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Australia - USA Tax Treaty
The Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (more commonly called the Australia / US Tax Treaty) was signed in 1982 and took effect in October 1983. A protocol amending the treaty was signed in 2001 and took effect in 2003.
Some useful links:
- Explanatory Memorandum (Income Tax (International Agreements) Amendment Bill 1983)
- House of Representatives Floor Speeches in Hansard (29 May 2002) - see page 2687
- Senate Floor Speeches in Hansard (27 June 2002) - see page 2821
- Explanatory Memorandum (International Tax Agreements Amendment Bill (No.1) 2002)
- The Report of the Joint Standing Committee on Treaties that includes the 2001 protocol can be found here
- Hodgen Law's Tax Treaty website (contains a wide variety of treaties and agreements from many countries)
treaty - general article about how the treaty works and major flaws
other articles about treaty negotiation or australia-specific US tax problems that must be addressed in the treaty.
Model Tax Treaties
Tax treaties are very complex. Most treaty negotiations start with a model treaty that is then modified to suit the specific situation. In 2016 the US issued a new model treaty. Relevant documents:
The OECD also has a model tax treaty, issued in 2017 and available here.
The US practice of CBT often results in Double Taxation despite some mitigation mechanisms that are in place. The following page covers double taxation further, discusses the ethics and provides examples.
Specific Issues with Income Tax Treaty
The Saving Clause, a key element of almost all US Tax Treaties, allows or saves the right of each country to tax its citizens or residents as if the rest of the terms of the tax treaty did not exist. However, individual treaties may allow some exemptions to the saving clause.
The Saving Clause allows the US to reach into the Australian tax base and tax the Australian source income of Australian resident taxpayers. This erodes the ability of the affected US Persons to take advantage of Australian public policy and tax breaks encouraging retirement savings and local investment.
Karen wrote a 3-part blog explaining how the Saving Clause impacts tax treaties:
Clearly, the Saving Clause will be a key issue that must be addressed in any future tax treaty renegotiation if Australia is to protect their tax base from the exceptional US practice of Citizenship Based Taxation.
Totalisation (Social Security) Agreement
In 2001, Australia and the United States entered into an agreement, commonly called a Totalisation Agreement, for the purpose of avoiding double taxation of income with respect to social security taxes. Further information can be found here:
Estate and Gift Tax Treaties
While there are no Estate taxes in Australia, there are in the US. US citizens in Australia are taxable on their worldwide estate, including Australian assets. A little known aspect of the US Estate Tax is that US assets of non-resident aliens are also subject to Estate Tax. This includes US real estate, US business operations, and investments in US companies (but not portfolio debt).
US citizens and residents
Information on Estate Tax for US citizens and residents can be found here - note that for US citizens and green card holders, living outside of the US does not matter; you are still required to pay US Estate Tax on your worldwide assets.
Yes, even an Australian citizen/resident who has no connection to the US may be subject to US Estate Tax. Estate tax on non-resident aliens is imposed by Internal Revenue Code sections 2101-2106. The IRS has a handy information page. For non-resident aliens the tax is 40% of US-situated assets in excess of US$60,000 (from the notation in the IRS treaty table linked below, it is possible that Australian-resident NRAs may be able to use a pro-rata portion of the much more generous unified credit).
Australia had estate tax treaty with US - signed 1953. It seems the US still recognises the treaty (https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international) but Australia no longer has an estate duty. The treaty is listed as in force on the Australian Treasury website, but a page on the DFAT website says that the treaty is no longer in force and was terminated by the income tax treaty of 1982 (there is no reference to the Estate Tax treaty in the 1982 Income Tax Treaty).
Implications - looks like shares in US companies (directly held) and other investments (other than portfolio debt excluded by §2105(b)(3)) issued by US entities would be considered US taxable property. Newer estate tax treaties apparently treat only real property and US businesses as US taxable property (exempting portfolio assets).