There’s a moment when many US expats in Australia hit sooner or later. You learn that a tax treaty exists. You see franking credits reduce Australian tax. And then a very reasonable thought follows: surely the treaty connects these two things.
It feels like it should. After all, treaties are supposed to stop double taxation. So if Australian tax has already been paid, why doesn’t the treaty step in and smooth things out on the US side?
The short answer is: treaties help, just not in the way most people expect.
Why the treaty feels like the missing piece
From the outside, the logic is tidy. Australia taxes company profits. Those taxes turn into franking credits. You receive a dividend that’s already been taxed once. The US has a tax treaty with Australia. Therefore, the treaty should prevent that income from being taxed again.
That chain of reasoning isn’t sloppy. It’s intuitive. And it’s reinforced by how people talk about treaties in general, as if they’re broad fairness agreements rather than narrow legal tools.
The problem isn’t the expectation. It’s what treaties are actually built to do.
What tax treaties are really designed to handle
Tax treaties are, at their core, traffic controllers. They decide which country gets first dibs on taxing certain types of income. They cap withholding rates. They reduce the chances that the same person is taxed twice on the same income at the same level.
What they don’t do is harmonize tax systems.
Each country keeps its own definitions of income, tax paid, and who is legally responsible for that tax. The treaty sits on top of those domestic rules. It doesn’t rewrite them.
So while a treaty can say, “Australia may tax dividends up to X%,” it doesn’t say, “Australia’s corporate tax should be treated as if it were paid by US shareholders.” That distinction turns out to matter a lot for franking credits.
Why franking credits fall outside treaty relief
Franking credits come from Australian company tax. That tax is paid by the company, not by you as a shareholder. Australia then allows that tax to flow through conceptually, reducing your personal tax.
The US doesn’t follow that flow-through logic.
Under US rules, company tax stays with the company. Shareholder tax is a separate layer. Tax treaties, including the US-Australia treaty, operate almost entirely at the shareholder level. They deal with dividends received, not company tax embedded in those dividends.
That’s why the treaty doesn’t convert franking credits into something the US recognizes as tax paid by you. From the US perspective, nothing about the treaty changes who paid the underlying tax in the first place.
This approach lines up with how the Internal Revenue Service looks at foreign taxes generally: legal responsibility matters more than economic effect.
Where the treaty actually does help
All of that can sound bleak, but it’s not accurate to say treaties are irrelevant.
They matter most with withholding tax. If an Australian dividend is unfranked, Australia may impose withholding tax on you as a shareholder. The treaty limits how high that withholding can go. That tax is imposed on you personally, which means it can often be considered for US Foreign Tax Credit purposes.
In those cases, the treaty does exactly what it’s supposed to do. It reduces overlap. It narrows the gap between the two systems.
It just doesn’t touch franking credits, because franking credits arise from a different layer of taxation altogether.
A scenario that shows the treaty’s limits
Consider a fully franked dividend from an Australian company.
Australia doesn’t withhold tax. The franking credits reduce or eliminate Australian personal tax on the dividend. From Australia’s point of view, the income has been handled cleanly.
Now shift to the US return. The US sees a cash dividend. There’s no Australian withholding tax imposed on you. The franking credits don’t count as tax you paid. The treaty doesn’t change that analysis.
So the US taxes the dividend. The treaty is silent, not because it failed, but because this situation falls outside its job description.
Why this still feels like double taxation
Emotionally, it’s hard to separate layers. You see company profits taxed in Australia, then dividends taxed in the US, and it feels like the same money is being hit twice.
In a sense, it is. But legally, each country is taxing a different thing. Australia taxes the company. The US taxes the shareholder. The treaty was never designed to eliminate that kind of overlap.
Understanding that doesn’t always make the outcome feel better, but it does explain why no clause suddenly comes to the rescue.
Where Careful Planning Helps Avoid Surprises
Tax treaties are powerful tools when they’re used for what they’re meant to do. Problems arise when expectations stretch beyond their limits.
For US expats investing in Australia, careful planning is often less about finding relief and more about setting expectations early. Knowing where the treaty helps and where it simply steps aside makes it easier to understand outcomes before filing season arrives.
That kind of clarity, bridging how the Australian Taxation Office and the IRS each see the same income, tends to prevent the most frustrating surprises. And in cross-border tax, avoiding surprises is often the real win.
