Managing taxes can be challenging, particularly when living overseas. 

Many Australian expats in the USA wonder, “What happens with taxes on Australian shares I still own back home?”

If you’re an Australian expat in the USA, there are a few things to know about the tax implications of holding Australian shares. 

You may already be aware of how the franking credit system in Australia works and how tax credits are tied to dividends. 

However, the US doesn’t have an equivalent system. 

Here’s how taxes on your shares work when you’re a US tax resident.

What It Means To Be A US Tax Resident

Let’s assume you’ve moved to the USA and are now a US tax resident. 

When you lived in Australia, you paid tax on all your worldwide income. 

Now, as a US tax resident, you’ll only need to pay Australian taxes on assets with a direct link to Australia.

However, the USA also taxes worldwide income, so income from both Australian and US sources must be reported. US tax rates vary by income type—ordinary income, capital gains, and qualified dividends, each with its own rate.

Owning Australian Shares

If you own shares in Australian companies, here’s how taxes apply to dividend income from those shares.

• Franked Dividends: In Australia, franking credits are added to dividends to reduce double taxation. For expats, these credits usually cover Australian taxes, so you won’t pay additional Australian taxes on franked dividends. However, no tax refund is provided for these credits, even though they offset your Australian tax obligation.
• Unfranked Dividends: Unfranked dividends don’t come with franking credits, so they’re taxed differently. Under the Australia/USA tax agreement, Australia caps the tax on unfranked dividends for US residents at 15%. Be sure to notify the share company that you’re a non-resident so they can apply the correct withholding tax; otherwise, you may need to report it later your tax return.
• Reporting in the USA: The USA considers dividends from Australian shares as taxable income. However, you may be able to claim the franking credit or tax withholding as a foreign tax credit, which reduces your US tax bill.

Inheriting Australian Shares

Australia doesn’t have an inheritance tax. So, when you inherit shares, they’re either valued based on their market price on the date of death or the original cost base paid for the asset. It depends on when the asset was acquired by the deceased. This amount becomes your “cost base,” which you’ll use later to calculate any capital gains tax if you sell the shares.

In the US, while beneficiaries aren’t directly taxed on inherited assets, an estate tax could apply to the estate if it’s large enough. The fair market value on the date of inheritance serves as your cost base for capital gains. 

Buying & Selling Australian Shares

Purchasing shares in Australia as a non-resident doesn’t trigger any immediate tax consequences. In usual cases non-residents don’t pay tax on the sale of Australian listed shares.

There is a narrow category of share sales that would be taxable in Australia, however. Generally, these relate to shares in companies that have Australian real estate.

The US imposes a capital gains tax, with different rates for long-term and short-term holdings. You may claim the Australian tax paid as a credit against any US tax due on the same capital gain to avoid double taxation.

Understanding Double Taxation

Australia and the USA have a tax agreement to prevent double taxation. 

This means that while you’ll need to report your income in both countries, you can usually apply tax credits for Australian taxes paid against your US taxes on the same income.

Using The Check The Box Election To Simplify Tax Treatment

For Australian expats with ownership stakes in Australian companies or entities, the Check the Box Election can offer significant tax flexibility and may simplify your US tax obligations.

The Check the Box election is a choice US taxpayers can make to treat an Australian business entity (such as a private company) as either a corporation or a pass-through entity for US tax purposes. 

If you choose to treat the company as a “disregarded entity” (for a single-member entity) or a partnership (for a multi-member entity), the income flows directly to you as the individual taxpayer. 

This may allow you to avoid some of the more complex reporting and potentially double-taxation issues that can arise with foreign corporate ownership.

However, if you opt to treat the Australian company as a corporation, it will be taxed separately, which can sometimes be advantageous but will introduce reporting requirements (such as filing Form 5471). 

Please consult with us further so we can better advise you of your position.

Holding Shares Through a Passive Foreign Investment Company (PFIC)

If your shares are held through a Passive Foreign Investment Company (PFIC), special US tax rules apply, which could increase your tax bill. 

The IRS defines a PFIC as a foreign corporation earning mostly passive income or holding mostly passive income assets.

US shareholders of a PFIC may face complex tax rules. 

To reduce tax, you might consider specific elections like the Qualified Electing Fund (QEF) or mark-to-market options, but these require filing IRS Form 8621.

Controlled Foreign Corporation (CFC) Rules

Under CFC rules, the US may tax you on undistributed income if you own a significant stake in a foreign corporation. If, along with other US taxpayers, you own more than 50% of an Australian company, the company may qualify as a CFC, requiring you to report certain types of income in the US.

Seek Professional Advice

International tax can be complex, and tax rules change often. It’s wise to speak with a CST tax advisor as we provide advice in both US and Australian tax advice.

