How Australian Investors Can Utilize the U.S.-Australia Estate Tax Treaty to Avoid the U.S. Estate Tax

Foreign investors generally have the same goal of minimizing their tax liabilities from their U.S. real estate and other U.S. investments, as do their U.S. counterparts, although their objective is complicated by the very fact that they are not domiciled in the U.S. The U.S. has a special estate tax regime that is applicable to foreign investors that are not domiciled in the U.S. Sometimes, with proper planning, foreign investors can avoid U.S. estate and taxes. This article discusses the special provisions of the U.S.- Australia Estate Duty Convention (also known as the United States-Australian Estate Tax Treaty) Australian investors should consider when planning to avoid or mitigate U.S. estate taxes.

An Overview of the U.S. Estate Tax

The U.S. estate and gift tax is assessed at a rate of 18 to 40 percent of the value of an estate. A unified credit is available to minimize the impact of the transfer tax. The unified credit gives a set dollar amount that an individual can gift during their lifetime and pass on to beneficiaries before a gift or estate taxes apply. U.S. citizens and resident individuals are permitted a unified credit that exempts $13.99 million (for the 2025 calendar year) from the estate tax. This means that U.S. citizens and residents can pass $13.99 million to their heirs without being assessed an estate tax. The unified credit is significantly smaller for foreign individuals that are not domiciled in the U.S. The current unified credit for non-domiciliaries is equivalent to a $60,000 exemption, unless an applicable treaty allows a greater credit. See IRC Section 2505(a).

There are also significant differences as to how the estate tax is calculated for individuals domiciled in the U.S. compared to individuals not domiciled in the U.S. The worldwide estate of a decedent is subject to U.S. estate tax only if the individual was either a U.S. citizen or resident at the time of death. See IRC Sections 2001(a) and 2031(a).  In contrast, the estate of an individual not domiciled in the U.S. is subject to estate tax solely on his or her U.S. situs assets.

Determining Domicile for U.S. Estate Tax

Because individuals domiciled in the U.S. are permitted a unified credit of $12.92 million, for most U.S. citizens, the estate and gift tax is not an issue. This situation is different for foreign persons who are not domiciled in the U.S. Instead of a unified credit that would shelter up to $13.99 million from the estate tax, individuals not domiciled in the U.S. are only provided a credit equivalent to an exemption of just $60,000 against the estate tax. Given the differences in the way the U.S. estate tax is calculated, it is crucial to understand when an individual can be classified as being domiciled in the United States. An individual is presumed to have a foreign domicile until such domicile is shown to have changed to the United States. A person acquires a U.S. domicile by living here, potentially even for a brief period of time, with no definite present intention of leaving. To be domiciled in the U.S. for estate and gift tax purposes, an individual must physically present in the U.S. coupled with the intent to remain in the U.S. indefinitely or permanently. For U.S. estate and gift tax purposes, an individual can only be domiciled in one country. The term “domicile” for estate tax purposes should not be confused with the terms “resident” or “residence” used in the income tax context. An Australian investor may be characterized as a resident of the U.S. for income tax purposes through either the green card test or substantial presence test. Just because an Australian is classified as a U.S. resident for U.S. federal income tax purposes, does not mean the individual is domiciled in the U.S. for estate tax purposes.

How the Estate Tax and Gift Tax is Computed for a Decedent Not Domiciled in the U.S.

The estate tax for a decedent that was not domiciled in the U.S. is only assessed on its gross estate. The gross estate is made up of property or assets situated in one of the U.S. states or the District of Columbia at the time of death. This is often referred to as U.S. situs assets or property. The gross estate is composed of revocable transfers, transfers taking effect on death, transfers, with a retained life interest or (to a limited extent) transfers within three years of death are includible in the U.S. gross estate if the subject property was U.S. situs property at either the time of the transfer or the time of death. In the case of corporate stock, the stock of a U.S. corporation is U.S. situs and stock of a foreign corporation is foreign situs, regardless of place of management or location of stock certificates.

Introduction to U.S.- Australian Estate Tax Treaty

The U.S. tax laws with respect to U.S. estate taxation of nonresident alien domiciliaries can be quite harsh as compared to those that apply to U.S. citizens and domiciliaries. As discussed above, nonresident alien domiciliaries are subject to U.S. estate tax on their U.S. situs assets and allowed an exemption of only $60,000 (equivalent to a unified credit of $13,000). In addition, there are severe limitations imposed on the ability to take deductions (i.e., marital, mortgages, funeral, and administrative) to reduce the taxable estate. However, under Article IV of the United States-Australia Estate Tax Treaty, individuals domiciled in Australia are entitled to utilize a proportion of the applicable unified credit amount otherwise available only to the estates of resident alien domiciliaries and U.S. citizens.

Article IV(2)(a) of the United States-Australia Estate Tax Treaty States “Where, upon the death of a person, tax is imposed by one Contracting State and that person, at the time of his death, was not domiciled in any part of the territory of that State, but was a citizen, or was domiciled in some part of the territory, of the other Contracting State, the State so imposing that tax- shall allow as an exemption an amount not less than an amount which bears the same proportion to any specific exemption that would have been allowed under the laws of the State if that person had been domiciled therein as the value of the property subjected to that tax bears to the value of the property which would have been subjected that that tax if that person had been domiciled.”

For example, let’s assume a domiciliary of Australia died in 2018, with Australian assets valued at $1,356,939, stated in U.S. dollars. She also owned U.S. situs assets valued at $125,000. The total worldwide estate was valued at $1,481,939. Since the estate tax exemption in 2018 was $11,180,000, the applicable unified credit amount was $4,417,800. The estate tax on $1,481,939 was $536,576, which was offset in full by the unified credit leaving a U.S. estate tax of zero.

Filing Requirements

In order to take advantage of the United States-Australian Estate Tax Treaty, an Australian decedent’s estate must file a Form 706-NA and attach the proper schedules of exhibits and a copy of the necessary calculations. The decedent’s estate will also need to complete a Form 8833.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.