CPF vs Superannuation: Pay Tax on Gains & Report Accounts?

CPF vs Superannuation: Pay Tax on Gains & Report Accounts?

Tax Treatment of Australian Superannuation vs Singaporean CPF 

CPF vs Superannuation:  Two of the most common types of foreign retirement plans are the Australian Superannuation and Singaporean CPF. Both of these programs have complex IRS tax and reporting requirements. Even though the programs are similar, the treatment is different based on the fact that the U.S has entered into a Tax Treaty with Australia, but not with Singapore. In addition, the IRS has issued memoranda on the tax treatment of CPF, while the Australia-U.S. Tax treaty is silent on the specific issue of Superannuation.

What is a Singapore CPF?

A CPF is a mandated retirement scheme in Singapore. Both the employer deferrals and employee contributions are required. A CPF has multiple components to it, and the funds are broken down into different categories.

While the rules will vary depending on whether the portion of the contribution is mandatory or not, and whether it exceeds certain thresholds or not, typically the portion of the Employers Contribution that is compulsory or “mandatory” is not taxable, while the portion that is voluntary is taxable.

The employer contributes to the CPF, and then the employer can seek to recoup the money contributed for the employee’s share of the contribution.

What is an Australian Superannuation Fund? 

A Superannuation is a retirement fund. As provided by the Australian Securities and Investment Commission:

It’s similar to a managed fund where your money is pooled with other members’ money and invested on your behalf by professional investment managers.

Generally you will not be able to access this money until you retire. Your employer will make contributions to your super fund and you can top it up with your own money.

The government may also make contributions if you are a low income earner. Most people can choose which super fund they’d like their super contributions paid into. For most people, your employer must pay an amount equal to 9.5% of your salary into your super fund account.

This is on top of your salary or wages. Over the course of your working life, these contributions from your employer add up, or ‘accumulate’, which is why they are known as accumulation funds. Your super money is invested by your super fund so you will earn investment returns on the money. There are several different types of superannuation funds.”

How Is the CPF Taxed in the U.S.?

Unlike a Superannuation, the IRS has issued memorandum regarding the taxation of CPFs…and it is not good.

If you are a U.S. Person, the CPF is taxed twofold by the IRS:

First, the amount of income that is deferred from your salary and deposited directly into the CPF is taxed by the IRS (even if tax deferred in Singapore).

Second, the growth within the fund is also taxed. The IRS has issued memoranda on each of these issues.

How is a Superannuation Taxed in the U.S.?

Even though the IRS has not ruled specifically as to the tax treatment of Superannuations and the U.S and Australia Income Tax Treaty is silent as to the specific issue of Superannuations — there are signs that the Superannuation contributions/deferrals may be taxable by the U.S., even if it the growth may not be taxable (except under certain situations).

What Does the U.S. – Australian Treaty Say about Supers?

The U.S. and Australia Treaty is silent on Superannuation Funds. In other words, the tax treaty does not provide any specific guidance on superannuation funds.

Is Australia Superannuation Social Security or Pension for U.S. Tax?

Until the IRS rules on this issue, there are two main comparisons:

  • Is a Superannuation similar to U.S. Social Security; or
  • Is a Superannuation similar to a Foreign Retirement Pension?

U.S. Social Security

U.S. social security contribution is relatively simple, and a way of life for U.S. Persons (subject to any applicable totalization agreement). We all pay (subject to a totalization agreement) 6.2 percent and your employer pays 6.2 percent. If you’re self-employed, you pay 12.4 percent. You don’t pay Social Security taxes on earnings greater than the annual cap. You and your employer each pay 1.45 percent.

When a person reaches a certain age, they begin receiving social security payments and the age in which a person begins taking social security can vary.. A person can typically elect to begin receiving U.S. Social Security at different ages, and then based on the total income received by the person, that will determine whether a portion or all of their social security is taxed (when a person earns less additional income, then less of the social security is taxed, and vice versa).

Comparing the CPF vs. Superannuation Fund

While a Superannuation and CPF are not identical, they are very similar. Both are mandated retirement funds by their respective governments, and both are classified as privatized social security by the SSA (Social Security Administration).

But, while the IRS has ruled on taxation of a CPF, the IRS has not ruled on Superannuations.

Therefore, the CPF will serve as good comparison. And, for all you tax geeks (like us) out there, we know they are not identical, but the CPF serves as a solid base for comparison purposes.

A Superannuation is very similar to a CPF

  • Both are deferred from salary.
  • Both have their own identifier number (aka “assigned account number”)
  • Neither is required if it is not a local employer
  • Both can be depleted in full by the employee/owner 
  • Both offer periodic distributions but they are not mandatory (a person can take the full deduction)

Conclusion 

As to the CPF:

  • Salary Deferrals are taxable
  • Growth within the fund is taxable.

As to the Superannuation, it is probably safe to:

  • Pay U.S. Tax on any income you earned from an employer that was diverted to a Superannuation – while you were a U.S. Person
  • Pay U.S. Tax on Distributions, if you are a U.S. Resident
  • Report the Super (see below)
  • Consider the pros and cons of paying tax on the growth (especially HCE, Highly Compensated Employee)

International CPF and Superannuation Reporting

Putting income tax issues aside for a moment, the CPF and Superannuation must be reported on various IRS international tax forms and the failure to report may lead to extensive fines and penalties (although there are IRS approved programs designed to reduce, minimize, and/or eliminate penalties).

*The goal of this article is just to keep you informed of how the IRS may rule and provide an alternative opinion to some other information presented online. We are not making any concrete statement that you should pay tax on any accrued but non-distributed income growth.

What if You Never Paid Tax or Reported?

Depending on facts facts and circumstances of the noncompliance the IRS has the right to issue extremely lopsided penalties against any individual who is out of IRS compliance.

Even a cursory review of the IRS penalties and the Standard of Proof required by the IRS to prove the penalties reflects that even minor infractions can result in significant penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.

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