Tag: Australia

Living as an Expat in Australia

Moving to Australia but still having tax residency/citizenship status in another country (including the United States) can lead to questions about filing for both. Let’s look at the overall question below:

Do I Need to File 2 Income Tax Returns – Both US and Australia?

If you’re an American working or residing in Australia for some time (short or permanent), you should assume you have an income tax return obligation in both the U.S. and Australia.

If you’re an American working in Australia, you may also have to file Australian taxes based on your residency and domicile status. Where Australian taxes are concerned, your domicile is generally where you have your permanent home, and your tax residency is where you spend most of your time. You can be a resident in more than one country, but you can only have one domicile.

How do U.S. Expat Taxes Work While You Live and Work in Australia?

Here is what American expatriates can expect from both U.S. and Australian tax laws about living and working in Australia:

Americans Who Are Self-Employed in Australia

It is required by Australia’s tax law to file a U.S. income tax return in the case that you have net earnings worth $400 or more from self-employment, regardless of age. You are required to pay self-employment tax onto your self-employment income, no matter if it can be excludable as foreign earned income in figuring your income tax.

Does Australia tax foreign income?

The Australian income tax system taxes its residents based on their worldwide income (i.e., whether the income is earned within or outside Australia).

Generally, non-resident individuals are only required to pay tax to the ATO on an Australian-sourced income. However, unlike the U.S., individuals that have become residents in Australia for a short time may be eligible for a temporary resident tax exemption on their foreign income and capital gains.

What is the Income Tax Rate in Australia Compared to the U.S.?

Current Australian income tax rates are relatively high compared to the U.S., which is 37%. Australian tax rates vary depending on your taxable income and between 0% – 45%,

When is My Australian Income Tax Return Due?

Australia’s tax year starts on July 1 each year and ends the following year on June 30. The deadline to lodge (file) your taxes is October 31.

U.S. Taxes – What You Need to Know

If you earned over U.S. $12,550 (per individual) in 2021 (or $12,400 in 2020), have $400 of self-employment income, or only have a minimum of $5 of any income if you are married to (but happen to be filing separately) from a foreigner, it is a requirement to file Form 1040. While taxes owed are due on April 15, expats are able to get an automatic filing extension until the deadline of June 15, which can be extended further online on request until October 15.

If you have foreign assets valued at over U.S. $200,000 (per person, excluding your home if it is owned under your name), you must also file a Form 8938 to declare them.

If you had over U.S. $10,000 in one or multiple foreign bank accounts during the tax year at any time, it would be necessary for you to file FinCEN form 114, also known as an FBAR (Foreign Bank Account Report).

If you are paying any income tax in Australia, several IRS provisions allow you to avoid paying double tax onto the same income in the U.S.

The two primary provisions are the Foreign Earned Income Exclusion, as it lets you exclude the first US$110,000 income earned from U.S. tax, and the Foreign Tax Credit. This gives you a U.S. tax credit to offset the tax you already have paid in Australia.

The Foreign Tax Credit is a more beneficial option for American expats who find themselves paying more tax in Australia than they would in the U.S. They can carry any excess U.S. tax credits forward for any future use. No matter if you don’t owe any tax in the U.S., you will still have to file if your income exceeds the IRS minimum thresholds.

Does the U.S. Have a Tax Treaty with Australia?

Yes, the U.S.-Australia Income Tax Treaty was signed in late 1982 and later entered into force a year later in 1983

The U.S. – Australia Tax Treaty

However, the U.S. – Australia Tax Treaty doesn’t prevent U.S. expats living in Australia from having to file U.S. expat taxes. It contains provisions that can benefit some U.S. expats in Australia, such as students and individuals who will be given retirement income.

Most kinds of income are set out in the Treaty for U.S. expats so that they can avoid double taxation of their income arising in Australia. One way is to claim U.S. tax credits towards the same value as Australian taxes that have already been paid on their income by claiming the IRS Foreign Tax Credit.

If they have income arising in the U.S., U.S. expats in Australia can claim Australian tax credits against any U.S. income tax paid to the IRS when they file their Australian tax return.

The Treaty also covers any corporation taxation, stating that a company shall only be taxed in the country which it is registered under. An exception would be a ‘permanent establishment’ (an office, branch, factory, etc.) in another country. In that case, the permanent establishment’s profits shall be taxed within the country where it is located.

It’s also worth mentioning that the Treaty contains a clause that allows the two countries to share tax information; in other words, the IRS can see the Australian taxes U.S. expats currently residing in Australia are paying and vice versa.

Australian banks also share their U.S. account holders’ contact and balance info with the U.S. Treasury.

To claim a provision in the Tax Treaty (besides claiming U.S. tax credits), expats should use IRS form 8833.

What are Australia’s Taxes Like for U.S. Expats?

For the 2022/2023 tax year, all Australian residents are expected to be taxed on all income over $18,200, regardless of where it’s earned. Also, non-residents are taxed on all Australian-sourced income, with some exceptions.

Australian Pension Plans

Superannuation is considered to be Australia’s version of a pension system, as superannuation is partly mandatory and voluntary. Excluding salary and wages, the government has minimums employers and employees must meet to fulfill superannuation requirements. The current rate is 9.5%, which will increase to 12% by 2025.

Employee investments are both funded and vested.

Superannuation funds can make filing U.S. expat taxes extra complicated. The IRS treats these funds as grantor or employee benefit trusts, so they are not considered to be qualified retirement plans; they also operate similarly to a 401(k). Anyone who has authority over these funds will encounter additional IRS reporting requirements.

The U.S.-Australia Totalization Agreement

This agreement influences most tax payments and benefits under their respective social security systems due to it being designed to eliminate dual social security taxation. This situation occurs when a worker from one country relocates (digitally or in-person) to another country to work and is required to pay social security taxes to both countries (IRS and ATO) on the same earnings. It’s also good to fill gaps in benefit protection for all workers who have divided their careers between the United States and Australia.

