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:

	Australia	United States
Tax Year	1 July to 30 June	1 January to 31 December
Tax Authority	Australian Taxation Office: ATO	Internal Revenue Services: IRS
Income Tax (residents)	As an Australian you are taxed at a tiered individual income tax rate that ranges from 0% to 45%.	Federal Income Tax is charged at tiered individual rates between 10% and 37%. Unlike Australia there is no initial tax free threshold. Most States also impose a personal income tax which varies between states. Typically the state tax rates are under 10%.
Income Tax (non-residents)	Australia typically only taxes non-residents on income that is sourced in Australia. The tax free threshold doesn’t apply, and the first $120,000 of Australian income is taxed at the rate of 32.5%. (Up to a maximum of 45% for every dollar over $180,000). There may be some limitations and exclusions depending on the relevant double tax agreement.	The US typically only taxes non-residents on income that is sourced in the US. Passive income (for example dividends, rent, royalties) is taxed at a flat 30% (unless a specific tax treaty specifies a lower rate). Effectively connected income (income earned through a business or personal services) is taxed at the same graduated rates as for a US person.
Social Security Tax Rate	Not applicable	The US charges additional social security taxes, which is payable by both the individual and their employer. There is a cap on the maximum wage that is subject to this tax each year.
Medicare	Australians are taxed for a medicare levy on all of their income, unless they are under low income rate thresholds. The medicare levy rate is currently 2% of taxable income. High income earners are also charged a medicare levy surcharge, unless they have appropriate private health care coverage. The rate of medicare levy surcharge is between 1 and 1.5% depending on the individual’s taxable income level.  In Australia many medical services and public hospital services are provided free for all Australians under the medicare system. This is what the medicare levy and medicare levy surcharge tax levies pays for.	The US also charges a medicare tax on all individual income. The rate is currently 1.45%. Employers are required to withhold an extra 0.9% medicare tax when an individual’s wage exceeds $200,000 in a year.   Unlike Australia, the US does not provide universal health care for its citizens. In the US each individual is responsible for funding their own health care. This means that instead of the medicare taxes going towards a general public funding pool for universal healthcare, they go towards your Medicare Hospital Insurance for when you are a senior. Medicaid is available to help support low income earners.
Health Insurance	It is optional for an individual to pay for private health insurance, which covers private health care as well as services that aren’t covered by medicare. High income earners will be exempt from the additional medicare levy surcharge if they take out private health insurance with adequate hospital coverage.	In the US an individual is responsible for health insurance (most employers do provide health insurance coverage) in order to get their health care services covered, or partially covered, by their insurance provider. Medicaid is available to assist low income earners to access free or reduced cost health care.
Sales Tax	GST is a federal tax charged at 10% on most goods and services. Basic essentials are exempt.	Sales taxes apply on most goods and services, and these are levied by the various state governments. These taxes range from 0 to 13.5%.
Tax Return Due Dates	The financial year ends on 30 June. Individual tax returns are due for lodgement by the 31 of October (however extensions typically apply until May in the following calendar year where an individual uses a tax agent to lodge their return and they have no outstanding obligations).	The financial year aligns with the calendar year in the US, meaning the tax year ends 31 December. Tax lodgements are due by 15 April the following year. Self-employed and small business owners are required to make quarterly reports to pay estimated taxes that are reconciled with the annual filing.
Income from your Australian Superannuation Fund	Taxation on superannuation income streams and lump sums is taxed differently depending on whether you have reached the preservation age, and the type of super income stream that is paid.	Distributions from an Australian superfund are typically exempt from US tax provided the benefits are appropriately claimed and reported.
Retirement	Once you reach preservation age (60), your retirement benefit from your superannuation fund is tax free. Aged pensions form part of your taxable income, however if you have no other income then your pension won’t exceed the tax free threshold.	Your income stream from any 401(k) plan, social security or pension are taxed depending on your income sources and overall level of income.

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.

This article relates to foreign business founders with an active business, who are moving to the US. There is a risk that foreign earnings may be double taxed when your organisation is taxed as a US entity. This is due to the application of US attribution rules (Controlled Foreign Corporation (CFC) rules) and Passive Foreign Investment Company (PFIC) rules.