Whether you have already moved to the United States or are planning to, there are tax implications for Australian expats to consider. 

For example, how does the Australia-US tax treaty apply to capital gains on the realization of assets, and what will your Australian and US tax obligations be? 

These are just a few questions this article will answer for you.

What Is Capital Gains Tax?

To begin, it is crucial to have a comprehensive understanding of capital gains tax concerning Australian expats. 

Capital Gains Tax or CGT is a tax on the profit made from selling an item classified as an asset. In Australia, as in the United States, CGT is complex and different from other taxes. Let us review both Australian and US CGT and then bring them together.

Australian CGT Tax

In Australia, CGT applies to any asset acquired after 20 September 1985. 

Selling an asset for more than it costs means you have a capital gain and must pay CGT. If an asset is sold for less than it cost, this results in a capital loss that can offset against current or future capital gains.

Generally, if an Australian tax resident makes a capital gain and the asset sold was held for at least 12 months, the 50% capital gain tax discount will apply. This results in half the capital gain being included in assessable income and being assessed at marginal rates of tax – which may vary between financial years. See the ATO website for the current individual tax rates. 

There are potential exemptions from the capital gains tax regime, including the main residence exemption.

A person’s main residence, which was moved into as soon as practicable after purchase and continues to be a person’s main residence for the entire ownership period, and on sale, if still a tax resident of Australia, will be exempt from CGT.

In relation to the main residence exemption, new laws passed in 2019, which came into effect 1 July 2020 now mean a total loss of this exemption if the property is sold while the taxpayer is a non-resident of Australia. There are some exceptions known as life events but careful planning is required to ensure the preservation of this exemption.

US CGT Tax

Under US law, the tax rate applied to capital gains depends on the asset’s holding period.

For assets held more than a year, you pay long-term capital gains tax, usually lower than the tax on ordinary income.

For assets held for less than a year, short-term capital gains tax rates apply, equal to your normal income tax rate.

Your income also determines the percentage of CGT you pay in the United States.

Your US CGT rate will depend on your taxable income. It is best to check the IRS website for the most current income thresholds for which CGT rate applies. 

There are also special circumstances under which your capital gains might be taxed at a higher rate. For example, net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.

Australia-US Tax Treaty And Its Impact On Capital Gains Tax

For Australian expats in the US, the Australia-US Tax Treaty is particularly important to understand. First signed into law in 1982, the treaty has been updated several times since then to address changes in areas such as superannuation and non-US investments.  

The Australia-US Tax Treaty determines where your tax obligations lie between the two countries. The overarching goal of the treaty is “avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.” 

As we explain in this article, the Australia-US Tax Treaty, allows the tax paid in one jurisdiction to be claimed as a tax credit in the other jurisdiction, in the event that the income is assessable in both.  

For example, if the US sourced income is first taxed in the US and the income is then assessed in Australia, the tax first paid in the US will be taken up as a foreign tax credit against the tax assessed on the income. If the foreign tax credit covers the Australian tax, then any excess foreign tax credits are lost. If there is a shortfall after the foreign tax credit is applied to the assessed Australian tax, then extra tax will be required to be paid.

Tax Obligations When Selling A Former Main Residence In Australia

Let us look at an example to demonstrate how the Australia-US Tax Treaty affects Australian expats when selling their former main residence. 

An Australian couple moves to the US and lives there for eight years. They have decided to sell their former main home in Australia (purchased in 2015 for AUD1,000,000 and now worth AUD3,000,000).

Australian Tax Considerations

This couple would be classified as foreign residents and would not qualify for the CGT main residence exemption. As such, they will pay Australian CGT tax on the AUD2,000,000 (AUD3,000,000-AUD1,000,000) capital gain. 

However, if this Australian couple moves back to Australia and are considered residents for tax purposes and they reestablish the home as their main residence, depending on the length of their absence from Australia and whether they rented the property out or left it vacant, will determine whether a full or partial main residence exemption exists.

This example makes it clear that planning the timing of the sale of your former primary residence can and will have material tax implications. With that in mind, it is critical to get professional tax advice to optimize any potential or upcoming CGT liabilities.

It is important to note Australia also offers certain life event exemptions if they occurred during the time this family lived abroad, which could make them eligible for the CGT main residence exemption. 

The life events this includes are:

• You, your spouse, or your child under 18 had a terminal medical condition
• Your spouse or your child under 18 died
• The CGT event happened because of a formal agreement following the breakdown of your marriage or relationship

USA Tax Considerations

Any income earned, including employment income and realized capital gains, is subject to US tax. Australians who have become US tax residents, including green card holders and those in the US for over 183 days in the last two years, are taxed on worldwide income. This would include the AUD2,000,000 capital gain.

