In today’s globalized world, businesses and individuals frequently operate across borders which presents both opportunities and challenges. Proper planning can minimize tax liabilities, avoid double taxation, and ensure compliance with the tax laws of multiple jurisdictions. Cross-border planning involves structuring your finances, business operations, and investments in a way that optimizes tax-efficiency across different countries. It requires a deep understanding of the tax regulations in each country, as well as the tax treaties between those countries.
In this post, we will explore key strategies and considerations for effective cross-border financial and tax planning.
US vs. Australia Tax Systems
Australia is the only country in the world to receive net positive migration from the US[1], and the US is the third largest two-way trading partners of Australia[2]. Therefore, it is no surprise that we receive a lot of questions about taxation from Americans who move to Australia (and vice versa). Below are some common issues to consider:
- Tax Residency
Australian taxes apply to individuals based on residency and source. Australian residents are subject to income tax on their worldwide income and gains. Non-residents are only subject to income tax on Australian-sourced income.
The US tax system is an outlier (Eritrea is the other one)[3] in that it taxes on the basis of citizenship as well as residency. “US persons” are subject to federal income tax on their worldwide income and capital gains, regardless of their country of residency. “US persons” include citizens, lawful permanent residents (‘green card’ holders), and resident aliens (who meet the substantial presence test).
- Tax Rates
Similar to the US, the Australian Taxation Office (ATO) uses a progressive tax system with multiple marginal tax rates or tax brackets. The highest income tax rate for individuals in the US is 37% (which is federal, plus any applicable state income tax rate), while the highest income tax rate in Australia for individuals is 45% plus a 2% Medicare levy for a total tax rate of 47%. However, the highest marginal tax bracket in Australia is reached with a much lower income threshold of $190,001 compared to the US where an individual’s ordinary income must exceed $609,351 to be in the highest marginal tax bracket (for 2024 tax year).
- Other Important Differences
- The US tax year is based on the calendar year (January 1 to December 31) while the Australian tax year operates on a June year end (July 1 to June 30). Extensions are available for both tax jurisdictions.
- Most married couples can file joint tax returns in the US, whereas couples must file separate tax returns in Australia (no joint filing).
- The US impose both gift and estate taxes on assets above certain thresholds, while Australia does not impose either of these taxes. However, the US allows a step-up in cost basis for most inherited assets while Australia does not.
- Primary residences are generally exempt from capital gains tax in the Australian tax system. Conversely, primary residences are subject to capital gains tax in the US (although some exclusions often apply).
- Double Taxation and Tax Treaties
Tax treaties were established between the US and Australia to alleviate double taxation of income. Understanding the provisions of the relevant treaties may help you claim relief from double taxation. For example, Australian tax residents are only required to withhold 10-15% of US taxes on their US-sourced investment income (whereas the standard withholding rate is 30% for tax residents of some other countries without a tax treaty).
Strategies for Effective Cross-Border Tax Planning
- Engage Experts Early
- Cross-border tax planning is complex and requires expertise in international tax law, local tax regulations, and accounting. Engaging financial advisors and tax professionals early can help identify potential issues and opportunities that require more planning and/or time to implement.
- Stay Informed
- International tax laws are constantly evolving. Staying up to date about changes in tax regulations and international agreements is crucial for effective tax planning.
- Regular Reviews
- Regularly reviewing your tax strategy is essential to ensure it remains effective, especially in light of changing laws, business circumstances, and market conditions.
Conclusion
Proactive and informed cross-border tax planning can be a game-changer in achieving your financial goals. By understanding key considerations and employing effective strategies, businesses and individuals have the opportunity achieve significant tax savings and ensure compliance in an increasingly interconnected world.
[1] https://www.thenewdaily.com.au/news/good-news/2024/01/20/us-australia-migration
[2] https://www.dfat.gov.au/sites/default/files/australias-goods-and-services-by-top-15-partners-2023.pdf
[3]https://www.greenbacktaxservices.com/knowledge-center/difference-residency-based-taxation-citizenship-based-taxation/
https://csglobalpartners.com/resources/what-is-citizenship-based-taxation/