Australia: US Citizens Living In Australia – US Tax Filing Obligations

On July 4, 2015, The Sydney Morning Herald ran an article entitled "Why Australia is now home to the sixth largest American population in the world." The article discusses the dramatic increase in US citizens who have recently chosen to make Australia their home. According to the article, and the Australian Bureau of Statistics, the number of US citizens living in Australia has increased to 90,000 from 60,000 from 2001 to 2011. Economist Lyman Stone has published even more statistical information on the American diaspora in Australia.

Regardless of the reasons US citizens immigrate to Australia, they all share one thing in common: the requirement to file US tax returns. The unfortunate news is that US tax law is agonizingly complex, and the worse news is that this complexity increases exponentially when applied to an individual who is subject to both US and Australian tax law.

For US citizens in Australia, the tax and filing obligations continue throughout the individual's life and even upon death. The only way to end the tax liability and filing obligations is to renounce US citizenship, which comes with its own set of filings and traps for the unwary. Renouncing US citizenship will be the subject of a subsequent article (however, you may click here for additional articles on the topic).

In this article, I identify many of the US tax forms that are typically required to be filed by US citizens living in Australia. There are a lot of them, they are complex, and penalties for non-compliance are shockingly high, but there are administrative programs through which an individual can get caught up with the tax filings and avoid penalties.

National Taxpayer Advocate Report

The unenviable predicament faced by US citizens living in Australia (and elsewhere abroad) has not gone unnoticed in Washington D.C. The National Taxpayer Advocate 2011 Annual Report to Congress was very critical of the current compliance burden of US citizens residing abroad. In its introduction to this issue, the report states:

The complexity of international tax law, combined with the administrative burden placed on these taxpayers, creates an environment where taxpayers who are trying their best to comply simply cannot. For some, this means paying more US tax than is legally required, while others may be subject to steep civil and criminal penalties. For some U.S taxpayers abroad, the tax requirements are so confusing and the compliance burden so great that they give up their US citizenship.1

The report continues to address more specific areas that are particularly challenging for these taxpayers:

  • The overwhelming complexity of international law;
  • The complexity and administrative detail of often duplicative international reporting requirements;
  • Steep penalties that may be disproportionate to tax liability;
  • The IRS's focus on international tax enforcement without adequate coordination or a corresponding increase in service; and
  • The lack of targeted taxpayer service for each of the four groups of international taxpayers, which leads to confusion, errors, and higher compliance costs for this population.2

While the IRS's National Taxpayer Advocate (which is an independent branch of the IRS itself) does not draft policy or enforce the law, it can (and has) affect change through its annual reports. Misery loves company, but what it loves more is recognition. If nothing else, the reports recognize the plight of US citizens living in Australia.

Common US tax filing obligations for US citizens in Australia

In applying US tax law, we do so through the lens of the Internal Revenue Code, which is to say that common Australian income tax planning, estate planning, and so forth needs to be analyzed under US tax law. Unfortunately, common savings, retirement, and educational planning in Australia does not lend itself well to US tax analysis and, as a result, there can be significant complexity. Most of these filing obligations do not affect the individual's US tax liability, however, there can be significant penalties for the failure to file the requisite returns on time.

In the discussion that follows, I identify many of these filing obligations and the penalties for failing to timely file. It is important to note, however, that nearly all of the penalties are subject to the statutory defense of "reasonable cause". In addition, the IRS has several programs and procedures under which an individual can get caught up with his tax filing obligations and avoid the application of the penalties. IRS has recently updated its website to make the rules of these procedures easier to find and follow. Further, our firm has written several articles on this topic (which you may find by clicking here and here).

The Paperwork Reduction Act of 19803 was enacted in order to identify and reduce the burden imposed by federal filing obligations. To that end, the IRS is obligated to collect data on the time required to complete various tax forms. The estimate of time is typically located on the back page of the instructions for the appropriate form and is reproduced in the discussion below.

1. Australian Superannuation fund

Without a doubt the most common and difficult to analyze planning scheme faced by US citizens in Australia is the superannuation fund. In March of 2016, my colleague Marsha Dungog and I wrote an extensive paper on this topic and were invited to present it to representatives of IRS, US Treasury, and the US Congress. A summary of the paper is available here.