To avoid being double taxed and ensure that foreign tax credits can be appropriately applied, it may be advisable to make a check-the-box election. This election essentially means that foreign corporations are choosing to elect their US tax status at the point in time that the US tax system becomes ‘relevant’ to them.

This check-the-box system is a tax regime that doesn’t just impact organisations that are set up in the US. It can also impact Australian businesses and global businesses when the foreign founder of the corporation moves to the US.

When does the US tax system become ‘relevant’ to a foreign corporation:

The US tax system is considered to be ‘relevant’ to a foreign corporation when one of the following applies:

a) the foreign corporation derives US sourced income;

b) the foreign corporation is required to file an income tax return in the US; or

c) the owner of a foreign corporation becomes a US tax resident (ie a US Person).

Why might a check-the-box election be made?

The most basic reason for making the check-the-box election is to ensure that the owner of the corporation in the US is properly credited with the foreign tax payments. A check-the-box election will avoid the attribution of income under CFC rules or the loss of long term capital gains tax rate discounts when shares are transferred in a passive foreign investment company (PFIC).

When will a foreign corporation be a CFC?

When US shareholders own more than 50% of the shares, either directly or indirectly, then the foreign corporation will be considered to be a controlled foreign corporation (CFC). To be considered a ‘US shareholder’ the person must own more than 10% of the voting rights or stock value of the foreign company.

When is a foreign corporation a PFIC?

A passive foreign investment company (PFIC) exists when one of the following two conditions are satisfied:

1. Passive investments generate at least 75% of a corporation’s gross income (as opposed to regular business activities); or
2. At least 50% of the corporation’s assets create passive income. Passive income includes interest, dividends and capital gains.

What is a foreign eligible entity?

A foreign eligible entity is defined by whether a member has limited liability or not. This is a default classification under the check-the-box regulations. When all members of the corporation have limited liability the US taxes the foreign eligible entity as a corporation. When at least one member does not have limited liability the entity is not a foreign eligible entity.

An eligible entity may make a check-the-box election to opt out of the default classifications.

Warning on making an election after default classification has been made

It is important to make your election prior to the default classification being applied. This is because making a later election will change the organisation’s classification. Such a change in classification can trigger a liquidation event.

When you should make a check-the-box election:

To ensure the check-the-box election is made appropriately you should consider making the election when you meet all of the following conditions:

1. you own a foreign corporation
2. the US tax system is relevant for your corporation
3. you need to apply foreign tax credits against your US corporate tax regime
4. you wish to avoid applying the CFC or PFIC rules.

Burton’s case [Burton v Commissioner of Taxation [2019] FCAFC 141] has set an interesting precedent for claiming foreign tax credits on capital gains made from the sale of overseas investments in the United States.

In simple terms, if you own a capital asset in the USA, and you are taxed in the US the capital gain, then you may not be able to claim all the US tax paid as credit in Australia.

The reason for this is because the ATO will only allow you to claim the foreign tax offset that relates to the portion of taxable discounted capital gain being declared in your Australian tax return. The Australia-US Double Taxation Agreement will not assist you in this regard.

Since Burton’s application to appeal the decision was denied on 14 February 2020, the position under the law has been clarified in a situation where an Australian taxpayer makes a capital gains on US real estate (or other assets which are considered effectively connected with the USA).

While some articles claim that this case means the ATO is clawing back the 50% discount on Australian residents with foreign held assets, this isn’t strictly true. It’s actually that not all of the US tax paid would be creditable here.

Example – Comparing the net tax effect on an Australian tax resident selling capital assets owned under different tax regimes. 

To understand the situation let’s consider the example of Jack, an Australian taxpayer who sells a long-term capital asset held in the US, NZ and Australia.

The US taxes capital gains in full, however they tax the capital gain at a different tax rate. NZ does not tax capital gains. Including NZ as a comparison makes it clear that the ruling from Burton does not claw back the discounted 50% capital gain.

For our purposes Jack is an Australian tax resident.

