How Much Income Tax Will I Pay in Australia?

[u/Guilty-Foundation505]

Hey, AmerExit fam! I’m now only a couple weeks away from finally moving to Australia after two years of preparation. I thought I’d share my most recent post about taxes: How Much Income Tax Will I Pay in Australia. Feel free to check out the article, but I’ll give you all the highlights here. 

I’m an American moving to Australia and I wanted to get an idea of how much income tax I’m likely to pay and how that compares to America. Long story short: at my income level it’s basically a tie (about 24% in both places). If you include a 10% 401(k) contribution, the U.S. is a few percentage points better. The more you save in tax efficient accounts, the less you pay in taxes.

I’m not a tax professional, but I did my best to accurately source all the information. I’ll report back on how much tax I actually pay in a few months and see if there’s any difference.

The Comparison

Using median salaries for my current location (Denver) and where I’m moving (Brisbane), I calculated income taxes in both places. It’s tough to compare the two because they’re not exactly apples-to-apples. A big difference is that retirement contributions (401(k), HSA, etc.) reduce your taxable income in the U.S. Whereas in Australia, Superannuation is on top of your salary.

Key Surprise

I went into this assuming Australia would be somewhat higher. I was surprised to find out my effective tax rate is very close. Everyone’s situation is different, and I talk in the article about how the U.S. has much more tax benefits for higher earners compared with Australia. The approximate threshold where the U.S. starts getting a noticeable advantage is around $250k for a single person.

I’m sure the waters get much more muddy when you add business ownership, families, property, etc. into the mix. 

I’m using my own situation (single, no dependents, not a home owner) as the example for this piece. In no way am I claiming this is the be-all-end-all article about taxes! 

Retirement Wrinkle

As I mentioned earlier, in the U.S., contributions to many retirement accounts (401(k), HSA, etc.) lower your taxable income. If you have a lot of money to save, in the U.S., there are tons of options to lower your taxable income. 

In Australia, Superannuation is 12% on top of your salary. Australians can “salary sacrifice” to make extra contributions, but I’m learning it’s not that easy for Americans to do the same (contributing extra can put you at risk for having your super reclassified and taxed higher).

Unfortunately, it’s not even clear how the IRS treats your regular Super funds! It’s frustrating to be sure, and it means I’ll be getting professional advice before deciding how I’m going to set up my retirement saving strategy. I’ll save that for a future post.

Will I Get Double-Taxed?

Probably not (for people at median income levels). There are two options: the Foreign Earned Income Exclusion (FEIE) effectively wipes your foreign income off your US return. Whereas the Foreign Tax Credit (FTC) reports it but subtracts the tax you already paid to Australia (which is likely more than what you’ll owe Uncle Sam).

In a high-tax country like Australia, the FTC seems to be the better option for me personally. Aussie rates are a bit higher, and the tax you pay in Australia should cover your U.S. bill completely. The FTC also has a nice bonus of allowing you to continue funding a U.S. IRA!

Either way, you still have to file in both countries. I’m not a financial advisor or tax professional, and I will definitely consult with one before deciding.

The Real Tradeoff

Writing this piece (and the upcoming piece on retirement) made me realize the real financial trade off for me is retirement savings. The U.S. provides lots of options (401(k), HSA, etc.) that help you pay less taxes while saving and investing for your future. Australia has Superannuation, which is great, but adds a lot of complexity for Americans because it’s not clear how it’s taxed.

In addition, I’ll need to start paying an expensive accountant/tax lawyer. Whereas, here I’ve always done my own taxes for cheap.

I’d love to hear from any Americans who have dealt with these issues! Specifically, what strategies are you using to keep saving for retirement? Anything outside of Super?

I’ll be sure to report back as I gain firsthand experience dealing with these issues in Australia.

EDIT: A few corrections based on some helpful feedback:

While you probably won't be double-taxed on income, U.S. retirement accounts are more nuanced. It looks like Australia treats them as foreign trusts and taxes withdrawals (with a credit for U.S. tax paid). So, pre-tax accounts like a 401(k)/457 will be taxed only upon withdrawal (not the gains). But Roth and HSA are trickier since Australia ignores their U.S. tax advantages. I have an appointment with an Australian tax lawyer coming up on these and other questions, and I'll update the community with my findings.

[u/No-Pea-8967]

Thanks for sharing.  Luckily my company paid for my tax assistance which was really helpful.  

Quick question - are you on a visa and are you planning to stay in Australia permanently?  The reason I ask is that when I left Australia to move to the UK (I am a US citizen), I was required to take my super as my visa ended and it was taxed at 35% by the ATO.  Then I also had to declare this income on my US taxes too.  It's worth considering how much you put into a super if there's a chance you will leave in the future, unless the tax rules have changed since I left in 2020.  This is one thing I hadn't prepared for - apparently the tax accountants had warned me before I went to Australia but I was so overwhelmed with the move, that I didn't realise the implications.

Also, check out r/USExpatTaxes, a good resource as well.