Suffice to say that this area is nearly impenetrable in its complexity and there are no clear answers as to how superannuation funds should be reported and taxed for US purposes. Shortly we will publish another article on this topic, however until we do so I am compelled to offer the following advice: beware of anyone who claims to have a simple or straightforward answer to the US taxation of Australian superannuation funds. Until the law is changed or guidance is provided, those who claim to have "the answer" are simply uninformed.

2. US individual with an income tax filing obligation

The most common situation that will cause a filing obligation is when the individual has an income of a sufficient amount or of a particular type that will trigger the obligation to file the US Individual Income Tax Return (Form 1040).

Form Failure to File Penalty IRS Estimate of time required to prepare return
1040 Failure to file penalty is 5% of the amount shown on the return per month not to exceed 25%.

IRC section 6651(a)(1)

Failure to Pay Penalty is 5% of the amount shown on the return per month not to exceed 25%

IRC section 6651(a)(2)

Accuracy Penalty depending on understatement is 20%-40% of the amount shown on the return

IRC section 6662
13:00 hours

While an individual may not have income sufficient to trigger a filing obligation, if the individual owns or has signatory authority over a foreign bank account, the individual must file the Schedule B regardless of the balance in the account.4 Since the Schedule B cannot be filed without the form 1040, an individual with a foreign account must file the form 1040.5

3. US individual who owns or has signatory authority over non-US accounts with an aggregate value in excess of $10,000

Because it comes with the threat of criminal sanctions for not filing, the form that has caused the most commotion in Australia is the FinCen 114 (commonly referred as the foreign bank account report or FBAR). Under the Bank Secrecy Act6, a resident or citizen of the US must file an FBAR in certain circumstances.

Form Failure to File Penalty IRS Estimate of time required to prepare return
FinCen 114

Non-willful penalty is $10,000 per year per account

Willful penalty is:
  • Greater of 50% of the account or $100,000
  • Not more than 5 years in prison
31 USC. 5321(a)(5)
0:45 hours

4. US individual resides in Australia and owns or has signatory authority over non-US financial interests with aggregate year-end value in excess of $200,000 ($600,000 for joint filers)

Form Failure to File Penalty IRS Estimate of time required to prepare return
8938 Failure to file penalty is $10,000 if form is not "accurate and complete." If account is disclosed and tax is unreported on the account, penalty is 40% of the tax owed

IRC section 6038D
2:52 hours

5. US individual transfers money or other property to an Australian trust (education savings plans)

In Australia, education savings plans (ESPs) are a tax-efficient way to save for a child's tertiary education. However, that can have onerous tax and reporting consequences to US taxpayers if they are classified under US law as foreign trusts. While IRS has not ruled on the classification of education savings plans (ESPs) the conservative approach is to treat both of these vehicles as foreign trusts and report them on both the Form 3520 and 3520-A.

Form Failure to File Penalty IRS Estimate of time required to prepare return
3520 Failure to file penalty is 35% of the value of the property transferred

IRC section 6048
6:40 hours

6. US individual receives a distribution from an Australian trust (including education savings plans)

Since ESPs are likely considered foreign trusts, distributions from them are subject to the same reporting obligations as are any other foreign trust.

Form Failure to File Penalty IRS Estimate of time required to prepare return
3520 Failure to file penalty is 35% of the value of the property transferred

IRC section 6048
6:40 hours

7. US owners of ESPs or US individual is a trustee of a non-US trust

US individuals who are deemed to be owners of foreign trusts must report these interests on an annual basis. The form 3520-A provides information about the foreign trust its beneficiaries, and US persons who are treated as an owner.7

Form Failure to File Penalty IRS Estimate of time required to prepare return
3520-A Failure to file penalty is greater of $10,000 or 5% of the amount "owned" by person.

IRC section 6677(b)

Criminal Penalties may apply for failure to file if fraudulent or wilful

IRC sections 7203, 7206, 7207
3:24 hours

8. US individual receives a gift from a non-US person or a distribution from a non-US estate

US individuals are required to report gifts from non-US persons and gifts from foreign entities (including foreign estates). These filing obligations are frequently overlooked.

Form Failure to File Penalty IRS Estimate of time required to prepare return
3520 Failure to file penalty is 5% of the amount of the gift or distribution, not to exceed 25%

IRC section 6039F
6:40 hours

9. US individual is a shareholder, officer, or director of certain Australian corporations

Generally, the form 5471 must be filed if the individual has an interest in a controlled foreign corporation (CFC).8 However, even if the corporation does not meet the definition of a CFC, a shareholder, officer, or director may, nonetheless, have a filing obligation.