Let’s assume:

• For ease of calculations Jack makes a capital gain of $1,000,000 on the sale of each of the following assets.
• Jack’s first $1,000,000 capital gain is on an asset that he held in the US for more than 12 months. While the US taxes capital gains, it applies a concessional tax rate for assets held over 12 months. For ease of calculations we will assume the top concessional rate of 20% applies.
• The second $1,000,000 gain is on an investment that was held in NZ for more than 12 months. NZ does not tax domestic capital gains.
• Finally, Jack also sells $1,000,000 investment in Australia, which he has also held for over 12 months. Accordingly, Jack will only be taxed on 50% of the Australian capital gain. For ease of calculations we will assume the flat top marginal rate and Medicare levy applies, 47%.
• Jack sells all 3 investments in the same financial year for a capital gain of AUD$1,000,000 each.
• For ease of calculations Jack has no capital losses to apply and he is able to apply the 50% CGT discount in full when preparing his Australian tax return. 

		US owned Asset (AUD$)	NZ owned Asset (AUD$)	Australian owned Asset (AUD$)
	Capital Gain	$1,000,000	$1,000,000	$1,000,000
a.	Foreign Taxable gain after applying any discounts for assessing tax on capital gains	$1,000,000	0	–
b.	Foreign tax paid US 20% NZ NA on capital gains	$200,000	0	–
c.	Australian Capital Gain	$1,000,000	$1,000,000	$1,000,000
d.	Portion of capital gain eligible for discount in Australian assessment	$500,000	$500,000	$500,000
e.	Net taxable Australian gain to be taxed (c – d)	$500,000	$500,000	$500,000
f.	Australian tax at $47% (including Medicare levy)	$235,000	$235,000	$235,000
g.	Net foreign tax paid that is eligible to be claimed as an offset against the Australian taxable portion of the capital gain US: b x 50% All others: b	$100,000	0	–
h.	Australian net tax payable (f – g)	$135,000	$235,000	$235,000
	Total foreign & Australian tax (b + h)	$335,000	$235,000	$235,000
	Global Tax Paid	33.5%	23.5%	23.5%

As you can see from this example, Jack ends up paying more tax on the US asset. This is because the US taxes the full gain at a discounted rate. Australia then taxes half of the gain at the Australian tax rate and only allows the 50% portion of the foreign income tax credits to be applied.

Conclusion

The net impact of applying this precedent is that Australian taxpayers will end up paying up to 33.5% income tax on capital gains made on US investments that are held for more than 12 months. This is in contrast to the 23.5% income tax that they will pay on capital gains that are limited to only paying Australian income tax.

The biggest personal tax residency case in 40 years just got bigger. The taxpayer Mr Glen Harding having lost his case in front of a single judge in the Federal Court has won an emphatic victory in the Full Federal Court in a decision handed down on 22 February 2019.

In Harding v Commissioner of Taxation [2018] FCA 837 in a unanimous decision the Court found that Glen Harding was not a resident of Australia because;

• he did have a Permanent Place of Abode in Bahrain; and
• he did not reside in Australia;

As we reported last year in our blog (an Appeal to Common Sense) the taxpayer, Glen Harding, appealed from an initial Federal Court decision against him.

The Facts of Harding’s case were, in essence, that Mr Harding, in his evidence, had abandoned his residence in Australia, with the intention never to return. However, in establishing life in Bahrain, he lived in an apartment building called “Classic Towers”. Initially he took a two bedroom apartment because he believed that his wife and children would visit him from time to time.  He remained in that apartment from 10 June 2009 until 9 June 2011.  When his marriage broke down around 2011 and he realised that his wife would not be moving to Bahrain, he moved in to a one bedroom apartment where he remained until 9 June 2012.

The case was all about whether Mr Harding was a resident in Australia for the income tax year ended 30 June 2011 and the single judge in the first instance found that because of the style of accommodation that Mr Harding chose in Bahrain, being a fully furnished apartment, he had not established a permanent place of abode in Bahrain, despite several other factors which demonstrated that he was living in Bahrain.

Several principles of residency law were analysed in detail by the Court. However, the main focus was on the question of what was meant by the phrase ‘Permanent Place of Abode’. A clear understanding of that phrase is critical because of the definition of tax residency in Section 6(1) of the Income Tax Assessment Act 1936.

That definition says that a person is a resident of Australia if they reside in Australia and includes a person who is Australian domiciled unless the Commissioner would be satisfied that the person has established a Permanent Place of Abode outside Australia.