What Tax Forms do Americans Living in Australia Have to File?

The most common forms to file as a U.S. expat include the following:

Foreign Bank and Financial Account Report (FBAR): it should not be considered a tax form and is not filed with the IRS. Instead, it is an informational form submitted to the U.S. Treasury Department. Any U.S. account holder (either person or entity) with a financial interest in or has signature power over one or more foreign financial accounts with more than $10,000 in aggregate value in a calendar year must file the FBAR annually with the Treasury Department.
Form 8938, Statement of Specified Foreign Financial Assets (FATCA Reporting): If you reside outside the U.S. and have a bank account or investment income account with a foreign financial institution, you will be required to include FATCA Form 8938 along with your U.S. federal income tax return if you meet certain monetary thresholds.

U.S. Tax Forms for Expats in Australia

- FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR)
- Form 1040: Individual Income Tax Return
- IRS Form 8938: Statement of Specified Foreign Financial Assets (FATCA)

U.S. Tax Reporting Considerations

U.S. expats who possess accounts or other overseas assets can be subject to several specific filing requirements in the structure of informational forms. Some forms need to be submitted to the IRS as attachments onto the personal income tax return (Form 1040), while others can be submitted to other governmental departments. Failing to file any of the proceeding forms will result in severe civil penalties, such as a $10,000 per form per year. Additionally, criminal penalties, including fines and incarceration, may apply in certain extreme cases if the reporting delinquency is shown to be willful.

Australia Expat Income Taxes

There are a few standard expectations when paying taxes for Australian-sourced income, such as:

Who is Liable for Income Taxes in Australia?

For the 2022/2023 tax year, all Australian residents are expected to be taxed on all income over $18,200, no matter where it’s earned. Non-residents are taxed on all Australian-sourced income, with some exceptions.

Who is an Australian Tax Resident

You can qualify as an Australian resident if you’re domiciled in Australia or spent more than half of the tax year without a permanent home residing elsewhere. Additionally, you also may be a resident if you happen to be an “eligible employee” of a superannuation fund.

Tax Year in Australia and Tax Filing and Payment Rules

Unlike in the U.S., the Australian tax year starts on July 1 and ends on June 30 of the following calendar year. The official deadline for filing an Australian income tax return is October 31, after the end of the country’s tax year.

Extensions are available for taxpayers in certain situations for exceptional and unforeseen circumstances, such as those affected by natural disasters or even those who volunteered to aid victims of natural disasters.

If you hire a registered tax agent before October 31, the filing deadline is automatically extended to June 5 of the following year.

Expat Tax Withholding in Australia

When U.S. Expats start working as an employee in Australia, they pay income tax on payments received from their employers. The U.S. Expats’ employers deduct tax from your pay and send those amounts to us.

As an expat your employer withholds tax on your behalf from your salary or wages. Your employer will use your TFN declaration to work out how much taxes will be withheld from your pay.

Who Qualifies for a Resident of Australia?

If you’re domiciled in Australia, you qualify as a permanent resident of Australia or spent more than half of the tax year without a permanent home elsewhere. Additionally, permanent residents may be “eligible employees” of a superannuation fund.

What is the Implication of Being a Self-Employed American in Australia?

All U.S. expats are required to file a U.S. income tax return if your net earnings are $400 or more from self-employment, regardless of age. You must also pay self-employment tax onto your self-employment income, no matter if it is excludable as a foreign-earned income when calculating your income tax. Any net earnings from self-employment include the income earned in Australia and the United States.

What You Need to Know about Living and Working in Australia for Your U.S. Expat Tax Return

Along with standard expectations, some common dos and don’ts come with being an Australia-residing expatriate are:

Common Mistake

Of particular importance is that U.S. expats, more often than not, mistakenly assume that once they have moved abroad, any U.S. tax obligations will cease to exist.

So much so that, as a basic rule, all U.S. citizens, even those residing outside the United States, will be recognized as U.S. residents for tax purposes. Therefore, they are subject to U.S. tax reporting on their worldwide income and can be held towards tax liability if unable to report all current tax information.

Australia Foreign Bank Account

Suppose you reside outside the U.S. and possess a bank account or investment account in a foreign financial institution. In that case, it is necessary to have FATCA Form 8938 included with your U.S. federal income tax return so you can meet certain monetary thresholds.

Additional Child Tax Credit for American Families in Australia

American expatriate families living in Australia should know the benefits they can receive from the Additional Child Tax Credit.

Australia is a country that has a higher income tax rate than the U.S., so Americans residing abroad in Australia can use the Foreign Tax Credit way instead of the Foreign Earned Income Exclusion. They can also then receive up to $1,400 per qualified child per year.

A qualifying child must be dependent on you, is under 17 years old, and has a valid Social Security Number.

We have met families who made up for lost years of tax filing through our Streamlined Procedure and were surprised to receive up to $3,000 of refunds every year when they claim the child tax credit.

What Tax Deductions are Available for Expats Living in Australia?

Because of the Treaty, most Americans residing in Australia already have an exemption from double taxation. However, the IRS can also provide several other beneficial tax credits and deductions for expats, such as:

Foreign Housing Exclusion (or Deduction);
Foreign Earned Income Exclusion; and
Foreign Tax Credit.

Most expats who apply these tax credits are able to erase their U.S. tax debt entirely.

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How to Deal with the Different Tax Year in Australia in Your U.S. taxes?

Filing your U.S. tax return is due on June 15 – the automatic, 2-month filing extension for expats. However, you may need to file for the October 15 deadline because Australia has a different tax year.

When you report income as a U.S. citizen in Australia, you cannot use the same tax year in Australia as in the U.S. Both countries have different tax years. Therefore, for filing a U.S. tax return as an expat, you’ll need to calculate your worldwide income according to the U.S. tax year. This tax year is January 1 – December 31.