Form Failure to File Penalty IRS Estimate of time required to prepare return
5471 Failure to file penalty is $10,000 and reduction of foreign tax credits

IRC sections 6035, 6038, and 6048
24:17 hours

10. US corporation has 25 per cent or more ownership by non-US persons

Foreign-owned US corporations or foreign corporations engaged in US trade or business are typically required to report transactions between 25 per cent foreign-owned domestic corporations and the foreign parent.

Form Failure to File Penalty IRS Estimate of time required to prepare return
5472 Failure to file penalty is $10,000

IRC sections 2038A and 2038C
3:30 hours

11. US individual transfers property (including money) to certain Australian corporations

US individuals are required to report transfers of property to CFCs and other information. Just as with the reporting obligations under the form 5471, even if the corporation is not a CFC, the form 926 may still be required.

Form Failure to File Penalty IRS Estimate of time required to prepare return
926 Failure to file penalty is 10% of the value transferred with a maximum of $100,000

IRC section 6038B
14:51 hours

12. US individual owns certain Australian partnerships or sells interest in Australian partnerships

Form Failure to File Penalty IRS Estimate of time required to prepare return
8865 Failure to file penalty is $10,000

IRC sections 6038, and 6046A
36:05 hours

13. US individual transfers property (including money) to Australian partnerships

Form Failure to File Penalty IRS Estimate of time required to prepare return
8865 Failure to file penalty is 10% of the value transferred with a maximum of $100,000

IRC sections 6038B
36:05 hours

14. Person owns an Australian insurance policy on a US individual

There is a one per cent excise tax on insurance premiums for policies issued on US individuals. This is one of the most overlooked filing obligations for US individuals residing in Australia. At this time there is no penalty for filing the form 720 and the liability for the tax is joint and several with the owner, broker, and issuer.

Form Failure to File Penalty IRS Estimate of time required to prepare return
720 No failure to file penalty
  • Excise tax of 1% on premiums
  • Tax is joint and several with owner, broker and issuer
IRC section 4371
1:58 hours

15. US individual owns an interest in an Australian mutual fund

In 2010, IRS released a memorandum that concluded an unidentified Canadian mutual fund was classified as a corporation for US tax purposes. 9 The consequence of IRS's position is that the mutual fund trust in question would also be classified as a passive foreign investment company (PFIC) and as a result, subject to the PFIC reporting requirements on form 8621.10

Form Failure to File Penalty IRS Estimate of time required to prepare return
8621 No failure to file penalty 20:34 hours


The US is the only industrialized country that taxes its citizens on their worldwide income regardless of where they reside. (However, there are some in the UK that believe their tax system should revert to a US style system to prevent "tax dodging"). In the past, the filing obligations that accompany US citizenship were far less onerous than they are now because in the olden days the penalties for not filing the right form at the right time were typically a percentage of the US taxes owed. Since the US allows a credit against US tax liability for the taxes paid in Australia (and elsewhere) there was typically no additional US tax owed. No filing, no tax owed, no penalties, no problems!

Under current law, however, the penalties for not filing the appropriate returns when due can be financially ruinous. The penalties can be waived by either participating in one of the IRS's catch-up compliance programs or establishing "reasonable cause" for not having filed.

The IRS's National Taxpayer Advocate is aware of the unenviable situation faced by US citizens in Australia and elsewhere abroad. And the recognition that there is a problem is, of course, the first step in correcting the problem.


[1] National Taxpayer Advocate 2011 Annual Report to Congress at 129. Citing Memorandum for Secretary Geithner from J. Russell George, Treasury Inspector General for Tax Administration, Management and Performance Challenges Facing the Internal Revenue Service for Fiscal Year 2011 13 (Oct. 15, 2010).

[2] Id. at 130.

[3] Pub. L. No 96-511, 94 Stat. 2812, codified at 44 USC. 3501-3521.

[4] Question 7a on the Schedule B to the form 1040 and 1040A states: "At any time during [the year] did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?"

[5] Failure to check "Foreign Account" box on Schedule B can result in criminal penalties. IRC section 6662.

[6] 31 USC. 5311-5330 and 31 C.F.R. Pt. 103.

[7] See, IRC section 678 for the determination of ownership status.

[8] See, IRC section 957 for the definition of Controlled Foreign Corporation.

[9] Chief Counsel Memorandum 201003013.

[10] IRC section 1298(f).

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions