Foreign Earned Income Exclusion and the Pine Gap Facility

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Background

FAQs for Employees

FAQs for Employers

Background

The United States and Australian governments jointly operate the Joint Defense Facility Pine Gap (JDFPG) in Alice Springs, Australia. When they established the facility in 1966, the governments signed an agreement (the Pine Gap Agreement). Article 9 of the Pine Gap Agreement addresses how U.S. citizens and resident aliens, who are not also Australian citizens, working at the facility are taxed by the United States and Australia. The intent of the agreement was to ensure that the income earned by these individuals would be taxed only in the United States, rather than in both jurisdictions. A conditional exemption from Australian income tax in the Pine Gap Agreement was enacted into Australian income tax law.

In the Pine Gap Agreement, Australia agreed that the income of U.S. employees of U.S. federal government contractors at the JDFPG who are in Australia solely to work at the JDFPG would be exempt from income tax in Australia provided that income is taxed in the United States. The IRS and Australian Taxation Office (ATO) then developed procedures to implement the agreement.

These FAQs address common questions regarding how these employees and their employers meet their U.S. and Australian tax obligations in light of the Pine Gap Agreement, including the effect of a closing agreement that an employee might enter into with the IRS regarding the taxation of JDFPG employment income. The IRS and the Australian Taxation Office cooperated to develop these FAQs. These FAQs do not apply to U.S. citizen and resident alien employees of U.S. federal government contractors at locations other than JDFPG because the Pine Gap Agreement does not apply to them.

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FAQs for Employees

A1. As a U.S. citizen or resident alien, you must report your worldwide income, including your JDFPG employment income, to the IRS on a timely filed tax return. See IRS Publication 54. You might be entitled to exclude your JDFPG income from U.S. taxable income (and therefore exempt it from U.S. income tax) under the foreign earned income exclusion (section 911 of the Internal Revenue Code).

Your Australian income tax reporting and payment obligations will differ depending on whether you elect to exclude your JDFPG employment income from U.S. tax under the foreign earned income exclusion. For example, although you are deemed to be not a tax resident of Australia, your JDFPG income is taxable in Australia as Australian-source income if it is exempt from tax in the United States due to the foreign earned income exclusion. See FAQ Q3 for further information about the effects of this election.

Added: 05-22-2019 Source: ATO/IRS

A2. No. Article 19 does not apply to income earned by employees of U.S. federal government contractors. Article 19 applies only to individuals who are paid by, or from the funds of, the United States; a state or other political subdivision of the United States; or an agency or authority of the United States, a state, or other political subdivision. As an employee of a U.S. federal government contractor, you are paid by, and from the funds of, your employer. You are not considered to be an employee of the United States government or of a U.S. government agency for purposes of the Treaty.

The Pine Gap Agreement was signed in 1966, and it was incorporated into Australian law in section 23AA of the Income Tax Assessment Act 1936 (ITAA 1936). The Treaty was signed in 1982. Generally, when countries enter into successive international agreements addressing the same subject matter, and an agreement indicates that its provisions are subject to the provisions of an earlier or later international agreement, the provisions of the earlier or later international agreement prevail.

If an international agreement does not contain language addressing the impact of an earlier agreement, provisions of the earlier international agreement, if it has not been terminated or suspended, apply to the extent they are consistent with provisions in the later agreement. In other words, where possible, treaties should be read harmoniously with other later enacted international agreements and domestic law. This is acknowledged in Article 1(1) of the Treaty, which states, “This [treaty] shall not restrict in any manner any exclusion, exemption, deduction, rebate, credit or other allowance accorded from time to time . . . by any other agreement between the Contracting States.” The Treaty and the Pine Gap Agreement operate in harmony with one another. As a result, the Treaty does not nullify the Pine Gap Agreement, which provides an exemption from Australian income tax when JDFPG employment income is taxed by the United States.

Added: 05-22-2019 Source: ATO/IRS

A3. Pursuant to the Pine Gap Agreement, Australia exempts your JDFPG employment income from Australia tax if you are in Australia solely to work at JDFPG and that income is not exempt, and is brought to tax, in the United States. If you exclude your JDFPG employment income from your U.S. gross income under the foreign earned income exclusion, however (and thereby exempt that income from U.S. tax), that income is assessable in Australia under Australian tax law.

Under ordinary tax principles, your employer would withhold and remit U.S. and Australian income taxes on your behalf throughout the year to the IRS and ATO, respectively, as appropriate. Then, you would file individual income tax returns with the IRS and ATO annually to pay additional taxes due or claim a refund, depending on your tax situation, including whether you claim the foreign earned income exclusion for your JDFPG employment income.

The IRS and ATO developed procedures in the 1980s to address the complexities caused by dual U.S. and Australian requirements for U.S. citizen and resident alien employees at JDFPG and their employers due to the Pine Gap Agreement. These procedures allow these employees to avoid withholding throughout the year of Australian tax installment deductions for their JDFPG income and the requirement to file Australian income tax returns with respect to that income if a closing agreement is concluded. Under these voluntary procedures, you may enter into a closing agreement with the IRS, in which you agree that you will not claim the foreign earned income exclusion for your JDFPG income for the taxable period(s) covered by the closing agreement. As further discussed in FAQ Q4 below, if you enter into a closing agreement, you must pay tax on your JDFPG income in the United States, but you would not have to pay Australian tax on this income or report this income on an Australian tax return.

(If you have other income from Australian sources, you may have Australian tax reporting and payment obligations associated with that income. Your family situation (for example, if your spouse is a resident of Australia or earns income in Australia from employment outside the JDFPG) also affects your Australian tax reporting and payment obligations. Please refer to the ATO or a qualified tax adviser for guidance on your individual circumstances.)

FAQ Q9 below addresses your tax obligations regarding your JDFPG employment income if you do not enter into a closing agreement with the IRS.

Added: 05-22-2019 Source: ATO/IRS

A4. As stated in FAQ Q3, the IRS and ATO developed voluntary procedures allowing you to enter into a closing agreement with the IRS in which you agree that you will not claim the foreign earned income exclusion for JDFPG employment income earned during the taxable period(s) listed in the closing agreement. This process was developed to alleviate the burden of dual withholding and reporting of U.S. residents’ income from employment at JDFPG.

You are not obligated under U.S. or Australian taxation law to enter into a closing agreement; the IRS and ATO expect only that you properly report and pay U.S. and Australian taxes consistent with whether you entered into a closing agreement for the taxable period.

If you enter into a closing agreement with the IRS, your employer has no obligation to withhold Australian taxes on your income from employment at JDFPG for the taxable period(s) covered by the closing agreement, and you are not required to file an Australian tax return for that income. However, as a U.S. citizen or resident alien, you must file a U.S. income tax return reporting and paying taxes on your worldwide income, including your JDFPG employment income. Under the closing agreement, you agree that you will not claim the foreign earned income exclusion for your JDFPG employment income earned during the taxable period(s) covered by the closing agreement. You therefore must include all of your JDFPG employment income in your worldwide gross income reported on your U.S. income tax return and cannot exclude it from U.S. taxation.

As stated in FAQ Q9, if you do not enter into a closing agreement with the IRS, then under Australian tax law, your employer must withhold Australian taxes on your income from employment at JDFPG for the taxable period(s) covered by the closing agreement. You also must file tax returns with both the IRS and the ATO and pay the appropriate tax to both jurisdictions.

Added: 05-22-2019 Source: ATO/IRS

A5. As explained above, if you enter into a closing agreement with the IRS, your employer will not withhold Australian taxes on your JDFPG employment income, and you are not required to file an Australian tax return for that income. In other words, signing a closing agreement affects both your Australian income tax liability and your employer’s withholding tax liabilities in the United States and Australia. The Consent to Disclose document makes clear, for example, that the IRS may notify your employer that you entered into a closing agreement with the IRS. If your employer does not have proof that you entered into the closing agreement, your employer must withhold Australian taxes on your JDFPG employment income, which would then require you to apply for any applicable refund in Australia. Or, depending on your Form W-4 on file, your employer might over- or under-withhold U.S. taxes on your income.

Added: 05-22-2019 Source: IRS

A6. The closing agreement applies for the U.S. taxable year(s) listed in the closing agreement as the taxable period(s) covered by the closing agreement. Pursuant to the closing agreement’s terms and section 7121 of the Internal Revenue Code, a closing agreement that is properly executed by a taxpayer and an IRS official is a final agreement and may not be reopened, except in the event of fraud, malfeasance, or misrepresentation of material fact.

Added: 05-22-2019 Source: IRS

A8. No, you may not revoke a closing agreement that has been signed by you and the IRS. Pursuant to the closing agreement’s terms and section 7121 of the Internal Revenue Code, a closing agreement that is properly executed by a taxpayer and an IRS official is a final agreement and may not be reopened, except in the event of fraud, malfeasance, or misrepresentation of material fact.

Added: 05-22-2019 Source: IRS

A9. If you do not execute a closing agreement with the IRS, you must file tax returns with both the IRS and the ATO and pay the appropriate tax to both jurisdictions. Your employer also will be required to withhold from your salary to satisfy your U.S. and Australian tax obligations. As a U.S. citizen or resident alien, you are required to file a U.S. income tax return reporting and paying taxes on your worldwide income. In addition, you would be required to file an income tax return reporting your JDFPG employment income to the ATO. That income would be taxable in Australia if you claimed the foreign earned income exclusion to exclude that income from U.S. tax. If your JDFPG employment income is taxed in Australia, that income is considered foreign-source income for U.S. tax purposes and may be eligible for a foreign tax credit on your U.S. tax return, subject to any applicable limitations, including the restrictions on claiming foreign tax credits if you choose to exclude foreign earned income from your U.S. income. Note that refunds of Australian taxes might be delayed until the ATO can confirm whether you claimed the foreign earned income exclusion to exclude that income from U.S. tax. As explained in FAQ Q2, above, income earned as the employee of a U.S. federal government contractor is not exempt from Australian tax under Article 19 (Governmental Remuneration) of the United States-Australia income tax treaty.

Added: 05-22-2019 Source: ATO/IRS

A10. Section 6103 of the Internal Revenue Code states that tax returns and return information must be kept confidential by the IRS except as otherwise authorized by the Code. One such authorized disclosure is the disclosure of tax returns and return information to a competent authority of a foreign government that has an income tax treaty with the United States to the extent allowed by that treaty. Article 25 of the United States-Australia income tax treaty (“Treaty”) allows the United States and Australia competent authorities to exchange information, including tax returns and return information, that is relevant to administering U.S. and Australian income tax laws. Any information exchanged under Article 25 is protected from disclosure under the limitations of Section 6105 of the Internal Revenue Code and Article 25(2) of the Treaty.

Added: 05-22-2019 Source: IRS

A11. No. The Pine Gap Agreement applies only to U.S. employees of U.S. federal government contractors at the JDFPG who went to Australia solely to work at JDFPG. If you were ordinarily resident in Australia before working at JDFPG, then your JDFPG employment income is not eligible for an exemption from Australian tax under the Pine Gap Agreement.

Added: 05-22-2019 Source: ATO/IRS

A12. No. The Pine Gap Agreement applies only to U.S. employees, who are not also Australian citizens, of U.S. federal government contractors at the JDFPG who went to Australia solely to work at JDFPG. If you are an Australian citizen, then your JDFPG employment income is not eligible for an exemption from Australian tax under the Pine Gap Agreement.

Added: 05-22-2019 Source: ATO/IRS

A13. No. Note, however, that as a U.S. citizen or resident alien your worldwide income is subject to U.S. federal income tax, subject to any available deductions, credits, exemptions, or exclusions, such as the foreign earned income exclusion. Your income also may be subject to tax in the country where you work, depending on that country’s law.

Added: 05-22-2019 Source: IRS

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FAQs for Employers

A1. No. Your employee’s JDFPG employment income is taxable in the United States and Australia. It is taxable in the United States because, as a U.S. citizen or resident alien, the employee is taxable on worldwide income. See IRS Publication 54. It is taxable in Australia because your employee earned the income while working in Australia. Your employee’s U.S. and Australian reporting and payment obligations will differ depending on whether he or she elects to exclude some or all of this income from U.S. tax under the foreign earned income exclusion in section 911 of the Internal Revenue Code.

