U.S. Tax on Australian Superannuation Funds – IRS Taxation Summary
- 1 U.S. Tax on Australian Superannuation
- 2 Superannuation in Australia
- 3 Superannuation Taxes
- 4 Is Australian Superannuation Taxable in the U.S.?
- 5 Superannuation Definition
- 6 Superannuation IRS Tax Treatment Rules
- 7 Superannuation on a U.S. Tax Return?
- 8 How Different Types of Super Income is Taxed?
- 9 Superannuation Example
- 10 Additional More Complex Super Questions & Answers
- 11 Is Australia Superannuation Social Security or Pension
- 12 Is a Superannuation the same as U.S. Social Security (and Tax Exempt)?
- 13 Is a Superannuation a Retirement Fund or Social Security?
- 14 Conclusion
- 15 Non-Compliance with U.S. Tax Law
- 16 Safely Get Into IRS Offshore Compliance
- 17 4 Types of IRS Voluntary Disclosure Programs
- 18 How do you Vet out Potential Attorneys?
- 19 Beware of Copycat Law Firms
- 20 How do Offshore Disclosure Lawyers & Tax Pros Charge?
U.S. Tax on Australian Superannuation Funds – IRS Taxation Summary
U.S. Tax on Australian Superannuation Funds: The U.S. Tax on Australian Superannuation Funds analysis is an unnecessarily difficult concept — and the IRS has not made it any easier.
In general, Australian Superannuation is taxable in the U.S. We will summarize and explain how the IRS can tax supers, and how income may be “taxable.”
U.S. Tax on Australian Superannuation
If you are Australian, but also as a U.S. Person, you may be subject to U.S. Tax on Australian Superannuation Funds.
But, just because it is “taxable,” does not mean there will be any actual tax — it depends.
Understanding how Supers are taxed in the United States is difficult, because the Australia U.S. Tax treaty is silent as to “supers,” and the IRS has not issued any definitive memoranda, like it has for other retirement, such as CPF (Singapore) and RRSP (Canada).
Superannuation in Australia
Superannuation is a form of mandatory or compulsory retirement. It is a pension that has components similar to both a 401K and Social Security.
U.S. Tax on Australian Superannuation varies, based on whether it is employer superannuation contributions, growth or distributions.
*There are also Australian Superannuation account disclosure requirements, but we have a separate article dedicated to assist you with those issues.
Is Australian Superannuation Taxable in the U.S.?
When it comes to U.S. Tax on Australian Superannuation Funds, two of the major questions we receive are:
Is Australian Superannuation Taxable in the U.S?
What is the IRS Tax Treatment of a Super?
*We have a separate article to assist you If you are seeking information on how to report the Superannuation on your U.S. Tax Return.
A superannuation is a form of Retirement. Many countries have Superannuations, with one of the most popular countries being Australia.
If you are Australian, you probably have an Australian Superannuation…or many. Although Superannuation Taxes are relatively simple for non-U.S. persons — the IRS likes to make things…difficult.
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.
Superannuation IRS Tax Treatment Rules
|Australian Superannuation||Category of Superannuation Fund||Is it Taxable (What is the IRS Tax Treatment)|
|Employer contributions to the Super||A U.S. Person earns income from an Australian employer, and money is being contributed on behalf of he employer||It is taxable. While the contributions may be considered equivalent to 401K contributions (which escape tax at contribution), it does not received deferred tax treatment.|
|Employee Contributions||Generally, this is when an employee (or former employee) contributes to their Super, and usually with post-tax dollars.||It may be taxable, but depends on if the contribution was pre or post-tax; tax credits may apply.|
|Growth Within the Super Fund||This generally includes passive income: Interest, Dividends, Capital Gains, Rents.||It depends: If the growth is due to SMSF, PFIC (if rollover or any distributions) and/or the owner is an HCE, immediate tax issues may apply.|
|Distributions (Growth vs Principal)||Distributions are usually from principal, loans, or accrued growth.|| |
It may be taxable; tax credits may apply.
|What Does the U.S. Tax Treaty Say?||The Treaty is silent specifically as to the Taxation of Superannuation Funds||It may be taxable; tax credits may apply.|
|Form 8833 Treaty Position||A person may make a treaty position to avoid taxation based on residence or for it to be treated as “social security.”||It may be taxable; tax credits may apply.|
Superannuation on a U.S. Tax Return?
Yes, you include an Australian Super on your Tax Return. There are many components to U.S. Tax on Australian Superannuation Funds, along with the Reporting of a Superannuation on your U.S. Tax Return.
Generally, there are two main components to the Superannuation:
- Reporting the Superannuation on the FBAR, FATCA, PFIC, etc.
- U.S. Taxation – Contributions, Growth, and Withdrawals.
How Different Types of Super Income is Taxed?
Here are the answers to some of your most common questions:
General U.S. Tax Law – Worldwide Income
The United States is one of the only countries in the world the practices citizen-based taxation. In other words, if you are a U.S. Citizen, Legal Permanent Resident, or you have a work permit or otherwise meet the Substantial Presence Test, you have to file a tax return and report your worldwide income on a regular 1040 return. You may want to take a treaty position and make a closer-connection test submission to the IRS, but the general rule is if you earn income, you pay tax — subject to treaty and approved retirement plan program rules (deferred income). This is why there may be U.S. Tax on Australian Superannuation Funds.
Employer Contributions – Are they Taxed?
Contributions would be taxed in the U.S. Although the Super is similar to a 401K (in which contributions are not taxed at the outset), there is no specific law that exempts contributions.
