An Australian tax resident (who is not a U.S. citizen or green card holder) generally must file a U.S. tax return under one of four scenarios:
The first scenario occurs when he or she has U.S. effectively connected income (ECI). Examples of U.S. ECI include wages earned while on business travel to the U.S., income from personal services conducted in the U.S. (e.g., consulting, employment, board meetings), business income from a non-U.S. corporation with activities in the U.S., and the sale of U.S. real property.
The second scenario occurs when an Australian resident has certain types of U.S. investment or passive income, referred to as “fixed, determinable, annual, or periodic (FDAP) income,” that has not had adequate U.S. income tax withholding. Examples of FDAP are certain types of U.S. interest income, U.S. dividends, rents from U.S. rental properties, U.S. royalties, and U.S. pensions, annuities, and social security.
The third scenario occurs when an Australian tax resident has an ownership interest in U.S. Corporation or Limited Liability Corporation (LLC). If the ownership interest exceeds 25% and there is income or reportable transactions, such as loans, capital contributions, or changes in ownership, then the Australian tax resident may be required to file IRS Form 5472. Failure to file this form is a $25,000 penalty.
The last scenario occurs when an Australian tax resident makes a gift of certain types of U.S. assets or dies while still owning U.S. real property. These scenarios may require the filing of U.S. estate or gift tax returns to report and/or pay estate or gift taxes.
It is also important to note that different rules apply to Australian tax residents who are U.S. citizens or green card holders. Despite being Australian tax residents, these individuals remain taxable in the U.S. on their full worldwide income and must file U.S. tax returns annually. In addition, they generally must complete annual informational declarations to report their ownership of many non-U.S. assets. Failure to file such asset declarations carries penalties of $10,000 to $25,000 per form.