Prior to COVID, my wife and I had plans to move to the United States for a working holiday and I studied for my US CFP so that I could also work in Financial Planning over there. Whilst COVID stopped those plans, it did give me a great insight into the two financial systems and I thought it would be worthwhile to compare the two, particularly for people migrating between the two countries.
Taxation
Australia's top tax bracket is 47% including the Medicare levy, whereas in the United States, federally it is 37%. However, in the United States, state and local taxes also apply based on income. In Australia, most state taxes are applied on certain transactions (namely stamp duty on property purchases) and local taxes are paid via rates notices on the value of homes for homeowners in their local areas. There are no percentage based income taxes for state and local areas. Other interesting differences include:
There are a lot more deductible expenses in the United States, including interest on your primary residence mortgage up to certain thresholds and some medical expenses.
In the United States you can file your tax returns together as spouses, whereas in Australia each individual is always treated separately.
In the United States, they allow a lot more exempt fringe benefits that are tax free. This is why you often hear employers offering health plans, company discounts and life insurances as part of the employees package. In contrast, in Australia these would trigger FBT so there is no point the employer providing them, they may as well give employees the cash equivalent.
In the United States, because there are so many deductions available, they allow a 'standard deduction' amount rather than itemising every deduction. This reduces the burden of completing tax returns for many people and their accountants.
In the United States, the corporate tax rate is 21% instead of between 27.5% and 30% in Australia.
If it sounds like Australian's pay a lot more tax, you would be correct however we receive the following favorable like for like benefits:
Negative gearing (in the United States, losses can only offset the income on the specific investment and not offset other income).
Withdrawals from account based pension accounts are fully tax free in retirement whereas some retirement pensions are taxable in the US.
Australia does not have 'estate' tax, however it does have tax on superannuation paid to non-tax dependants and CGT on certain inherited assets
Australia's capital gains tax discounts are more favorable as the US has certain thresholds.
Government Retirement Funding
In Australia, eligibility for Government Age Pension starts at age 67, subject to an income and asset test. In the US eligibility for Social Security starts at age 62 (although you receive a lower ongoing benefit than if you wait until age 67, on a sliding scale).
In Australia, Age Pension is means tested meaning a couple with over $1,012,500 (not including their primary residence) would receive no pension from the government. By contrast, social security in the US is not means tested after age 67 so even the wealthiest people receive it.
Personal Retirement Funding
In Australia, the government mandates that employers pay superannuation to employees at 11% per annum of their total remuneration. Therefore, over long working careers and in combination with investment returns, these accounts often become substantial. They are then converted to tax free pension accounts in retirement up to certain limits (currently $1,9m per person). This very favorable benefit helps offset the disadvantage that many people are knocked out of receiving government Age Pension due to the asset test.
By contrast, retirement accounts in the US are not mandated and are instead either optional to set up (often called IRA's) or often provided as part of the employee benefits that a company offers (often called 401(k)). These plans typically offer tax benefits at either the contribution or withdrawal stage as opposed to superannuation where tax benefits are provided at all stages, including on ongoing investment earnings.
Education Funding
In Australia, many parents put away money and plan for paying for private high school education costs which can often range from $10 - $50,000 per annum. Financial Planners often recommend education bond investments to support these fees. When kids go to University, most people typically put their education costs on HECS/HELP (essentially a government loan with interest only at CPI) and unlike most Americans, most Aussies stay at home with their parents whilst at university in their home city.
In contrast, in the United States parents generally focus on putting money away for College funding. There are a range of different college investment plans including UTMA/UGMA, 529 Plans, Coverdell ESAs and EE Bonds. They each have their own pros and cons in terms of contribution limits, withdrawal limits, restrictions on what expenses the funds can be used for and the affect on whether someone is eligible for financial aid from the government.
I was really quite surprised just how convoluted and technical the American College funding system was in contrast to Australia.
Health Care and Insurance
Most people will already be aware that Australia has 'universal healthcare' whilst the United States does not. This means that health insurance is extremely important in the United States rather than private health insurance being a 'nice to have' or simply a tax minimisation strategy (compared with paying the surcharge) in Australia. For this reason, employers often offer Health Insurance as an employee benefit.
In terms of Life Insurances and Disability/Illness Insurance, the products are fairly comparable however there are still a lot more whole of life policies in the US than in Australia where they are largely not offered any more.
Estate Planning
The United States has estate tax at 40% over the generous exemption value of $13.61 million. Therefore, there is a lot more focus in US Financial Planning on how to limit estate tax for very wealth families, largely via gifting assets to family members (up to yearly thresholds) or putting money into trusts such as "Dynasty Trusts". Interestingly, there is no gift tax on gifts to political parties and charities.
In contrast, Australia has no Estate tax however it does have tax on super to non-tax dependents and CGT implications on inherited assets. You can find out more via a previous article I wrote on this. I would be shocked if some form of estate tax wasn't introduced in Australia in my lifetime. As a 'newer' country it may not have been as necessary in previous eras however the inequality gap has increased significantly and an estate tax does provide a check and balance on this whilst also helping the governments bottom line.
Summary
The IMF lists the US as the 8th richest country per capita at $83,066 (USD) per annum, whilst Australia is 12th at $62,609 (USD) per annum. It is also much more expensive to buy a house in Australia as a result of there being too few cities and due to poor government planning. REA found the average house price in the US is less than $2,541 per square metre, but down under it’s more than $8,470 per square metre.
Australia's political system is more left leaning and therefore people pay more tax and receive a less generous government age pension, however in return they do receive universal health care and a more generous government safety net.
Wealthier people in the United States definitely keep more in their pocket with lower total taxes.
In retirement, Australia's generous estate tax and retirement rules help to offset the means testing of government benefits leading to many people not receiving any government support in retirement.
Overall, each countries financial system has it's perks and disadvantages and most people of both nations can live very comfortable lives.
If you're an American or Australian with income or assets in both countries, or you are moving from one country to the other, you can book in a free initial chat with us! We can help ensure you have a financial plan and strategy which carefully reflects and optimises your dual residency considerations.
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