However, the U.S. allows a foreign tax credit for U.S. residents on US taxes owed against any tax already paid to Australia or vice versa. 

The Australia-US Tax Treaty requires that the combined taxes paid in both countries cannot exceed the total tax that would otherwise have been payable in the country where the sale occurs.

Australia And USA Combined Tax Considerations

If the Australian couple decided to sell their former main residence in Australia while being a non-resident for tax purposes, they will need to declare this income on both the Australian and US income tax return. 

As the property is situated in Australia, the first taxing rights reside with Australia. Tax will be applied at non-resident marginal rates on their AUD2,000,000 capital gain.  

For the US CGT, the tax on their AUD2,000,000 capital gain would be calculated depending on their combined income and the CGT rate applicable. 

Thankfully, this couple would not have to pay both the full amount of tax in Australia and the US, as the tax treaty allows taxpayers in each jurisdiction to avoid double taxation. In this case as Australia has the first taxing rights, the US would give the couple a tax credit for the tax paid in Australia and the excess tax paid will be carried forward.

CGT On Selling Shares Originally Purchased In Australia

Let us assume an Australian citizen moves to the US for a period of five years. During this time, they decided to sell the shares purchased while they resided in Australia.

The first aspect to consider is what their choice was when then became a non-resident of Australia. If an Australian tax resident moves to the US and becomes a non-resident and they hold a share portfolio, the choices on cessation of residency with respect to the share portfolio is either to take a deemed disposal or ignore the deemed disposal and treat the shares as Taxable Australian Property. 

A deemed disposal involves comparing the purchase price of the shares to the market value of the shares on the date that residency ceased. Importantly, there is no cash received with respect to this type of CGT happening and so if there is a large accumulated capital gain, then there will be a tax bill that requires payment from other funds. 

If the latter option is chosen (ie. they choose to treat the shares as Taxable Australian Property), any future sale of these shares are connected with Australia and a capital gain or capital loss requires calculation and reporting in the Australian income tax return, even as a non-resident.

Fortunately, the treaty provides a paragraph where future sales of this portfolio can be subject to tax solely in the US. If a choice is made to have future sales subject to tax solely in the US, then the deemed disposal on cessation of residency is ignored.

CGT On Inheritance In Australia

If an Australian citizen has lived in the US for 15 years and inherits an investment property and shares, what are the tax implications in both Australia and the US?

Inheriting Property

The original property was purchased for AUD500,000 and has a current market value of AUD2,500,000. If the property was sold on when inherited, there will be a capital gain of AUD2,000,000 (AUD2,500,000-AUD500,000). As Australia has the first taxing rights, tax will be applied at non-resident rates.

If they had no other Australian sourced income for the year in which the property was sold, tax on the capital gain of AUD2,000,000 would be AUD875,350.

The USA CGT tax on their AUD2,000,000 capital gain would be calculated depending on their combined income and the CGT rate applicable.

The Australian citizen would not have to pay both the AUD875,350 Australian CGT and US CGT as the treaty allows taxpayers in each jurisdiction to avoid double taxation. In this case, the US would give the person a tax credit totaling AUD875,350.

Inheriting Shares

If they inherit shares, they can choose to have any future sales solely taxed in the US under the Australia-US Treaty.

Get Help Navigating CGT For Australian Expats

There are many intricacies and challenges to navigating tax laws between countries. The information in this article may not cover some variables relevant to your circumstances and as such it is recommended you seek tax advice for your specific situation.

Exceptionally talented individuals with the capacity to raise Australia’s standing in their field may be eligible for a Global Talent Visa. This Visa is a permanent residency Visa that offers a migration pathway to individuals who can bring exceptional skills into Australia.

Because the Global Talent Visa is not a temporary visa, the temporary resident tax concessions are not available and you will be taxed just like any other Australian citizen moving home to Australia.

As international tax specialists in Australia we are often asked by individuals moving to Australia on a Global Talent Visas, what the Australian tax implications of making this move are in relation to the assets back in their home country.

The tax implications of making this move will depend on the type of assets you have back home.

Below is an overview of what you can expect.

Moving To Australia With No Assets Other Than A Bank Account

When you move to Australia with no assets except the cash in your bank account, the tax consequences of holding onto your foreign assets are limited to foreign exchange (forex) issues. Since foreign currency is considered a taxable asset, Australia will tax realised exchange gains and will allow a deduction for realised exchange losses. 

This means that money sitting in a bank account with fluctuating values will have no tax consequence. However, if you spend or transfer that money, including bringing it into Australia at a later date, then you trigger a forex realisation event.

