CPF vs. Superannuation – Do I Pay Tax on Gains, Report the Account?
Two of the most common Foreign Retirement plans we handle are the Singaporean Central Provident Fund (CPF), and the Australian Superannuation Fund (“Super”).
CPF vs. Superannuation for U.S. Tax
The following is a summary of the difference between a CPF and Superannuation as provided by Golding & Golding, A PLC.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving International Tax.
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)
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.
Not Everyone Gets Penalized
We understand that as you research issues online, many attorneys and CPAs seem to enjoy the fear mongering aspect of being tax professionals – we do not.
They toss around terms like “five years in prison,” “$500,000 Fine”, or “Tax Fraud” to scare you. They do this, without providing examples of the penalties and without placing these penalties into context.
For example, if an individual was clearly non-willful, they are not going to jail for five years or being penalized millions of dollars for tax evasion.
Still, some attorneys go out of their way to unnecessarily scare individuals with relatively benign facts with jail or prison, but of course neglect the fact that the U.S. Government still must prove a person acted beyond a reasonable doubt to pursue criminal charges.
You Have Methods for Getting IRS Compliant
In reality, the IRS doesn’t issue penalties against every individual with undisclosed or unreported foreign money. In addition, the IRS offers various amnesty program to facilitate compliance.
In addition, depending on your facts and circumstances you may qualify for various alternatives to amnesty, which may result in a complete penalty waiver.
We Specialize in International Tax (IRS Voluntary Disclosure)
We have successfully handled a diverse range of IRS Voluntary cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to IRS Voluntary Disclosure.
No Case is Too Big; No Case is Too Small.
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Submit to IRS Voluntary Disclosure?
All different types of people submit to OVDP. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
…We even represent IRS Staff with getting into compliance.
IRS Offshore Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.