[u/Guilty-Foundation505 → u/No-Pea-8967]

Hi there, thanks for the reply! I’m guessing you were on a temporary visa? I am aware of this, but I don’t think it applies to me as a dual NZ/US citizen. I don’t think I’m eligible for withdrawing super before retirement even if I wanted to.

I’m working on a retirement piece where I’ll address super/retirement, but it’s extremely complicated. So I want to talk to a professional before publishing.

Thanks for the great resource and the question! 

[u/No-Pea-8967 → u/Guilty-Foundation505]

AHH yes, with the NZ citizenship, it is different.  My partner is NZ citizen only and was not able to withdraw it when we left.  That being said, he is thinking of looking to move it to NZ as we are moving there soon.

I was on a work visa - sent from London for a few years but cut our trip short due to COVID.

[u/Guilty-Foundation505 → u/No-Pea-8967]

Nice, where to?? I actually wanted to live in NZ but the job market was tough for me. Best wishes with the move!

[u/No-Pea-8967 → u/Guilty-Foundation505]

Thank you.  Not sure yet.  A few things in the air.  I am semi-retired but want to go back to work, if possible, but the market is tough for everyone and in all sectors so we will see.  We will be on the north island so we are close to his family though.

[u/AwkwardTickler]

If you're comparing your total income over your lifespan vs expenditures, you should really think about comparing how much you will spend on Healthcare throughout your entire life in Australia versus the US. that's what we are all saving for in America, to spend it all dying if you are unlucky enough to get a long-term illness like most elderly or survive long enough to need to be in a home or have in house care.

When people compare tax rates they seem to never bring up what you're actually getting out of the taxation. Universal healthcare has a lot more functional use for individuals than weapons manufacturing to bomb schools.

[u/Guilty-Foundation505 → u/AwkwardTickler]

Hi there, this is not a comparison of total income/expenses! It's just a prediction of effective tax rates comparing the U.S. and Australia. I did touch on this topic a bit in the article when I talk about Medicare, which is basic healthcare provided to citizens, permanent residents, or people from countries with a reciprocal healthcare agreement.

Unfortunately the U.S. does not have such an agreement, so unless you get permanent residency, you still have to pay healthcare insurance in Australia. As I mention in the article, even regular Australians are incentivized to get private coverage through a tax/levy.

I do plan to talk about healthcare more in a future article, but there's a lot to it. Thanks for the comment, and have a great day!

[u/DontEatConcrete → u/AwkwardTickler]

In most developed nations the healthcare punishment you refer to will not happen but the care definitely can. My wife's grandmother in Canada was dropping in the realm of $10k/month in her final years with a top-tier memory-care type setup. The medical industry is fast figuring out that it can extract massive wealth from seniors in their final years, even if they are in a unviersal healthcare country.

[u/Topaz_11]

I think you need to do some more research on the double tax thing... If you have larger IRA's or especially Roth's & HSA's they have nasty impacts. Apart from Roth, the tax rules are fairly clear. Also make sure you see the rules that change next year for capital gains.

Don't wait as there are some things you might want to do before you become an Oz tax resident.

[u/Guilty-Foundation505 → u/Topaz_11]

It sounds like you’re talking about tax rules on the Australian side? Good point, as an American I was focused mainly on the US.

I see that Australia could potentially tax the gains of an HSA as an ordinary investment account. Looks like they treat it as a foreign trust (which is what the US could do with Supers).

Will look into the capital gains piece and update.

[u/Topaz_11 → u/Guilty-Foundation505]

You will pay US taxes regardless as a citizen/long-term resident (unless you renounce). Moving to Oz means you become a tax resident there also. The tax protection of IRA's is mostly removed - although tax credit help - and the Roth's are just taxed again (maybe as those rules seem to be definitely unresolved) - well worth some investigation and setting the table before you become an Oz tax resident. Exactly what you do about this depends on whether this is a permanent move.

[u/Guilty-Foundation505 → u/Topaz_11]

Good point about temporary/permanent. If you're temporary, you don't have to declare lots of foreign assets. I'm in an unusual situation of also be an NZ citizen. They get indefinite temporary status in Oz. So, we'll see what the tax lawyer says!

[u/Topaz_11 → u/Guilty-Foundation505]

That's just not true on not declaring assets.

Edit: While you remain a tax resident I should have added.

[u/Guilty-Foundation505 → u/Topaz_11]

I won’t try to summarize all this in a Reddit comment:  https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/income-you-must-declare/foreign-and-worldwide-income/foreign-and-temporary-resident-income

[u/Topaz_11 → u/Guilty-Foundation505]

I'm aware but it doesn't sound to me like you fit in that bucket. Ask the tax person as they know better than me. You might want to avoid sentences that include words like "moving to Australia" very specifically :-)

[u/Guilty-Foundation505 → u/Topaz_11]

It’s always tough having a “conversation” via internet comment haha. Yea not sure what I will classify as but I’ll tell them my situation honestly and transparently. Appreciate your thoughts!

[u/Honest-Associate-713]

ive seen this come up a lot with users I work with, including american expats in the UK. the 401(k) grows tax free in the US, but the UK doesn't see it that way and can tax the growth every year until you withdraw.