Added: 05-22-2019 Source: ATO/IRS

A2. Pursuant to the Pine Gap Agreement, Australia exempts your employee’s income from employment at JDFPG from Australia tax if the employee went to Australia solely to work at JDFPG and the income is not exempt, and is brought to tax, in the United States. If your employee excludes JDFPG employment income from U.S. gross income under the foreign earned income exclusion (and thereby exempt that income from U.S. tax), Australia may tax the income.

Under ordinary tax principles, you, as the employer, would withhold and remit applicable U.S. and Australian taxes throughout the year to the IRS and ATO, respectively. The amount of withholding would depend on various circumstances, including the contents of the employee’s U.S. Forms W-4 and 673, and whether the employee has an Australian tax file number (TFN). In addition, an employer that provides fringe benefits will not be liable for Australian fringe benefits tax (FBT) if it has no withholding obligations. An employer will, however, be liable for FBT if it has withholding obligations and provides taxable fringe benefits.

Given the complexities caused by dual U.S. and Australian requirements for U.S. employees at JDFPG and their employers because of the Pine Gap Agreement, in the 1980s the IRS and ATO developed procedures to allow these employees to avoid withholding of Australian tax installment deductions for their JDFPG employment income and the corresponding need to file Australian income tax returns with respect to that income. Under these procedures, the employee may enter into a closing agreement with the IRS, in which the employee agrees that he or she will not claim the foreign earned income exclusion for the JDFPG income for the taxable period(s) covered by the closing agreement. This process was developed to alleviate the burden of dual withholding and reporting of U.S. residents’ income from employment at JDFPG, and it is completely voluntary for the employee. The IRS and ATO expect only that the employee’s income from employment at JDFPG is properly withheld, reported, and paid, as appropriate, in the United States and Australia. For example, U.S. tax but not Australian tax would be withheld from an employee’s JDFPG income if the employee enters into a closing agreement with the IRS. Conversely, both U.S. and Australian tax would be withheld if the employee does not enter into a closing agreement.

Added: 05-22-2019 Source: ATO/IRS

A3. If your employee enters into a closing agreement with the IRS, then you have no obligation to withhold Australian taxes on the employee’s income for the taxable period(s) covered by the closing agreement. By entering into a closing agreement with the IRS, the employee agrees that he or she will not claim the foreign earned income exclusion for the employee’s JDFPG employment income earned during those periods. (Note that because the United States and Australia use different taxable years (that is, January 1-December 31 in the United States, and July 1-June 30 in Australia), the closing agreement must cover the entire Australian income year to satisfy your withholding obligation as employer.)

If your employee enters into a closing agreement with the IRS, the employee will generally also submit a Consent to Disclose document, which allows the IRS and the employee’s employer to discuss the closing agreement. You and the employee also will sign a Declaration that is to be provided to the ATO to inform it that your employee has not and will not claim the foreign earned income exclusion for JDFPG employment income, and thus the exemption from Australian tax for this income is appropriate.

Added: 05-22-2019 Source: ATO/IRS

A4. If your employee does not execute a closing agreement with the IRS, he or she must file tax returns with both the IRS and the ATO and pay the appropriate tax to each jurisdiction. As the employer, you would withhold and remit applicable U.S. and Australian taxes throughout the year to the IRS and ATO, respectively. The amount of withholding would depend on various circumstances, including the contents of the employee’s U.S. Forms W-4 and Form 673, and whether the employee has an Australian tax file number (TFN).

Added: 05-22-2019 Source: ATO/IRS

A5. if you do not receive a closing agreement signed by the employee and the IRS, or any other evidence that the employee has entered into a closing agreement with the IRS, you should assume that the employee has not entered into a closing agreement with the IRS and withhold and remit U.S. and Australian taxes accordingly. The amount of withholding would depend on various circumstances, including the contents of the employee’s U.S. Forms W-4 and Form 673, and whether the employee has an Australian tax file number (TFN). In addition, if you provide a fringe benefit to the employee you may be liable for Australian fringe benefits tax (FBT) on its taxable value.

Added: 05-22-2019 Source: ATO/IRS

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