Most Australian expats who move overseas will remain domiciled in Australia and hence, unless they can show that they have established a permanent place of abode overseas, will remain fully taxable in Australia. It has never been the case that an Australian who is itinerant overseas avoids taxation in Australia.

So the question ‘what is a Permanent Place of Abode?” is critical. In their joint decision,  Davies and Steward JJ with Logan J in agreement, indicated that the word ‘place’ should be read as including a reference to a country or state and they expanded by saying;

In the context of the legislative history, in our view, the phrase “place of abode” is not a reference, as one might have thought, only to a person’s specific house or flat or other dwelling.  If that had been Parliament’s intention it would have used the phrase “permanent abode” rather than “permanent place of abode”.  The word “place” in the context of the phrase “outside Australia” in subpara (i) invites a consideration of the town or country in which a person is physically residing “permanently”.

In taking that approach, the Court referred to the analysis of Sheppard J in Applegate’s case where he indicated that as follows:

“place of abode”’ may mean the house in which a person lives or the country, city or town in which he is for the time being to be found.  I am of the view that the latter is the meaning of the expression used in s. 6(1.) of the Act.  Thus a person might be correctly said to have a permanent place of abode in, say, Vila, notwithstanding that during a given period he lived in a number of different establishments occupying each for only a relatively short period.  His case is no different from one where a person, such as the appellant here, lives, for a substantial period, in the same house.

So here we see, for the first time, a definite focus by the Federal Court on the permanence in a particular jurisdiction as being of paramount importance rather than the particular ‘type’ of accommodation that a tax payer chooses to live in within that jurisdiction.

If this decision stands, it would be a victory for common sense, because if a person is living permanently in a particularly city it should not be critical what type of accommodation the person chooses to live in.

Author: Matthew Marcarian

The taxpayer, Mr Harding has appealed to the Full Federal Court of Australia from a decision handed down on 8 June 2018 by Justice Derrington, in Harding v Commissioner of Taxation [2018] FCA 837. In that case His Honour, found that Mr Harding was resident of Australia for tax purposes under the Domicile Test, because he failed to establish a ‘permanent place of abode’ in Bahrain during the relevant year, even though he left Australia permanently in 2009 and lived in Bahrain until 2015, before moving to Oman.

We believe the decision creates significant uncertainty and we are glad to see it appealed.

What happened in the case?

In 2009 Mr Harding departed Australia to take up full time employment in Saudi Arabia. He chose to live in Bahrain (as is commonly done) and obtained a visa to do so. Mr Harding and his wife Mrs Harding had previously lived overseas in the Middle East.

On the facts outline in the case, Mr Harding seemed to have lived in the one apartment in Bahrain for almost 2 years from June 2009 to 9 June 2011, including almost all of the year ended 30 June 2011 – which was the year in dispute in the case.

Matters were apparently made complicated for Mr Harding because on this occasion his wife (and his children) did not accompany him to Bahrain initially and after going so far as to enrol his youngest son into the British School in Bahrain, Mr Harding’s marriage did not survive.

There is a some suggestion that Mr Harding only secured a two bedroom apartment when he initially moved to Bahrain, perhaps because he knew that when his family moved (as he intended that they would) more suitable accomodation would be required. His Honour also appeared to be completely convinced that Mr Harding had departed Australia permanently – even going so far as to list the things which he considered were evidence of that fact.

What was the problem?

The problem for Mr Harding was that even though His Honour was convinced that he had left Australia permanently (and was not resident according to ordinary concepts), His Honour was not convinced that Mr Harding had established a ‘permanent place of abode’ in Bahrain. Consequently since Mr Harding was an Australian domicile – he was still a tax resident of Australia.

This is because of the operation of the ‘Domicile Test’ in Australia’s residency laws. The Domicile Test treats all persons who have their domicile in Australia as being tax resident, unless they can show that they have a ‘permanent place of abode’ outside Australia. We believe that the concept of Permanent Place of Abode is a settled concept under Australia’s tax law and has been so for over 40 years since FC of T v Applegate 79 ATC  4307 (Applegate). The concept of ‘place of abode’ has its ordinary meaning and the use of the word ‘permanent’ in connection with an abode simply implies a place which is not temporary.