If the value of your qualifying forex accounts is less than AUD $250,000 then you can make an election (known as the Limited Balance exemption) which effectively allows an exemption so that you can disregard any forex gains or losses that might arise on the accounts. This is a simplicity measure for taxpayers who are considered to have low balances of foreign currency. The objective is to lower tax compliance costs. People moving to Australia should take advice on the effect of these rules on their foreign savings.

Moving To Australia With A Main Residence In Your Home Country

While an Australian resident is eligible for an exemption from capital gains tax on their main residence, it is unlikely that this exemption will apply to you. This is because you were not an Australian resident while you were living in your property, in your home country.

Once you are living in Australia the overseas property becomes a property that is not your main residence. This applies whether you rent the property out or not.

If you rent your former residence out it becomes an investment property. The rental income is taxable and the expenses associated with generating that rental income are tax deductible. This includes interest on any mortgage taken out to purchase or renovate the property, any local rates, repairs, and other costs. Travel costs incurred to inspect or repair the property are specifically precluded as an eligible deduction. If you pay income tax on the rental income overseas, then you will be able to apply that as a foreign tax credit in your Australian tax return. This way the Australian tax paid on this rental income is limited to any difference between the Australian tax assessed and the tax paid overseas.

If you don’t rent out your former residence (or otherwise earn income relating to the property), then there is no income to declare, and no ability to claim deductions relating to the cost of owning this property.

When you sell the property you will be subject to CGT. The CGT will be calculated on the difference between the value the property sells for and the value of the property at the time you moved to Australia.

Moving To Australia With Investments

If you hold assets in your country of origin, then you will be required to report any assessable income earned from those assets, as well as any capital gains or losses generated on the disposal of those assets.

Certain types of income, such as interest, royalties, and dividends, are typically covered by Double Tax Agreements (DTAs) in a way which limits the amount of tax that the country of origin can impose. This means it is important to advise your bank and investment managers when you become an Australian resident so that they can ensure the correct foreign tax rate is applied at the source.

Regardless of the tax rules in the country of origin, as an Australian tax resident you will be required to report income from all sources in your Australian tax return.

General Tax Information You Should Be Aware Of When Moving To Australia On A Global Talent Visa

It is important to keep in mind that moving to Australia on a permanent basis will mean you become an Australian tax resident.

For tax purposes this means you will need to declare your worldwide income in your Australian tax return, regardless of where the income is earned and whether the income is brought to Australia or stays in an overseas bank account.

All foreign investment income, including interest, dividends and foreign stock plans, are assessable in Australia, whether or not they are assessable in another country.

The foreign income must be reported in the relevant Australian tax year in which it was earned. This may be different to the tax year relating to foreign country in which the investment income was earned.

In general you will be able to offset the tax payable in Australia with any taxes already paid in the country of origin.

Also be aware that Australia has complicated rules if you have interests in overseas companies or trusts, even if you did not set up the relevant companies or trusts or even if they are just ‘family companies’ or ‘family trusts’.

Capital Gains Tax

Australia has a Capital Gains Tax regime. This means you may be required to pay capital gains tax on any assets that you retain in your country of origins.

CGT is assessed at the same rate as your marginal tax rate, however there is a 50% Discount on the value that is assessed on assets that have been owned for at least 12 months after becoming an Australian resident.

CGT discount example:

You purchase a property in 2020 for $500,000.

In 2024 you sell the property for $1,000,000.

This gives you a net capital gain of $500,000.

Instead of paying tax on the full $500,000 gain, tax is only applicable on 50% of the total gain, which means you only pay tax on $250,000.

Deemed Acquisition

At the time that you move to Australia, any assets that you retain overseas are considered to have been acquired for their market value on the day you arrive. This valuation will become their cost base for capital gains tax purposes in Australia.

You are also deemed to have acquired these assets on the date that you become an Australian resident. This ensures that any fluctuations in value between the original date of acquisition and your move to Australia, are ignored for CGT calculations. It also means that you need to continue to own your assets for at least 12 months from the date you move to Australia in order to access the 50% capital gains tax discount.

Summary

As an Australian tax resident you will be required to lodge an annual income tax return in which you must report:

• Income from your worldwide source

• Capital gains or losses on all assets held, regardless of the country in which they are held

• Any foreign tax paid, which may be applied as a credit to reduce the amount of Australian tax assessed on foreign earnings

When you move to Australia your assets will be deemed to be acquired at the market value on the date you become an Australian resident.    

As everyone’s situation is unique, and tax laws are frequently updated, it is important to obtain up to date advice for your specific situation. This will ensure that specific factors that may impact your situation differently are also included in the advice, as well as ensuring you are getting the most up to date information.

eBook: Key Items A Global Talent Visa Holder Should Know When Moving To Australia