Superannuation, Form 3520-A & Rev Proc. 2020-17
Rev Proc 2020-17 Exempts Superannuation from Form 3520? Is Australian Superannuation a Tax-Favored Trust that falls within the confines of Revenue Procedure 2020-17, so that the filer can avoid duplicate reporting Form 3520/3520-A?
It depends on how you slice it.
In general, a common issue for U.S. Persons with foreign pensions such as Australian Superannuation is how to report the pension annually to the IRS.
If a person wants to take a treaty position, that a Superannuation is social security instead of pension (so trust reporting would not even be a consideration), the taxpayer must weigh the pros and cons of such as submission.
*There are a few different strategies a Taxpayer may use, but this summary is just our analysis and cannot be relied on as legal advice for taking one position or the other.
Report The Super on Form 3520 and 3520-A
For some people, just reporting these forms will bring peace of mind.
Whether or not the Australian Superannuation it is technically reportable on Forms 3520/3520-A is up for debate. So, for those taxpayers with low risk-tolerance, reporting the Forms 3520 may be the easiest path to take.
The Form 3520-A can get technical, and the cost to hire a tax professional each year can get expensive – but peace of mind is also worth something — and in the end, it is up to the Taxpayer on how to proceed.
Relying on Rev. Proc 2020-17 to Not Report
The IRS recently released a revenue procedure 2020-17.
The purpose of the revenue procedure is to reduce the amount of duplicate reporting for certain trusts. The two main categories for eliminating duplicate reporting are the Foreign Retirement Trust and Non-Retirement Trust.
For this analysis, we will focus on the Superannuation as a Tax-Favored Foreign Retirement Trust.
Goal of Rev Proc 2020-17
As provided by the IRS, the goal of the revenue procedure:
“The Treasury Department and the IRS are exempting from section 6048 information reporting an eligible individual’s transactions with, or ownership of, an applicable tax-favored foreign trust.”
“Section 6048, enacted in 1996, generally requires annual information reporting of a United States person’s transfers of money or other property to, ownership of, and distributions from, foreign trusts, and section 6677 imposes penalties on United States persons for failing to comply with section 6048. As relevant here, section 6048(a)(3)(B)(ii) provides an exception from reporting with respect to transfers to foreign compensatory trusts described in section 402(b), 404(a)(4), or 404A.”
(a) Notice of certain events
(1) General rule
On or before the 90th day (or such later day as the Secretary may prescribe) after any reportable event, the responsible party shall provide written notice of such event to the Secretary in accordance with paragraph (2).
(2) Contents of notice
The notice required by paragraph (1) shall contain such information as the Secretary may prescribe, including— (A)the amount of money or other property (if any) transferred to the trust in connection with the reportable event, and (
(B) the identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust.
IRC 6048 Penalties
The Internal Revenue Service penalties for not complying with 6048 can be bad.
For purposes of this summary, let’s presume the filer is an eligible individual.
As set forth in the revenue procedure:
“For purposes of this revenue procedure, an eligible individual means an individual who is, or at any time was:
- A U.S. citizen or resident (within the meaning of section 7701(a)(30)(A)) and who, for any period during which an amount of tax may be assessed under section 6501 (without regard to section 6501(c)(8)),
- is compliant (or comes into compliance) with all requirements for filing a U.S. federal income tax return (or returns) covering the period such individual was a U.S. citizen or resident, and
- to the extent required under U.S. tax law, has reported as income any contributions to, earnings of, or distributions from, an applicable tax-favored foreign trust on the applicable return (including on an amended return).”
Is a Superannuation a Tax Favored Retirement Trust?
If you are reading this article, you probably already know the basics of the Australian Superannuation.
It is a compulsory form of pension. The Super has concessional and non-concessional contributions. There are catch-up provisions, and some of the growth is tax-free, while some of it is not.
Our position based on the information available and prior rulings is that for U.S. tax purposes, the Super is treated as a Pension — not social-security.
The Social Security Administration (SSA) does deem it as “privatized social security,” but they also deem CPF in Singapore as privatized social security, and the IRS treats CPF contributions and growth as taxable.
