How Does the Australia/US Tax Treaty Help Avoid Double Taxation?

In 1982, Australian and the United States of America agreed on a formal tax treaty. The treaty set the framework so that citizens of both countries would not pay tax twice on the same dollars.

While the principle is that citizens of both countries will pay tax to the jurisdiction where that income was sourced, it does not exempt you from filing a tax return in both jurisdictions.

Additionally, not every form of income will be subject to any or the full US tax rate. The treaty outlines various types of income and sets out what tax rate - if any - will apply to Australians who receive passive income (non-employment) when they reside outside of the US. So in order to understand what your effective US tax obligation, it is necessary to consider a combination of your citizens, your location, your time involve, and the nature of the income.

Australia and the USA have a tax treaty

The process of applying the tax treaty will vary based on whether the income is deem passive or active (Effectively connected income) Here are a few examples:

Passive US Income

If an Australian is seeking to purchase some US shares through a US stock broker, this would be consider passive investing, so long as the investor was not travelling to the US to become a day trader. In this case, for tax purposes the stock broker may still request that the investor provide evidence that they are exempt from US tax withholding on the earnings on those shares. In this case the broker will ask the investor to complete form w8-BEN to identify which article of the US tax treaty they are claiming as an exception from withholding tax.

The Ausrtralian will then be expected to report theirUS sharemarket income on their Australian tax return and pay tax and their personal marginal rate to the ATO.

Active US Income

If an Australian sets up a US LLC as a passthrough (disregarded) entity to themselves or their Australian company, and that LLC manages from Australia the day to day sales of retail goods on the Amazon US store, then this would be an example of active US income. The Australian should obtain an EIN for their LLC and an ITIN for themselves as the owner.

They would need to supply the EIN (and maybe ITIN as well) to Amazon and any US bank at which they open a US business bank account. At the end of the fiscal year, they would need to report their US sourced income on a US tax return and pay any federal tax they owed. Depending on the nature of the income, they will also be able to classify the income as subject to the tax treaty when they file their US tax return. When they file a corresponding tax return with the ATO, they will report their US foreign income and claim a tax credit for actual tax already paid to the IRS. If their marginal ATO tax rate is higher than what has already been paid, then they will be required to pay the difference to the ATO.

So the principle is maintained. You cannot avoid reporting or pay tax. You will pay the higher tax rate of the two countries, but you will not pay a tax rate that is the sum of the two countries personal tax rates. In both of these scenarios, the Australian avoids 'double taxation', but does contribute their fair share of income tax.