5 Key Facts About Australian Super for U.S. Persons
It is very common for taxpayers who are U.S. persons for tax purposes to have either lived or worked in Australia and accumulated superannuation. When it comes to superannuation and U.S. tax reporting, it can get a bit complicated depending on the type of superannuation and whether any income has been distributed or not. Further complicating the facts is whether the taxpayer is a resident of the United States or a foreign resident and whether they are a U.S. citizen, lawful permanent resident, or foreign national who meets the substantial presence test. Let’s review five key facts about Australian superannuation for US persons.
Are Super Contributions Taxable?
In general, superannuation contributions are taxable because there is no distinct rule that states that superannuation contributions are deductible (like a 401K for example). The United States has entered into various double taxation agreements, and some of these agreements specifically state that the contribution is to a foreign retirement plan under specific circumstances and can be deducted similar to a 401K or other US pension plan, but because the superannuation was not developed until after the treaty was entered into between the United States and Australia, there is no mention of the superannuation in the treaty. Some deductions may be applicable under the totalization agreement, but that is different than deducting wages.
Is the Super Growth Taxable?
The general rule that most tax professionals take is that because Australia is a treaty country and because the superannuation is a form of pension, generally growth within the pension is not taxable until distributed. That is not a hard and fast rule, and there can be some exceptions, exclusions, and limitations, but the general rule is that employment-based pension in a treaty country is not taxable until it is distributed (or ‘available’)
Are Super Distributions Taxable?
Yes, distributions are taxable, and here is where it becomes very unfair for taxpayers. Unlike a 401K, within Australian superannuation the growth within the fund is being taxed within the fund, but then the distributions are tax-free to the recipient. But under U.S. tax rules, the pension income is taxable when it is distributed, and because the taxpayer did not pay the taxes himself while it was growing within the fund, there are no foreign tax credits (or franking credits). Some taxpayers who are not U.S. citizens but rather residents and live overseas may be able to make a treaty election to be treated as a non-resident alien for tax purposes and avoid paying income tax on the distributions.
The Super is Still Reportable for U.S. Tax Purposes
Even if a taxpayer is not receiving any distributions from the Australian superannuation, they are still required to report the fund itself on various international information reporting forms such as the FBAR and Form 8938. Some superannuation may be required to be reported on Form 3520 or 3520-A, although that is a gray area, and while the pension may also have foreign mutual funds and ETFs, generally the foreign pension fund will be exempt from Form 8621 under the PFIC regulations.
Be Careful Expatriating with a Large Super
Some taxpayers who are long-term residents or U.S. citizens may consider giving up their U.S. person status and formally expatriating from the United States. The superannuation may be considered ineligible deferred compensation for expatriation purposes, which means the taxpayer will then become subject to tax on the entire amount of the superannuation at the time they expatriate (minus any step-up basis or tax basis they may have in the Super).
Late Filing Penalties May Be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs. Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
Hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting can be overwhelming for Taxpayers trying to sift through the false information and nonsense they find in online research. Only a handful of attorneys worldwide are Board-Certified Tax Specialists who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
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