Personal Contributions to Australian Superannuation
Personal Contributions are not mandatory, but if the employee makes personal contributions there may be some additional tax benefits, but those benefits do not usually translate to a U.S. Tax Benefit
Access to Superannuation
Generally, a person can access the Superannuation at retirement, although under certain circumstances, a person may be able to withdraw benefits earlier. Benefits fall into different categories (such as Preserved and Non-Preserved) and the timing may impact U.S. Tax liabilities.
Are Withdrawals from the Australian Superannuation Taxable?
Generally, they are taxable (subject to issues of withdrawing principal), which is a return of basis — and not taxed, since it is not income. If you became a U.S. person after your contributions began, you may require a forensic analysis to assist with which portion of each withdrawal is taxable, or not — and if there will be any U.S. on Australian Superannuation Funds.
What’s Tax Treatment for the Growth within the Super (Tax on Super Earnings) ?
Unless the Super morphed into a Grantor Trust (or you are an HCE) generally, the contained growth within the fund is not taxed.
Undistributed Gains from a Superannuation
The big question will be how are non-distributed gains in your superannuation fund taxed in the United States.
For most individuals, the accumulated non-distributed growth of a superannuation fund will not be taxed in the United States. Why? Because the individual is not considered to be a Highly Compensated Employee (which is a legal term of art, and generally means the person in the top 20% of earners of the company).
As such, each year while contributions made by the employer or employee will not be deductible on a US tax return as a 401(k) would be, likewise, the accumulated growth of non-distributed income within the superannuation fund will not be taxed. But, if the person is considered a Highly Compensated Employee (HCE), then the US will tax the individual on the accumulated non-distributed growth within the Superannuation – which will increase the basis in order to reduce the tax at a later date.
How Much Tax Do You Pay on Australian Superannuation Withdrawal in the U.S.?
A person will gross-up their retirement income as regular income, and then their taxes due will be based on their progressive tax rate. Foreign Tax Credits may apply.
Jane has a Super worth $100,000. In 2017, the Super gains $5,000 of accrued, non-distributed income. If Jane was an HCE, she may have to pay U.S. Tax on the $5,000 gain.
But, if in next year the full $105,000 was withdrawn, she would not have any tax on it, because she already paid tax on the $5,000 gain in the prior year, before it was distributed (presuming she met all her U.S. Tax reporting/payment for the first $100K as well) so her basis is $105,000, and not $100,000 – and she would not be taxed on any distribution below the basis of $105,000.
Additional More Complex Super Questions & Answers
These questions we receive tend to be a bit more complex:
Is There a U.S. Australia Tax Treaty?
Yes, BUT the treaty is silent on the specific issue of Superannuation.
Is Australian Superannuation a Foreign Grantor Trust?
The Most experienced International Tax Attorneys take the position that it is an employer’s trust to the degree that the individual has not over-contributed. As such, the form 3520 and 3520-A is not reported, but rather the Form 8938 is used. (Exceptions, exclusions, and limitations apply).
Is an Australian Superannuation Fund PFIC?
PFIC is a Passive Foreign Investment Company. Generally, the Super is not considered a PFIC, but depending on various different factors, the Super can transform into a PFIC, and then may require a Form 8621 and/or 3520 and 3520-A.
Does Foreign Financial Asset include “Australian Superannuation”
Yes. A Form 8938 Foreign Financial Asset would include an Australian Superannuation Fund.
Is Australia Superannuation Social Security or Pension
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
Is a Superannuation the same as U.S. Social Security (and Tax Exempt)?
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).
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; it is a continued benefit.
– 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 a Superannuation (many different types of Supers to invest in, with different investment strategies and risks).
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 has public social assistance distinct from Superannuations.
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.
Is a Super considered a “Private Social Security” under U.S. Tax Laws?
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, and employer contributions from salary is probably “presently” taxable (as opposed to the growth)
Is a Superannuation a Retirement Fund or Social Security?
The superannuation is most like a retirement fund.
While the IRS has not issued any definitive ruling about the taxation of a Superannuation, the concern is that the IRS has issued rulings on similar types of retirement funds such as a CPF from Singapore (and the outcome was not great for U.S. Persons.
*We developed this comparative analysis. Golding & Golding have not authorized any other firm to use this analysis. If you see it on any other website, please email email@example.com (it is always appreciated).
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.
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.
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.
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.
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 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)
Non-Compliance with U.S. Tax Law
Whether it is because you did not you had to report foreign accounts, thought you were below the threshold for filing, did not realize non-bank accounts were required to be reported, and/or have other unreported income, accounts, investments or assets – we can help.
Safely Get Into IRS Offshore Compliance
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
How do you Vet out Potential Attorneys?
Three words: Credentials, Experience, Education.
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Once an Attorney earns the prestigious Board Certified Tax Law Specialist credential, it proves to the general public that the attorney is dedicated to tax law, and has real tax law practice experience as an Attorney.
Few tax attorneys have passed the tax speciality exam (regarded as one of the most difficult tax exams in the country) — and met the additional education, experience, and recommendation requirements necessary for certification.
Once a person becomes “Board Certified in Tax,” it shows they have met the following requirements:
- Advanced tax education
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- Attorney & Judge recommendations for certification
In California for example, there are 200,000 active Attorneys, with tens of thousands of Attorneys practicing in some area of tax — and only 350 Tax Attorneys have successfully earned the designation.
Less than 1% of Attorneys nationwide have earned the credential.
Beware of Copycat Law Firms
Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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