Due to this, it is recommended to use monthly payslips so you know how much income you receive every month. That way, you can translate what you earned from the Australian tax year to the U.S. tax year.

You `must report your worldwide income and file a U.S. tax return by June 15 every year as an American living abroad in Australia. However, if you are waiting for your second Australia income statement, that may come after the U.S. expatriate filing deadline.

Should I Take the FTC over the FEIE if I Live and Work in Australia?

While Australia’s top marginal rate is at 45%, the U.S. instead charges 37%. And the Australian maximum marginal tax rate starts much earlier. That way, you will be better off ignoring the FEIE but still claiming a full foreign tax credit.

But exercise caution, as you can only claim a new FEIE if six full years have passed since you had last rejected an FEIE. The sole exception for this scenario is if you receive permission from the Internal Revenue Service in order to change back earlier.

You may carry any qualifying unclaimed foreign tax credits for one year and then carry them forward for ten years. However, you can only claim these against other foreign income, so if you return to the States and still have excess foreign tax credits, you can’t use these against U.S.-sourced income.

Use the Foreign Tax Credit to Prevent Double Taxation

If you’d like to avoid double taxation, American expatriates in Australia can apply and use the Foreign Tax Credit. That way, whatever amount of taxes that is owed will be paid in Australia by you and can be applied to your U.S. tax return. That way, you will only have to pay taxes once.

Filing Requirements and U.S. Tax Deadlines

Suppose you are a U.S. citizen or resident, and your tax home and your abode are outside either the United States and/or Puerto Rico upon the regular due date of your return. In that case, you will be automatically granted an extension for June 15 to file your return and pay any tax due. You do not have to file a particular form to receive this extension, and you must attach a statement to your tax return when you file it, showing that you are eligible for this automatic extension.

Qualified Dividends in Australia for your Foreign Corporation or Investment

Resident shareholders in foreign companies can receive credits on distributions. If you happen to own shares within an Australian company and receive a grossed-up dividend report of profits, the company has already paid any and all taxes on a portion of those dividends (as of this posting, the rate is 30%). Australian residents can also receive a rebate (also known as franking or imputation credit) on the tax that has been paid and distributed by that company. Depending on your Australian tax bracket, receiving the entire credit or a portion of the credit is possible.

Selling Your Home in Australia

You need to be aware of some tax implications if you are planning on selling your home in the U.S. or Australia as a U.S. citizen abroad.

As an expat in Australia, you have the ability to claim Section 121 Exclusion and exclude up to $250,000 of profit from U.S. taxation if you file taxes separately (e.g., if your spouse is a non-U.S. citizen). But if filing jointly with another U.S. citizen, you individually can exclude a U.S. $500,000 maximum.

As long as you are qualified under Section 121 Exclusion and its protocols and have lived in your primary house for either two out of five years or owned it for two out of five years, you have the ability to exclude up to $250,000 on your U.S. tax return.

If not, and if the profit when selling the house comes to an estimated $300,000, then $50,000 will be taxable by the IRS. You need to make sure all your tax documents are on a cost basis. The house purchase price includes the cost of renovations, home improvements, etc., so your profit number goes down. Unless you make a significant profit on your home, it is unlikely you will owe U.S. tax for selling your home.

U.S. Tax Benefits are Available to You

Now that we’ve covered the financial and legal aspects that come with being an Australian-residing expatriate, here are some benefits for you to consider:

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion permits you the ability to exclude your wages from your U.S. taxes. However, this option is only available to those who meet specific time-based residency requirements.

Foreign Housing Exclusion/Deduction

Along with the FEIE, you can also claim a foreign housing deduction or exclusion (applied through Form 2555) for any housing expenses, with the exception of the base housing amount. This exclusion applies to housing paid for with employer-provided amounts similar to a salary, while the deduction can apply to housing that is paid for through self-employment.

Your housing expenses are your reasonable expenses incurred, limited to 30% of your maximum FEIE. High-cost localities like Melbourne, Perth, or Sydney have a higher limit listed in the Instructions for Form 2555. Housing expenses do not include the cost of buying a property, making improvements, or incurring other expenses to increase its value. And your housing expenses can also be within your total foreign-earned income.

The base housing amount is usually 16% of your FEIE.

Foreign Tax Credits

The Foreign Tax Credit permits you to claim a credit for any income taxes that have been paid to a non-domestic government.

Bilateral Agreements

There are two bilateral agreements to be aware of for future research and consideration. They are:

- Double Tax Treaty – U.S./Aus
- Social Security Totalization Agreements

Reach of U.S. Government

Because of FATCA and its Supporting International Agreements have made the U.S. Income Tax Reach more comprehensive than ever before.

FATCA, also recognized as the “Foreign Account Tax Compliance Act,” FATCA is a relatively new tax law enacted in 2010 as an addition to the HIRE Act. The objective behind FATCA since then has been to combat all offshore tax evasion by requiring U.S. citizens to report their holdings residing in foreign financial accounts and any foreign assets to the IRS annually. As part of FATCA’s implementation since the 2011 tax season, it is an IRS requirement that certain U.S. citizens must report (on Form 8938) the total value of any of their “foreign financial assets.”

Starting January 1, 2014, to further enforce FATCA reporting, foreign financial institutions (also known as “FFIs,” which include just about every investment house, foreign bank, and even some foreign insurance companies) must report all account balances held by U.S. citizen customers. To date, several large foreign banks have required that all U.S. citizens who have maintained accounts with them (the large foreign banks) to provide a Form W-9 (a form to declare their status as U.S. citizens) and to sign a confidentiality waiver agreement where they grant permission to the bank to provide the IRS all information about their account. There are cases where foreign banks have closed the accounts of U.S. expats who refuse to cooperate with the requirements.

This renewed effort by the U.S. government to combat offshore tax evasion through FATCA has led to a recent surge in tax compliance efforts by U.S. expats.

