Planning Your Finances Moving from the U.S. to Australia
Is moving to Australia next on your list? With a diverse climate, high standard of living and no fewer than 10,000 beaches, Australia is a popular destination for many U.S. expats and multinational families. But before you move, advanced planning can reap long-term benefits — especially when it comes to your finances. This article covers the basics if you’re considering or committed to making the move to Australia, with critical financial planning considerations in mind.
Tax Issues and Australian Tax Residency
The Australian Tax Office (ATO) has four main tests to determine tax residency in Australia:
- The 183-day test – If you’ve spent more than 183 days in Australia within one income year, whether continuously or intermittently, you’re considered a tax resident. However, there are exceptions, such as if you can establish that your usual abode is outside of the country and you have no intention of taking residence in Australia.
- The resides test – You will be deemed a tax resident if you’re a resident of Australia, which is determined by several factors, such as behavior and intention of your purpose in the country.
- Domicile test – If your permanent home is in Australia (and not outside Australia), you’re considered a tax resident.
- Commonwealth superannuation test – You may also be considered a tax resident if you’re an eligible government employee of certain kinds of superannuation funds, which are Australian pension programs.
The Australian Tax Year and Tax Planning
The Australian tax year goes from July 1 to June 30, and proper timing of tax filings must be considered to correctly claim tax credits between the U.S. and Australia. This is of particular importance, given the fact that Australia has higher income tax rates than the U.S. Careful timing of filings and tax payments will allow dual taxpayers to claim the maximum possible foreign tax credits.
It’s worth noting that there are separate tax rates for residents and non-residents (the latter doesn’t include the 2% Medicare levy).
Exit Tax: Don’t Forget to Pay Your Dues on Your Way Out
New Australian residents will receive a step-up in basis on many of their foreign assets on the day they become Australian tax residents. The step-up does not apply to what the ATO calls “taxable Australian property,” which includes real estate, indirect interests and other assets. It also excludes assets acquired prior to September 20, 1985.
If you later terminate Australian residency, the ATO will levy an exit tax upon your departure on property other than taxable Australian property. This could translate into a significant tax liability because it’s a deemed disposition of most of your assets based on the market value on the day you cease being a resident. However, it may be possible to elect deferral of capital gains or avoid the tax altogether with proper planning.
Australian Capital Gains Tax and Discount
Australian income tax rates are progressive. Capital gains are included in taxable income, but long-term gains will receive a 50% discount. Importantly, the discount on gains does not apply to non-residents who have chosen to treat their assets as taxable Australian property since May 2012. The capital gains discount will not apply if assets’ cost base is indexed for inflation (the indexation method).
Gains from the sale of a primary residence are usually exempt from Australian income tax, and any losses on the sale can’t be used to reduce your taxable income.
Treatment of U.S. Retirement Accounts
The Australian-U.S. income tax treaty recognizes tax-deferred accounts, such as traditional IRAs and 401ks. Distributions from pre-tax retirement accounts will be taxed at Australian income tax rates on the earnings portion of the distribution. Unlike taxable accounts, retirement accounts will not receive a step-up in basis for account owners that become Australian residents.
Roth accounts are not covered by the treaty, and the earnings portion of any Roth distribution will be subject to Australian income tax.
Under the treaty, Australian residents who are non-resident aliens from a U.S. tax perspective will not be subject to tax withholding in the U.S. on pension distributions.
Also called “the super,” this fund provides Australian tax benefits to workers saving for retirement but doesn’t confer the same tax treatment in the U.S. Care should be taken to ensure that supers are properly reported in the U.S. Depending on the structure of the super, underlying assets may require PFIC reporting, which is often lengthy and complicated.
Social Security Benefits
The Australian-U.S. income tax treaty gives the U.S. primary tax agency over Social Security benefits. Non-resident aliens will be subject to 30% IRS statutory withholding on benefits. Although the super is taxed differently than Social Security benefits, the windfall elimination provision applies to benefits from the superannuation guaranteed.
Estate and Succession Tax
In 1979, Australia abolished gift and inheritance tax. However, capital gains tax liability may arise when gifting appreciated assets. Trusts or other U.S. estate planning tools may not have the same tax consequences in Australia and could increase net tax liability.
Australia is also one of few jurisdictions to have both income and estate tax treaties with the U.S. The estate tax treaty provides Australian nationals that are non-resident aliens with increased exemptions for U.S. gift and estate taxes. Thus, ownership of U.S. situs assets by nonresident aliens may not pose a risk of increasing total tax liability.
Financial planning and investing bring additional complexities when Australian residents and domiciliaries are subject to two tax systems with different tax rules, tax years, currencies and categories of taxation.
Creative Planning works with many clients with assets across the U.S. and Australia, and we invite you to reach out to us if you’d like to schedule an introductory call with one of our international wealth managers to discuss your unique situation as an American expat.