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.
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.
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.
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).
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.