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

Australian Superannuation: Private Social Security or Pension?

When it comes to Australian Superannuations and U.S. tax, there is no concrete answer as to how the IRS will address the issue (as of the writing of this article). This analysis compares the two approaches. We have also summarized our position on taking a treaty position that Super qualifies as social security and exempt from U.S. tax.

1. 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.

    • The mains ones are; Employer/corporate/staff funds – these are funds established by an employer for the benefit of their staff. Personal funds – as the name implies, you personally join as an individual through a super provider. There are many available and most will offer a wide range of investment choices and other features. Industry funds – these were originally set up for people working in a particular industry, e.g. builders or health care workers.

    • Many are now available to the public. Self-managed super funds (SMSF’s) – these can have up to five members and are generally used by people with larger amounts in super who want more control and flexibility. If you would like more information about the different types of super funds, speak to your financial adviser.

    • 2. 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).

3. 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.

4. 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. We all pay (subject to a totalization agreement) a portion and the employer pays a portion. If you are self-employed, you pay both. You do not pay Social Security taxes on earnings greater than the annual cap. You and your employer each pay a percentage.

When a person reaches a certain age, they begin receiving social security payments. 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).

Foreign Retirement Pension

See below under Article 8 for discussion regarding CPFs (a foreign retirement pension).

5. Isn’t a Superannuation just like U.S. Social Security?

No, and here’s why:

– Australia already has its own form of Social Assistance (aka Social Security)

– Social Security is a defined benefit, a Superannuation ROI (Distributions) will vary

– You can withdraw the entire Superannuation balance in one withdrawal.

– A Superannuation is only mandatory to the EMPLOYER. Meanwhile U.S. Social Security is mandatory to the Employer and Employee.

– A Superannuation has a set amount of money per person that can be withdrawn in full, U.S. Social Security does not.

– A superannuation has an account number, specific to the individual, social security does not.

– You cannot choose the fund for investments or investment strategy for Social Security, but you can for superannuation.

Australian Has Separate Social Assistance (aka Social Security)

Social Security is called social assistance and is provided by the government in Australia. 

Social Assistance in Australia is different than a superannuation. In other words, Australia haspublic social assistance distinct from Superannuations.

6. SSA Says Superannuation is Privatized Social Security?

Yes, that is true, BUT, the SSA (Social Security Administration) also treats a CPF as “Privatized Social Security,” and the IRS has ruled that both the deferrals and the CPF growth within the fund is taxable (even if it is not distributed).

Result: The mere fact that the SSA designates something for Social Security and Totalization Agreement purposes is not binding on the IRS.

7. Is a Super considered a Private Social Security under U.S. Tax Laws?

While the IRS has not issued any rulings, it is impossible to say with any degree of certainty that the Superannuation is a Private Social Security and therefore will receive tax treatment under Article 18 instead of Article 22.

And, it is a pretty bold statement to presume it will be accepted by the IRS as privatized social security by referring on the SSA instead of an IRS ruling…especially when the IRS has ruled against deferred tax for contributions and growth of similar types of foreign retirement funds. Even though there is no tax treaty with Singapore, that is not the sole reason why the deferred contributions are taxable at the time of deferral/contribution.

Since there is a treaty with Australia, that may presume that the growth within the fund should not be taxed prior to distributions, but each specific case should be analyzed by its own set of facts and circumstance…it is not one size fits all.

8. Let’s Compare a Super to Foreign Retirement which the IRS has Issued Memoranda

At Golding & Golding, we handle many cases involving CPF and Australian Superannuation Funds. Therefore, we thought it be a good idea to try to compare the two and developed our following analysis.

This comparison analysis was prepared exclusively by Golding & Golding:

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.

Why is U.S. Tax of a CPF Important?

Because 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.

• See IRS Memo

9. Superannuation vs. CPF 

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 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)

Superannuation Reporting

Putting income tax issues aside for a moment, the 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 the Superannuation

IRS Offshore Penalties

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.

Golding & Golding: About our International Tax Law Firm

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