Recently, the IRS announced that the United States had signed a so-called competent authority arrangement (“CAA”) with Australia in furtherance of a previously signed intergovernmental agreement (“IGA”) with Australia. This agreement is designed to promote the implementation of the FATCA tax law requiring financial institutions (mainly banks and investment houses) outside the U.S. to report information on financial accounts held by their U.S. customers to the IRS.

Suppose you are a U.S. expatriate living in Australia. In that case, you must remain compliant with your continuing U.S. tax obligations and contact your local ATO for tax services and questions.

Our experts at Asena Family Office are available to help you understand your U.S. tax filing requirements and assist you with your U.S. tax compliance needs.

–Shaun Eastman

–Peter Harper

US-AU DTA: Article 18 – Pensions, Annuities, Alimony and Child Support

Posted on May 18, 2022December 5, 2022 by Peter Harper

Background

The background of this week’s blog is a bit different from the previous ones due to the unique nature of the topic. This week we will be looking at Article 18 of the DTA – Pensions, Annuities, Alimony, and Child Support, which affects a much broader demographic than other articles. The background focuses more on the global economy and financial markets, but there is a reason for this.

Most people start saving for their retirement when they earn their first salary. Contributions are made monthly (either by yourself or on your behalf) towards a Pension Fund (IRA, 401k, super, etc.) and are invested in various classes of assets. We diversify investments to reduce risk and maximize continuous growth, and it gives people a sense of comfort and security to invest in their future via a Pension Fund.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.

In recent months, the world has contended with the emergence of the Omicron variant, central bank policy tightening, and persistent inflation. And most recently, Russia’s invasion of Ukraine has ignited a geopolitical crisis that is shaking global financial markets to their core.

As tensions continue to mount in Eastern Europe, the concern about what is to come has led to some people impulsively cashing out their retirement portfolios or reviewing them.

I’ve always been a great admirer of Warren Buffet and his quotes on investments.

So just to lay the foundation for this week’s blog, I thought I would share two relevant quotes about the current economic climate.

“The most important quality for an investor is temperament, not intellect.”

“Uncertainty actually is the friend of the buyer of long-term values.”

Humans are, by nature, irrational beings and are often tempted to make trades when they think the market is working against them, whereas in contrast, it is the well-tempered investor that learns not to watch the market. This person ultimately ends up reaping the most rewards over the long term.

Their investment philosophy is that you don’t need to have an extremely high I.Q. to build more wealth, but rather that you should be more disciplined with your reaction toward the market’s irrationality.

Now to link the background with the rest of the blog to follow, if you are a U.S. resident with an Australian pension or vice versa, prior to considering whether to cash out your pension or not, make sure you take a step back and instead make sure you understand the potential adverse tax implications of having an international pension fund.

Introduction

The purpose of the Australian treaty is to prevent double taxation and fiscal evasion.

Because the U.S. does not tax contributions or accumulated earnings, and Australia does not tax the distribution of benefits, a U.S. resident could perceivably relocate from the U.S. to Australia and never pay income tax on contributions, accumulated earnings, or the payment of pension benefits that accrued while the employee worked in the U.S. To prevent this issue, the two countries formed a double taxation agreement.

Interpreting Article 18 of The DTA – Pensions, Annuities, Alimony, and Child Support

Article 18 addresses the taxation of cross-border pensions and annuities. Subject to Article 19, pensions and other similar remuneration paid to an individual who is a resident of one Contracting State in connection with past employment shall be taxable only in that State.

Article 18(4)

defines the term’ pensions and other similar remuneration, as used in this Article, to mean ‘periodic payments made by reason of retirement or death, in consideration for services rendered, or by way of compensation paid after retirement for injuries received in connection with past employment.’

Article 18(5)

defines the term ‘annuities,’ as used in this Article, to mean ‘stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).’

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

Article 18 is critical to any U.S. person who is a beneficiary of an Australian Superannuation Fund for the following reasons:

The U.S. has taxing authority over vested Australian superannuation benefits pursuant to Article 18 of the DTA; and
In the absence of a specific Article dealing with contributions and the annual income derived by pension schemes (as exist in the U.K. treaty), the U.S. retains the right under Article 1 of the DTA to tax contributions and accumulated earnings under its domestic tax laws.

In terms of the IRC, most foreign retirement plans are not considered “qualified plans” under Section 401(a), which means the plans generally do not qualify for tax-deferral treatment.

For a pension plan to be tax-exempt, the plan must satisfy the requirements contained in § 401 Internal Revenue Code 1986 (IRC). Section 401(a) IRC specifically provides that, for a pension plan to be a “qualified plan” (and therefore exempt from tax under § 501 IRC), it must be organized in the U.S. Accordingly, this means that no Australian superannuation plan (whether retail or self-managed) can be a “qualified plan.” (Read our Whitepaper on Taxation of Foreign Pensions for more details)

There are essentially three phases of U.S. tax treatment that need to be looked at when dealing with the taxation of an Australian superannuation plan. I will provide a brief summary of the three phases for this blog, but please review our Whitepaper for more information.

Phase 1 – Contributions

Suppose contributions are made to an Australian superannuation fund after an Australian citizen becomes a U.S. person (or a U.S. citizen becomes an Australian resident). In that case, the contributions will be taxable in the U.S. under § 402(b)(1) IRC.

Phase 2 – Earnings Derived Within A Superannuation Plan After An Australian Citizen Becomes A U.S. Person

Subchapter J contains the general rules concerning estates, trusts, beneficiaries and decedents, specifically the grantor trust rules. While it is critical that an individual assessment of the circumstances of every taxpayer be undertaken, most superannuation plans (or portions thereof) in Australia could be classified as grantor trusts for U.S. tax purposes.

Phase 3 – Distribution of benefits

In our opinion, there are two possible ways in which accrued Australian superannuation benefits (contributions and earnings) may be taxed in the U.S.