Given that the Court agreed that Mr Harding;

– made his life in Bahrain;
– had a visa to reside in Bahrain and in fact resided in Bahrain;
– owned a car in Bahrain;
– had exclusive use of an apartment in Bahrain which he leased (which the Court agreed was not short-term accomodation; see para 75);
– travelled every day from Bahrain to his full time place of work in Saudi Arabia;

we find it difficult to see why Mr Harding was found not to have a permanent place of abode in Bahrain.

The factors that seemed to be held against Mr Harding were that he did not own many possessions (given the apartment was fully furnished) and it was reasonably easy for him to move between apartments in the same complex which he did in July 2011 (after spending almost 2 years in the fist apartment) when it became apparent that Mrs Harding was not going to move to Bahrain.

It also seemed to weigh strongly on His Honour’s considerations that Mrs Harding did not seem to want to live in the original apartment Mr Harding had chosen (even though it was big enough to house the family) and that Mr and Mrs Harding together looked at alternative accomodation when she visited him in Bahrain.

A relevant fact also apparently was that Mr Harding’s postal mail was not sent to Bahrain, but continued to be sent to his former home in Australia. In relation to this His Honour remarked in his closing remarks (para 149) that “It is indicative of an intention to reside at premises permanently or, at least, not temporarily if that place is used as the address for correspondence. Were a person to use their apartment address as that to which important correspondence is to be addressed it can be thought that they are intending to remain there for an extended period of time.” We cannot understand why His Honour considered that the receipt of postal mail in Australia was of material significance, when by contrast His Honour did not see it as particularly significant that Mr Harding had continuing financial arrangements with Australia (paragraph 85).

Factors suggesting Mr Harding did have a Permanent Place of Abode was in Bahrain

The strangeness of the decision here is compounded by the fact that although Mr Harding’s contract of employment was only for 12 months, when Counsel for the Commissioner argued that Mr Harding’s presence in Bahrain was ‘somewhat tenuous’ because of this, His Honour responded by remarking (correctly in our view) on the permanent nature of Mr Harding’s departure from Australia, his intention never to return to Australia to live, and his working history which demonstrated that was ’eminently employable’, effectively dismissing the Commissioner’s argument that the short term nature of the employment contract was a material weakness in the case.

Indeed at para 147 His Honour remarks that “An associated argument advanced by the Commissioner was that as Mr Harding’s employment in the Middle East might be terminated at short notice, his presence there was necessarily of a transitory nature. That submission, however, fails to take into account that Mr Harding was intent on remaining in the Middle East, although not necessarily in Bahrain, and his presence there was not, necessarily, tied to his continued employment with TQ Education.”

The decision in this case is all the more puzzling given that His Honour accepted that Mr Harding took leases of the apartments as extended term propositions also accepting that“that Mr Harding made his life in Bahrain. It was the place from which he commuted daily to his work in Saudi Arabia. He formed friendships there and it was where he attended restaurants and bars after work. He also went to the beaches there and engaged in go-carting at the local grand prix track. In general terms, he pursued the expatriate lifestyle with which he had been familiar for many years.”

Implications for Australian Expats

We hope that the decision in Harding is overturned on appeal. The answer to question of whether a person has established a ‘permanent place of abode’ overseas should be arrived at simply and in a common sense fashion, by considering whether the taxpayer has only a temporary place of abode in the country.

For residency purposes if a place is not temporary then it must be permanent otherwise a person cannot have any certainty.  Surely we cannot have a third class of residency, being a state of being somewhere in the middle of temporary and permanent.

If the Court accepts that Mr Harding ‘made his life in Bahrain’ it should accept that he had a permanent place of abode there, regardless of where his postal mail is sent to.

It is pertinent to conclude by reflecting on the often quoted words of Fisher J in Applegate who said;

“To my mind the proper construction to place upon the phrase ‘permanent place of abode’ is that it is the taxpayer’s fixed and habitual place of abode. It is his home, but not his permanent home..Material factors for consideration will be the continuity or otherwise of the taxpayer’s presence, the duration of his presence and the durability of his association with the particular place.”

We look forward to a common sense judgement from the Full Federal Court in Mr Harding’s case.

UPDATE: On 22 February 2019, the Full High Court handed down a decision on the Harding v Commissioner of Taxation [2018] FCA 837  case. Please see Residency – Harding’s Appeal Victory for the decision.

Author: Matthew Marcarian