Let’s go through the six (6) factors of Rev. Proc. 2020-17 for Tax Favored Retirement Trusts:
Tax Exempt or Tax-Favored in Australia
As defined by the Revenue Procedures:
For purposes of this revenue procedure, a tax-favored foreign retirement trust means a foreign trust for U.S. tax purposes that is created, organized, or otherwise established under the laws of a foreign jurisdiction (the trust’s jurisdiction) as a trust, plan, fund, scheme, or other arrangement (collectively, a trust) to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits and ancillary or incidental benefits, and that meets the following requirements established by the laws of the trust’s jurisdiction.”
Yep, the Superannuation clears the first hurdle.
Annual Information Reporting Available in Australia
The Rev. Proc. requires:
Annual information reporting with respect to the trust (or of its participants or beneficiaries) is provided, or is otherwise available, to the relevant tax authorities in the trust’s jurisdiction.
Most super companies will issue a June 30th summary of the Superannuation, including the growth, contributions, etc. to the employee.
So far, so good.
Only Contributions from Employment
Generally, this is true – although it can be pre-and-post tax and voluntary contributions. Spousal contributions and the sale of a long-term home (10+ years) which is then invested in part, into the Super can further complicate the analysis.
But the primary purpose is to fund the super with contributions from employment, and there are also some exceptions later in the analysis (see section 6), so the fact that ancillary contributions may be permitted, should presumably not defeat eligibility from 2020-17..
The Employer pays 9.5% of ordinary earnings into the super account.
The employee may also “salary sacrifice” other portions of the salary, for a total employer contribution of $25,000 (AUD) per year.
This contribution is pre-taxed, and then taxed within the superannuation, depending on the tax bracket of the employee.
The Employee can also make contributions to the super from after-tax pay.
The total non-concessional payments can range up to $100,000 (AUD) – with some additional “catch-up” provisions beyond the scope of this article.
When a person make less than about $53,000 AUD, the government may make “matching contributions.”
This is where is the analysis diverges.
Section 4 requires contributions to be limited as follows:
“Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust, or are subject to a lifetime limit of $1,000,000 or less to the trust.”
There are a few ways to review this:
A. Does it mean that the trust does not permit more than $50,000 per year/$1,000,000, or that the employee does not contribute more than $50,000/$1,000,000?
B. Does it refer to employer pre-tax deferrals only, or does it include post-tax voluntary contributions?
If A. above is correct, then compliance is relatively easy, as long as you do not exceed the $50,000/$1,000,000 contribution limit, you can probably avoid reporting.
But, presuming the section refers to the actual limitation permitted by the laws of the jurisdiction, we still believe there is a non-frivolous argument that can be made that Revenue Procedure 2020-17 applies to Superannuation.
- The goal of the revenue procedure is to limit reporting
- The intended purpose of a retirement plan is the Pre-Tax deferral
- The Super Pre-Tax contributions (the primary purpose of a retirement trust) is limited to $25,000 per year
- Any additional post-tax contributions are “Voluntary”
In addition Rollovers are okay, which means that a “voluntary” contribution that would exceed $50K would not defeat 2020-17 requirements. There are also provisions for loans, etc.
Referring back to section 03:
(1) The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction. For purposes of this revenue procedure, a trust is tax-favored if it meets any one or more of the following conditions:
(i) contributions to the trust that would otherwise be subject to tax are deductible or excluded from income, are taxed at a reduced rate, give rise to a tax credit, or are otherwise eligible for another tax benefit (such as a government subsidy or contribution); and
(ii) Taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
Age or Disability
Superannuation withdrawals, distributions, and payments are “conditioned upon reaching a specified retirement age, disability, or death, or penalties apply to withdrawals, distributions, or payments made before such conditions are met.”
The super meets this requirement, as provided:
“nondiscriminatory insofar as a wide range of employees, including rank and file employees, must be eligible to make or receive contributions or accrue benefits under the terms of the trust (alone or in combination with other comparable plans), (ii) the trust (alone or in combination with other comparable plans) actually provides significant benefits for a substantial majority of eligible employees, and (iii) the benefits actually provided under the trust to eligible employees are nondiscriminatory.”
The Key Point of the Analysis
Why should post-tax voluntary contributions defeat the intended goal of an employment trust and 2020-17 reporting limitations. The cap on pre-tax contributions is $25,000 AUD per year, which meets the 2020-17 requirements.
Remember, the goal is to reduce duplicative reporting,
Thus, just because a person can volunteer post-tax contributions, should not defeat the overall goal.
And there you have it.
We hope this helps shed a little a light on the subject —
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.