foreign tax relates – offsets may not be carried forward to future income years. Transitional rules apply for the first 5 years of the new FITO regime (from 1 July 2008), whereby old foreign tax credits may be carried forward. The 5-year period is based on the year in which the foreign tax credits came into existence.
Participation exemption - Capital gains or losses on the disposal of shares in a foreign company that is held at least 10% by an Australian resident company for a certain period may be reduced by a percentage that reflects the degree to which the assets of the foreign company are used in an active business. Furthermore, dividends received by an Australian resident company from a foreign company in which the Australian resident company holds at least 10% of the shares are non-assessable non-exempt income.
Holding company regime No
Incentives R&D activities are entitled to beneficial treatment.
Australia Goods and Services Tax (GST)
The standard rate of Goods and Services Tax (GST) in Australia is 10%.
Goods and Services Tax (GST) is a transaction based tax (subject to exceptions) on the inputs and outputs of an organisation’s business activities. Goods and Services Tax (GST) is charged at each step in the supply chain, with GST-registered businesses including Goods and Services Tax (GST) in the price of goods and services being sold by those businesses. There are other types of sales where Goods and Services Tax is not included in the price; these include ‘input taxed’ sales such as financial supplies or ‘GST-free’ sales such as exports of goods and services.
All entities that carry on an enterprise in Australia are required to register for the goods and services tax (GST) if their annual turnover meets the registration turnover threshold of AUD $75,000 or AUD $150,000 for not-for-profit organisations.
Once registered, entities are required to charge a 10% GST on all goods and services that they supply within Australia, unless the supplies are specifically excluded, such as education, health, child care services and certain types of food.