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

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

Australian Superannuation: Private Social Security or Pension?

With the globalization of the U.S. economy and global workforce, there has been a significant increase in the number of foreign persons, such as Australian Nationals/Residents who also have U.S. Person tax status. And, many of these taxpayers have Superannuations. 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) of whether Australian Superannuation should be treated as Foreign Pension or Social Security. The Australian Super is used as a form of retirement for Australians. It generally operates similarly to a pension, in that a person may have several Supers and it has a gross value based on the value of the ER/EE contributions and growth. Unfortunately, the US/Australia tax treaty is silent on the tax treatment of Superannuation — although there is a totalization agreement between the United States and Australia and that agreement does refer to Superannuation. This analysis compares the two approaches.

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.

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 Plan?

U.S. Social Security

U.S. social security contribution is relatively simple. US persons (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).

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 superannuation. In other words, Australia has public social assistance distinct from Superannuation and when the treaty refers to social security, it refers to U.S. social security and Australia Social Assistance.

SSA Says Superannuation is Privatized Social Security?

Since the SSA refers to Superannuation as privatized, there is the concern that it would not be treated similarly to public social security benefits (Such as the SSA and U.S. Social Security) but since Australia has social assistance, and there are many distinctions between U.S. social security and Australia Superannuation, it may be a tough climb to state that Superannuation should be treated the same as U.S. social security (even in light of the language in the totalization agreement). There is also the potential that possibly a portion of the Superannuation may be treated as social security and the remainder a pension — which would seem like a plausible outcome based on the totalization agreement covering certain contributions into the Super.

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When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

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