What you need to know about US vs Australian tax rules before moving or investing

Whether you’re relocating, retiring or investing across borders, navigating the tax systems in both Australia and the United States can be rather complex.

The differences are significant, and without careful planning, you could face costly unintended consequences.

Cross-border financial planning is essential to ensure you’re not only compliant but also maximising the opportunities available under each system. It’s not just about knowing the rules in each country. It’s about understanding how they interact.

Here are some of the key areas where the US and Australian tax systems differ, and why smart planning is essential.

Filing status and asset ownership

One of the first differences is in tax filing for spouses. In the US, married couples can file a joint return, which means ownership of income-producing assets between spouses doesn’t typically affect tax outcomes.

Australia takes a different approach. Individuals must lodge their own tax return, regardless of marital status. This makes asset ownership a crucial tax planning tool. Holding investments in the name of the lower-income spouse can reduce overall tax, something that doesn’t usually apply in the US system.

Property and debt structuring

The treatment of debt also varies. In the US, mortgage interest on a principal place of residence can be tax-deductible up to $750,000. In Australia, there’s no such deduction. Only interest on loans used to purchase income-producing assets – like investment properties – can be claimed.

In Australia, where deductible expenses (including interest repayments) are greater than the income generated on an investment loan, losses can be used to reduce taxes on employment income, a tax planning strategy typically not available on a US return.

This is a key area where cross-border financial planning can add value. Strategic debt structuring, especially when moving between countries, can ensure you’re not missing valuable deductions or inadvertently increasing your tax burden.

Capital gains tax and asset transfers

The US often allows assets to be transferred between individuals or into trusts without triggering capital gains tax, as these are frequently treated as gifts. In contrast, Australia treats most changes in asset ownership, regardless of intent, as capital gains tax (CGT) events based on the asset’s market value at the time of transfer.

If you plan to gift assets or change structures in Australia, it’s critical to seek advice early. Getting the ownership right from the start can help you avoid unnecessary tax and administrative costs.

Education savings accounts

In the US, 529 plans are a popular way to save for college education, offering tax advantages on qualified withdrawals. Australia doesn’t have a direct equivalent. While some education bonds and savings products exist, they function quite differently and don’t provide the same tax treatment.

If you’re a US taxpayer residing in Australia, holding or contributing to a 529 plan could have unexpected consequences. Understanding the tax treatment under both systems is essential to preserving the intended benefits of these plans.

Inheritance and the cost base of assets

In the US, many inherited assets will receive a step-up in cost basis, resetting them to market value at the date of death. This can significantly reduce capital gains when those assets are later sold.

Australia doesn’t apply inheritance tax, but it also doesn’t provide a full cost base reset for inherited personal investment assets. For most investment assets acquired by the deceased after 20 September 1985, the beneficiary inherits the original purchase price as the cost base. This can result in larger capital gains down the line.

Retirement accounts and contributions

One of the biggest structural differences is in retirement saving systems. In Australia, after-tax contributions of up to $120,000 per year – or $360,000 under the bring-forward rule – are allowed into superannuation.

US retirement accounts, such as 401(k)s or IRAs, typically have much lower annual contribution limits. While earnings grow tax-free, withdrawals are taxed at your marginal rate. This is an important consideration for US expat taxes in Australia, as Australian super contributions and earnings can have US tax implications.

For those subject to US tax while living in Australia, it’s important to consider how superannuation contributions and withdrawals are treated under both systems. The Australia–US double tax treaty may offer some relief, but it doesn’t always eliminate complications.

Retirement income and drawdowns

In Australia, earnings within super in the pension phase are tax-free and withdrawals in retirement are generally not taxed. In the US, withdrawals from most retirement accounts are treated as income and taxed accordingly.

For US expats living in Australia, this can create a scenario where drawdowns from Australian super are tax-free locally but taxable under US rules. The key here is to avoid unexpected liabilities in retirement and to maximise the value of your retirement savings.

Government pensions and means-testing

In the US, social security benefits are generally based on your work history and are not means-tested. In Australia, the age pension is subject to income and asset tests. This means high-wealth individuals may not qualify for the Australian pension at all.

Understanding your eligibility and how income from overseas sources may impact Australian pension entitlements is another layer of complexity for those planning retirement across borders.

Why cross-border financial planning matters

With so many variables and differences between the US and Australian tax systems, tailored advice is critical. Whether you’re a US expat navigating Australian tax, an Aussie expat living in the US or holding US investments, or you’re simply planning a future move, proper structuring and foresight can save you time, money and stress.

Tax compliance, retirement strategy, investment structuring and estate planning for expats all require a coordinated approach when your financial life spans two systems.

At Apt Wealth Partners, we specialise in expat financial planning and help individuals manage the complexities associated with operating across two taxation systems. We have a network of specialised cross-border tax and legal professionals to ensure you have the right team in your corner.

If you’re unsure how the rules apply to your situation, get in touch for tailored advice.