Dividend income of American expats in Australia: A guide to foreign withholding tax and reporting
Being an American expat in Australia means enjoying pretty beaches, improved coffee, and—naturally—complex taxes. Dividend income is one area that tends to catch people off guard. If you’re receiving dividends from foreign or US corporations while living in Australia, chances are high that you’re up against foreign dividend withholding tax, double tax reporting requirements, and wondering exactly what you owe.
Let’s go through it all: what dividend income means for you as a US citizen residing in Australia, how it’s taxed, and what to keep an eye out for.
What is dividend income?
Dividend income is cash paid to investors when a company pays out profits. It’s typical with stock in listed companies, mutual funds, and exchange-traded funds (ETFs). Dividends may be from:
- US companies (e.g. Apple, Coca-Cola)
- Australian companies (e.g. BHP, Commonwealth Bank)
- Global companies in other jurisdictions
If you’re an American expat with investments in any of these, dividend income could be hitting your account regularly, and the tax authorities want their cut.
Problem: Double taxation on dividends
Here’s where things get messy: both the United States and Australia may want to tax the same dividend income. That’s double taxation, and it’s a major concern for US expats.
Example:
Suppose you receive $1,000 in dividends from a US business while resident in Sydney.
The IRS normally withhold 30% on dividends paid to non-resident aliens, but you’re a US citizen, so you’ll have to report the entire $1,000 on your US tax return.
In the meantime, Australia will regard you as a tax resident, and they’ll tax that same dividend income on your Australian tax return.
You may end up being taxed in both nations unless credits or treaty provisions are handled correctly.
Learning withholding tax on foreign dividends
US withholding tax rules
Being a US citizen, your US company dividends aren’t subject to the usual 30% nonresident withholding. Nevertheless, you must report all dividend income on Form 1040 and potentially Schedule B. If you have foreign mutual funds or are getting dividends from foreign non-US companies, you might need other forms such as Form 8938 or Form 8621.
Australian tax rules
Australia taxes worldwide income to all its tax residents. So if you reside in Australia and receive dividends, whether from the US or anywhere else, Australia wishes to tax it as well.
Australian company franked dividends usually come with a franking credit (a form of tax already paid by the company).
Foreign dividends and unfranked dividends do not come with that advantage and are taxed as ordinary income.
Solution: Evading double taxation
1. Apply the US–Australia tax treaty
The US-Australia tax treaty prevents double taxation but doesn’t do away with reporting in both nations. It provides for foreign tax credits, though.
You can claim a credit for Australia tax paid on your dividends on your US return using Form 1116.
You can receive credit on your Australian return for any withholding tax already remitted to the US.
2. Keep good records
You’ll need to record:
- What country the dividends originated from
- How much tax was withheld
- The rates of currency exchange at payment time
- Documentation from broker or fund manager
3. Distinguish franked and unfranked dividends
Australian dividends fall into two categories:
- Franked dividends contain an offset of tax (good news!)
- Unfranked dividends and foreign dividends don’t
When completing your Australian return, dividing these up properly prevents you from losing credits which are due.
Common mistakes to avoid
Ignoring foreign dividend tax
Many expats assume their broker is handling all the taxes. That’s only partially true. Withholding may be done at the source, but you’re still required to declare all dividend income on your personal tax returns in both countries.
Not reporting passive foreign investment companies (PFICs)
If you have investments in non-US mutual funds or ETFs, you might be under the rules of PFICs, which are complicated. This might mandate Form 8621, and not filing could mean hefty fines.
Forgetting currency conversions
Foreign earnings on your US tax return have to be reported in USD, with the exchange rate from the date you received the dividend. Selecting the wrong rate—or omitting this process—could cause misstated taxes.
People also ask (PAA)
What is foreign dividend withholding tax?
It’s automatic withholding tax at source when dividends are being paid from overseas. For instance, the US would withhold 15–30% of the dividend paid to foreign holders (not the case if you are an Australian resident/citizen).
Do I need to pay tax on dividends in Australia and the US?
Yes—but you might be able to deduct one with a foreign tax credit. You still need to report the income in both nations.
How are Australian dividends taxed in the US?
They’re treated as ordinary dividend income and are required to be reported on your US tax return. You might even be able to claim a foreign tax credit for Australian tax withheld.
Frequently asked questions
- I’m an American expat in Australia. Do I need to report Australian dividends to the IRS? Yes. You’re required to report all global income, such as Australian dividends, on your US tax return, even if you paid tax on it in Australia.
- What’s the best approach to deal with dividend taxation in two countries?
Properly file both tax returns, claim all eligible foreign tax credits, and seek advice from a cross-border tax expert if your investments are complicated. - Is it possible to escape tax on my dividends?
Not much. But clever planning, such as employing franking credits, claiming foreign tax credits, and organizing your portfolio in an efficient manner, can limit what you pay.
Final thoughts
Handling dividend income as a US expat in Australia involves playing by two countries’ rules. That may sound like a pain, but the bad news is that there are safeguards—tax treaties and foreign tax credits, for example, that will keep you from being taxed twice on the same money.
The secret is getting educated, filing accurately, and seeking professional assistance when your investments outgrow basic ETFs and stocks.