The first is that Australian superannuation benefits of a U.S. person will be taxable upon such a person attaining 60 years of age (the Australian retirement age). The taxpayer will first be liable for tax in Australia, but receive foreign tax credits in the U.S. (creditable only against U.S. federal income tax) for the Australian tax paid (which will be nil if the account is in the benefits phase). In the event of any shortfall, they will pay further federal, state, and city income tax (where applicable).

The second view (the alternate view) concerns highly compensated employees (HCE) and the application of § 402(b)(4) IRC. If an employee is a highly compensated U.S. person who is also a member of a foreign pension plan (i.e., an Australian superannuation plan), technically, on a literal reading of § 410(b)(3)(C) IRC, there is a high likelihood that the foreign pension plan will fail the minimum coverage tests because contributions made in favor of non-resident aliens with no US-source income are not included for the purposes of determining whether the coverage tests have been satisfied.

Conclusion

Both Australia and the U.S. recognize the need for their citizens to be able to self-fund their retirement and the importance of having a globally mobile workforce. This is evident when looking at the concessional tax treatment for individuals who maximize superannuation and pension contributions, and the current impact government-supported pension plans have on federal and state budgets.

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

The inadequacies in the DTA arise because it approaches Australian superannuation and U.S. pensions as though they are only taxed at one point, which is on distribution.

Unfortunately, unless Article 18 is amended, the adverse tax implications of U.S. migration on a taxpayer’s superannuation benefits may become a determining factor in whether an executive migrates between Australia and the U.S.

So, the current global economic turmoil might be the perfect opportunity to focus on reviewing the tax exposure of your pension fund instead of considering cashing it out.

Our team of International Tax specialists at Asena Advisors will be able to assist you with these complex tax rules that could apply to your pension fund. In times of adversity, you need proper guidance to your specific needs, and our Multi-Family Office will help you find opportunities in uncertain times.

US-AU DTA: Article 17 – Entertainers

Posted on April 20, 2022December 5, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing Article 17 of the US/Australia DTA which relates to entertainers and how they are taxed from an international perspective.

In general, Article 17, provides that if a resident of one country derives income in the other country as an entertainer or sports person, some of the income earned may be protected from tax in that other country, but usually not to the same degree as other individuals who are not entertainers or sports person.

What distinguishes entertainers and sportspersons from other individuals who receive income from employment is that by the nature of their work, some entertainers and sportspersons may have the opportunity to earn a large amount of income in a very short period of time.

INTERPRETING ARTICLE 17 OF THE DTA – ENTERTAINERS

Article 17 states that income derived by visiting entertainers and sportspersons from their personal activities as such will be taxed in the country in which the activities are exercised, irrespective of the duration of the visit.

However, where the gross receipts derived by the entertainer from those activities, including expenses reimbursed to the entertainer or borne on the entertainer’s behalf, do not exceed $10,000 or its equivalent in Australian dollars in the year of income, the income will be subject to tax in accordance with Article 14 or Article 15, which deals with independent or dependent personal services, as the case may be.

It should be noted that income derived by producers, directors, technicians and others who are not artists or athletes is taxable in accordance with Article 14 or 15, accordingly. The commentary to the OECD Model Convention indicates that the word “entertainer” extends to activities which involve a political, social, religious or charitable nature, provided entertainment is present.

It does however not extend to a visiting conference speaker or to administrative or support staff. The commentary acknowledges that there may be some uncertainty about whether some persons are entertainers or not, in which case it will be necessary to consider the person’s overall activities.

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

Article 17(2) is a safeguarding provision to ensure that income in respect of personal activities exercised by an entertainer, whether received by the entertainer or by another person, is taxed in the country in which the entertainer performs. This is irrespective of whether or not that other person has a “permanent establishment” or “fixed base” in that country.

If it is however established that neither the entertainer nor any person related to him/her participates in any profits of that other person in any manner, the relevant income accruing to that other person shall be taxed in accordance with the provisions of Article 7, 14 or 15, dealing respectively with business profits and income from independent or dependent services, as the case may be.

A legislative instrument has removed the PAYG withholding requirement in relation to entertainers and sportspersons who are US residents when working in Australia. This only applies where the payments relate to entertainment or sports activities carried on in Australia and where the combined payments do not exceed $10,000 or its equivalent in Australian dollars in the year of income..

This legislative instrument applies from 3 April 2014 until 1 October 2024.

A US entertainer who fulfils the contractual obligations of a US employer by performing in Australia, for a salary paid by the employer, is considered to derive “income from personal activities”, within Article 17 of the US/Aus DTA. This is irrespective of the fact whether or not the entertainer is at arm’s length from the US employer. Where the entertainer is paid an annual salary, an apportionment will be necessary to determine the amount applicable to the period of time spent in Australia.

Where the contract for the personal services of a US entertainer in Australia is made between a US resident and an Australian resident, and Article 17(2) of the DTA applies, both the US resident and the entertainer may be taxable in Australia.

The US resident will be liable to tax under Article 17(2) on the taxable income derived by it, and the entertainer may be taxed under Article 17(1) on remuneration derived from the US resident in respect of the personal activities in Australia.

CONCLUSION

For any person interested in tax planning, Article 17 could be a good motivator to start exercising to ensure this Article applies to you. However, that is easier said than done.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with your international tax planning needs to ensure that Article 17 is adhered to by entertainers. Lastly, we will never say no to an autograph.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with submitting the relevant forms in the US and Australia to get access to these relief measures.

US-AU DTA: Article 16 – Limitation of Benefits

Posted on April 13, 2022December 5, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing the technical Limitation of Benefits (LoB) Article (Article 16) of the US/Australia DTA.

Article 16 states that, in addition to being a resident of the US or Australia, taxpayers need to satisfy the requirements of Article 16 to obtain the benefits of the DTA.

In particular, the benefits of the DTA are only available if the resident is:

A qualified person (Article 16(2));
Actively engaged in a trade or business (Article 16(3)); or
Entitled to treaty relief because the IRS or ATO makes a determination (Article 16(5)).

The purpose of these restrictions is to prevent residents of third countries from using interposed companies or other entities resident in either Australia or the US to access treaty benefits, also commonly referred to as treaty shopping.

Treaty shopping is the use by residents of third countries of legal entities established in either the US or Australia with a principal purpose of obtaining the benefits of the US/Australia DTA.

INTERPRETING ARTICLE 16 OF THE DTA – LIMITATION OF BENEFITS

Article 16(1) stipulates that except as otherwise provided in Article 16 only residents of the US or Australia for the purposes of the DTA that are qualified persons are entitled to the benefits otherwise available under the DTA.

The benefits otherwise available under the DTA to residents are all limitations on source-based taxation under Article 6 through 15 and Article 17 through 21, the treaty-based relief from double taxation provided by Article 22 (Relief from Double Taxation), and the protection afforded to residents of a Contracting State under Article 23 (Non-discrimination).

The limitation in Article 16 does however not apply where a person is not required to be a resident in order to enjoy the benefits of the DTA. For example, Article 26 (Diplomatic and Consular Privileges) applies to diplomatic and consular privileges regardless of residence.

Article 16(2) lists the eight categories of resident that will constitute a qualified person for a taxable year and thus will be entitled to all benefits of the DTA provided that they otherwise satisfy the requirements for a particular benefit. It is therefore important to note that the tests must be satisfied for each year that benefits under the DTA are sought.

Article 16(2)(a) – Individuals

Article 16(2)(a) states that individual residents of a Contracting State will be a qualified person and hence entitled to rely on the DTA.

However, the definition of US resident in Article 4(1)(b)(ii) excludes citizens who are also a resident of another country with which Australia has a DTA. In addition, an individual that receives income as a nominee on behalf of a third country resident, may be denied the benefits of the DTA due to the beneficial ownership requirement in Article 10 for example, despite meeting the requirement in Article 16(2)(a).

Article 16(2)(b) – Governmental bodies

Article 16(2)(b) states that the Contracting State, any political subdivision or local authority of the state, or any agency or instrumentality of the state will be a qualified person and hence entitled to rely on the DTA.

Article 16(2)(c)(i) – Publicly traded companies

Article 16(2)(c)(i) states that a resident company will be a qualified person in the following circumstances:

Its principal class of shares is listed on a US or Australian stock exchange; and
Those shares are regularly traded on one or more recognized stock exchanges.

Article 16(2)(c)(ii) – Subsidiary companies

Article 16(2)(c)(ii) states that a resident company will be a qualified person if:

At least 50% of the aggregate vote and value of its shares are owned directly or indirectly by five or fewer companies that are qualified persons due to Article 16(2)(c)(i); and
In the case of indirect ownership, each intermediate shareholder is a resident of either the US or Australia.

Article 16(2)(d) – Other listed entities

Article 16(2)(d) states that certain publicly traded entities (other than companies) and entities beneficially owned by certain publicly traded entities or companies may be qualified persons and hence entitled to rely on the DTA.

Article 16(2)(d)(i) – Publicly traded entities

Article 16(2)(d)(i) states that a resident entity that is not an individual or a company is a qualified person if:

The principal class of units is listed or admitted to dealings on US or Australian stock exchange; and
These units are regularly traded on one or more recognized stock exchanges.

Article 16(2)(d)(ii) – Other Entities

Article 16(2)(d)(ii) states that a resident entity that is not an individual or a company will be a qualified person if at least 50% of the beneficial interests in the entity are owned directly or indirectly by five or fewer companies that are a qualified person due to Article 16(2)(c)(i) or publicly owned entities that satisfy the requirements of Article 16(2)(d)(i).

Article 16(2)(e) – Tax exempt organizations

Article 16(2)(e) states that a resident religious, charitable, educational, scientific or other similar organizations is a qualified person if:

It is organized under the laws of the US or Australia; and
Was exclusively established and maintained for a religious, charitable, educational, scientific or other similar purpose.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.

Article 16(2)(f) – Pension funds

Article 16(2)(f) states that a pension fund is a qualified person if:

It is organized under the laws of either the US or Australia;
Established and maintained to provide pensions or similar benefits to employed or self-employed persons pursuant to a plan; and
More than 50% of the beneficiaries, members or participants are individuals resident in either the US or Australia.

Article 16(2)(g) – Unlisted entities

Article 16(2)(g) states that a person other than an individual that is a resident of either the US or Australia is a qualified person and hence entitled to rely on the DTA if both an ownership and base erosion test are satisfied.

However, one or more of the following categories of qualified persons must principally own the unlisted entity directly or indirectly:

Individuals who are residents in the US or Australia (Article 16(2)(a));
Government bodies of the US or Australia (Article 16(2)(b); and
Entities resident in either the US or Australia that satisfy public listing and trading requirements in Article 16(2)(c)(i) and Article 16(2)(d)(i)).

Ownership test — companies

Article 16(2)(g)(i) requires that 50% or more of the aggregate voting power and value of the company must be owned directly or indirectly on at least half the days of the company’s taxable year by certain qualified persons.

Ownership test — trusts/partnerships

Article 16(2)(g)(i) requires that 50% or more of the beneficial interests of entities other than companies must be owned directly or indirectly on at least half the days of the entity’s taxable year by certain qualified persons.

Base erosion test

Article 16(2)(g)(ii) disqualifies a person that satisfies the requirement in Article 16(2)(g)(i) if 50% or more of the unlisted entity’s gross income for the taxable year is paid or accrued (directly or indirectly) to a person or persons who are not residents of either Contracting State in the form of payments deductible for tax purposes in the payer’s state of residence.

Article 16(2)(h) – Headquarters companies

Article 16(2)(h) states that a resident of the US or Australia that is a recognized headquarters company (RHC) for a multinational corporate group (MCG) is a qualified person and hence entitled to rely on the DTA.

A RHC is a US or Australian resident company where:

It has a substantial involvement in the supervision and administration of companies forming the MCG.
The MCG being supervised is engaged in an active business in at least five countries and each company generates at least 10% of the gross income of the MCG.
The gross income from any single country where a MCG member carries on business activities must be less than 50% of the gross income of the MCG.
No more than 25% of the gross income of the RHC can be derived from the other Contracting State.
The supervision and administrative activities for the MCG are carried out by the RHC independently of any other person.
Generally applicable taxation rules apply in its country of residence.
Income derived in the other Contracting State is attributable to the active business activities carried on by MCG members in that state.

Article 16(2)(h)(i) – Supervision and Administration

Article 16(2)(h)(i) requires that to be a RHC, the company must provide in its state of residence a substantial portion of the overall supervision and administration of the MCG.

Article 16(2)(h)(ii) – Active business

Article 16(2)(h)(ii) requires that the MCG supervised by the headquarters company must consist of corporations that are residents in, and engaged in active trades or businesses in, at least five countries. In addition the business activities carried on in each of the five countries (or groupings of countries) must generate at least 10% of the gross income of the MCG

Article 16(2)(h)(iii) – Single country income limitation

Article 16(2)(h)(iii) requires that the business activities carried on in any one country other than the headquarters company’s state of residence must generate less than 50% of the gross income of the MCG. If the gross income requirement under this clause is not met for a taxable year, the taxpayer may satisfy this requirement by averaging the ratios for the four years preceding the taxable year.

Article 16(2)(h)(iv) – Gross income limitation

Article 16(2)(h)(iv) requires that no more than 25% of the headquarters company’s gross income may be derived from the other Contracting State.

Article 16(2)(h)(v) – Independent supervision of MCG

Article 16(2)(h)(v) requires that the headquarters company have and exercise independent discretionary authority to carry out the supervision and administration functions for the MCG.

Article 16(2)(h)(vi) – Taxation rules

Article 16(2)(h)(vi) requires that the headquarters company be subject to the generally applicable income taxation rules in its country of residence.

Article 16(2)(h)(vii) – Income derived from the other Contracting State

Article 16(2)(h)(vii) requires that the income derived in the other Contracting State be derived in connection with or be incidental to the active business activities referred to in Article 16(2)(h)(ii).

Article 16(3) states that a resident of a Contracting State that is not a qualified person under Article 16(2) is a qualified person for certain items of income that are connected to an active trade or business conducted in the other Contracting State.

In broad terms, the benefits of the DTA will be available if the person resident in the US or Australia:

Is engaged in the active conduct of a trade or business in their state of residence;
The income derived in the other Contracting State is derived in connection with or incidental to the trade or business conducted in their state of residence; and
The trade or business activity in the person’s state of residence is substantial in relation to the activity in the state of source of an item of income.

Article 16(3)(a) firstly requires that a resident of the US or Australia must be engaged in the active conduct of a trade or business in their state of residence. However, a business of making or managing investments for the resident’s own personal account is not regarded as an active trade or business unless these activities are banking, insurance or securities activities carried on by a bank, insurance company or a registered, licensed or authorised securities dealer.

Secondly, the income derived in the other Contracting State must be derived in connection with or incidental to the trade or business conducted in the state of residence.

Article 16(3)(b) states that where a person or an associate carries on a trade or business in the other Contracting State which gives to an item of income the trade or business carried on in the state of residence must be substantial in relation to the activity in the state of source of the income.

The substantiality requirement is intended to prevent a narrow case of treaty shopping abuses in which a company attempts to qualify for benefits by engaging in de minimis connected business activities in the treaty country in which it is resident.

The substantiality requirement only applies to income from related parties.

Article 16(3)(c) states that where a person is engaged in the active conduct of a trade of business then the following will be deemed to be part of that activity:

Partnership activities provided the person is a partner, and
Activities of connected persons.

There are three circumstances in which a person will be connected to another person are, firstly, if either person possesses at least 50% of the:

Beneficial interest of the other;
Aggregate vote and value of a company’s shares; or
Beneficial equity interests of the company.

Secondly, if another person possesses directly or indirectly, at least 50% of the:

Beneficial interest;
Aggregate vote and value of a company’s shares; or
Beneficial equity interest in the company in each person.

Thirdly, a person is connected to another person if the relevant facts and circumstances indicate that:

One has control of the other; or
Both are under the control of the same person or persons.

The above rule is of particular importance to holding companies since they will generally not be able to satisfy Article 16(3)(a) due to the fact that they are managing investments for their own account.

Article 16(4) is an anti-avoidance provision and denies the benefits of the DTA where a company has issued shares that entitle the holders to a portion of the income from the other state that is larger than the portion of such income that holders would otherwise receive.

Article 16(5) states that the competent authorities of the US and Australia can grant the benefits of the DTA to a resident of the relevant Contracting State if they are not a qualified person in accordance with Article 16(2). However, to exercise this discretion the IRS or ATO has to determine that the establishment, acquisition or maintenance of such a person and the conduct of its operations did not have the principal purpose of obtaining the benefits of the DTA.

Article 16(6) defines the term “recognized stock exchange” as:

The NASDAQ System owned by the National Association of Securities Dealers and any stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934
The Australian Stock Exchange and any other Australian stock exchange recognized as such under Australian law, and
Any other stock exchange agreed upon by the competent authorities of the Contracting States.

Article 16(7) lastly states that nothing in Article 16 restricts, in any manner, the ability of the Contracting States to enact and enforce the anti-avoidance provisions in their domestic tax laws.

CONCLUSION

The Limitation on benefits clause is drafted with the intention of avoiding treaty shopping.

When planning an international structure it is therefore crucial to ensure compliance with Article 16. Failure to plan properly could result in a loss of valuable benefits and can render the structure ineffective.

To achieve optimal results, immediate business concerns of the client should be carefully balanced with the long-term goals to ensure the establishment of activities in the most favorable environment.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with your international tax planning and ensure that Article 16 is adhered to.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with submitting the relevant forms in the US and Australia to get access to these relief measures.

US-AU DTA: Article 15 – Dependent Personal Services

Posted on March 16, 2022December 5, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing the tax implication of rendering dependent personal services as stipulated in Article 15 of the US/Australia DTA.

The main purpose of Article 15 is to ensure that income derived by an individual who is a resident of the US or Australia as an employee or director in the other country is taxed appropriately.

In terms of Article 15 the source state will have taxing rights on such income if the individual is present in that state for a certain period of time.

INTERPRETING ARTICLE 15 OF THE DTA – DEPENDENT PERSONAL SERVICES

Article 15(1) sets out the basis upon which the remuneration derived by employees and directors should be taxed. Pensions, annuities, and remuneration of government employees are covered by Article 18 and 19 of the DTA and therefore not covered in terms of Article 15.

Generally, other salaries, wages, directors’ fees, etc derived by a resident of one country from an employment exercise or services performed as a director of a company in the other country will be taxed in that other country.

Article 15(2) includes an exemption from tax in the country being visited where the visits are only for a limited period. The conditions for exemption are:

That the visit or visits not exceed, in the aggregate, 183 days in the year of income of the country visited;
That the remuneration is paid by, or on behalf of, an employer or company who is not a resident of the country being visited, and
That the remuneration is not deductible in determining taxable profits of a permanent establishment, fixed base or a trade or business which the employer or company has in the country being visited.

Where these conditions are met, the remuneration derived in the source state will be taxed only in the country of residence.

Article 15(3) stipulates that income derived from employment aboard a ship or aircraft operated in international traffic is to be taxed in the country of residence of the operator. The US Treasury however explained that under US law, the US taxes such income of a non-resident alien only to the extent it is derived from US sources (i.e. in US territorial waters). This paragraph does not confer an exclusive taxing right.

Article 15(3) does not confer an exclusive taxing right and both countries retain the right to tax their residents and citizens under Art 1(3) of the DTA (Personal scope).

Remuneration derived by US residents from employment in Australia may in terms of Article 15 of the DTA, be taxable in the US rather than Australia if the remuneration is paid in respect of a visit not exceeding 183 days in the year by an employer who is not resident in Australia and has no permanent establishment in Australia.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.

COVID RELIEF

Both the US and Australia implemented certain relief measures for individuals who inadvertently spent more than 183 days in the source due to the Covid pandemic.

US Covid Relief Measures

Days that you were unable to leave the US either because of a medical condition that arose while were in the US or where you were unable to leave the US due to COVID-19 travel disruptions, you may be eligible to exclude up to 60 consecutive days in the US during a certain period.

Australia Covid Relief Measures

The ATO recognized that the Covid pandemic has created a special set of circumstances that need to be taken into account when evaluating the source of the employment income earned by a foreign resident who usually works overseas but instead performed that same foreign employment in Australia. If the remote working arrangement is short term (3 months or less), the income from that employment will not have an Australian source. However, for working arrangements longer than 3 months, an individual’s personal circumstances need to be examined to ascertain if the employment is connected to Australia. Employment income (ie salary or wages) is likely to be determined as having an Australian source if:

- The terms and conditions of the employment contract change;
- The nature of the job changes;
- Work is performed for an Australian entity affiliated with the overseas employer;
- The economic impact or result of the work shifts to Australia;
- The employing entity is in Australia;
- Work is performed with Australian clients;
- The performance of the work depends on the individual being physically present in Australia to complete it;
- Australia becomes the individual’s permanent place of work;
- The individual’s intention towards Australia changes.

Income earned from paid leave (such as annual or holiday leave) while in Australia temporarily does not need to be declared in Australia.

CONCLUSION

Individuals should therefore make sure that they do not unnecessarily file tax returns in the source state if their stay was extended due to Covid related measures.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with submitting the relevant forms in the US and Australia to get access to these relief measures.

US-AU DTA: Article 14 – Independent Personal Services

Posted on March 2, 2022November 19, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing the tax implication of rendering Independent Personal Services as stipulated in Article 14 of the US/Australia DTA. Article 14 is luckily far less complex than our previous blogs.

The main purpose of Article 14 is to ensure that income derived by an individual who is a resident of the US or Australia from the performance of personal services in an independent capacity in the other country is taxed appropriately.

INTERPRETING ARTICLE 14 OF THE DTA – INDEPENDENT PERSONAL SERVICES

In terms of US domestic legislation, income earned by a non-resident individual for personal services rendered in the US which are of an independent nature is taxed at a flat rate of 30%.

Income derived by an individual who is a resident of either the US or Australia for rendering independent personal services in the other country will be taxed in that other country in which the services are performed if:

Article 14(a) – the recipient is present in that country for a period or periods aggregating more than 183 days in the year of income (or taxable year) of the country visited, or

Article 14(b) – that person has a ‘fixed base’ regularly available in that country for the purpose of performing their activities, and the income is attributable to activities exercised from that base.

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Only the country of residence can tax this income if neither of the 2 tests above are met. The US Treasury Department noted that its understanding of the term fixed base is similar to the term permanent establishment.

Independent personal services include all personal services performed by an individual for their own account which includes any services performed as a partner in a partnership. This however does not include services performed as a director of a company which will be covered by Article 15 of the DTA – Dependent personal services.

Lastly, it is important to note that these personal services include all independent activities and are not limited to specific professions.

CONCLUSION

The interpretation by courts of Article 14 post COVID will be quite interesting as the way we conduct business has shifted significantly and could perhaps see an amendment to this article in the new future.

Our team of International Tax specialists at Asena Advisors, will be able to guide you on how to interpret and apply Article 14 to your specific circumstances.