U.S. Tax on Australian Superannuation Funds – Is Super Taxable

U.S. Tax on Australian Superannuation Funds - Is Super Taxable (Board Certified Tax Law Specialist)

U.S. Tax on Australian Superannuation Funds – Is Super Taxable (Board Certified Tax Law Specialist)

U.S. Tax on Australian Superannuation Funds – Is Super Taxable

The U.S. Tax on Australian Superannuation Funds analysis is difficult — and the IRS has not made it any easier.

That is because the IRS has not determined per se whether an Australian Super is treated as social security, or pension.

U.S. Tax on Australian Superannuation

And, whether or not the IRS treats a Super as pension, or social security will have a major impact on the way U.S. persons are taxed on their super.

We will summarize the basics of U.S. Tax and Australian Superannuation.

Taxation of Australian Superannuation

If you are Australian, but also are a U.S. Person (Dual-Citizen, Legal Permanent Resident, Visa-Holder), you may be subject to U.S. Tax on Australian Superannuation Funds.

The main reason why the analysis of U.S. Tax on Superannuation Funds is difficult, is because the Australia U.S. Tax treaty is silent as to “supers.”

In contrast, the U.S./U.K. tax treaty plainly spells out how contributions by a Foreign Employer to a Foreign Retirement are taxed in the U.S. (read: U.K. Foreign pension contributions can usually be excluded on a U.S. tax return).

To date, the IRS has not issued any definitive memoranda, as it has for other retirement, such as CPF (Singapore) and RRSP (Canada).

*There are also Australian Superannuation account disclosure requirements (FBAR & FATCA), but you may refer to our separate article on Super Reporting to assess your disclosure requirements.

Superannuation Tax Lawyers – Golding & Golding, A PLC

We specialize exclusively in international tax, and specifically IRS offshore disclosure.

We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems, and hundreds of clients from Australia.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.

What is 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. 

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?

What is a Superannuation

What is a Superannuation?

Superannuation Definition

Here is a quick run of the basics:

A superannuation is simply a compulsory form of retirement.

Many countries have Superannuation Funds, but the Australian Super is one of the most popular superannuation funds.

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.

Is a Superannuation a Retirement Fund or Social Security?

The superannuation is most likely a retirement fund.

Please visit our separate article on Superannuation and U.S. tax treatment for a comparison of the Superannuation to other forms of foreign mandatory retirement.

In that other article, we developed our own original analysis of Australia Superannuation vs. Singapore CPF to provide some perspective on the different tax positions.

Super Retirement vs. Social Security – The Basics

Here is the basics of the analysis:

Is Superannuation Treated as Social Security for U.S. Tax?

Is Superannuation Treated as Social Security for U.S. Tax?

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 Superannuation Funds.

SSA Says Superannuation is Privatized Social Security?

Yes, that is true, BUT, the SSA (Social Security Administration) also refers to 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.

Australian Superannuation Tax Rules

Australian Superannuation Tax Rules

IRS Superannuation and U.S. Tax

The Australian Superannuation has many different components

Do I Include the Superannuation on a U.S. Tax Return?

Yes, you include an Australian Super on your Tax Return. The two main components of the superannuation fund are:

  • Reporting the Superannuation on the FBAR, FATCA, PFIC, etc.
  • U.S. Taxation – Contributions, Growth, and Withdrawals.

Are Employer Contributions Taxed?

The common example we handle is when a U.S. Person earns income from an Australian employer, and money is being deferred by the employer, and on behalf of the employee into the fund.

As of now, there is no specific rule designating the contributions excluded from U.S. Tax. 

But, presuming that the Super is a pension instead of Social Security, then unlike the US/UK Tax Treaty for example (Article 18, Pargaraph 5), the Australia/US Treaty does not specifically identify U.S. employer contributions on behalf of a U.S. Person employed in Australia for an Australian retirement fund as non-taxable in the U.S. — as it does in the U.K. Tax Treaty.

Therefore, the employer contributions may be taxable.

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. The general proposition by most experienced specialists is that the growth is not taxable, unless the person is an HCE.

If the employee is considered to be an HCE  (Highly Compensated Employee), the rules are different, and the growth may be taxable.

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

U.S. Tax & Superannuation Frequently Asked Questions (FAQ)

U.S. Tax & Superannuation Frequently Asked Questions (FAQ)

Additional Super Questions & Answers (FAQ)

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 general position that the Super is an employer’s trust (unless the employee has self-contributed more than the employer) and form 3520 and 3520-A is not reported.

Insteaf, form 8938 is used. (Exceptions, exclusions, and limitations apply).

Is an Australian Superannuation Fund PFIC (Form 8621)?

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” (Form 8938)?

Yes. A Form 8938 Foreign Financial Asset would include an Australian Superannuation Fund.

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.

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.

Super 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.

Golding & Golding (Board Ceritfied Specialist in Tax Law)

Golding & Golding (Board Certified Specialist in Tax Law)

Interested in Filing IRS Tax & Amnesty Procedures?

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

Golding & Golding specializes in offshore tax and reporting amnesty. Contact our firm today for assistance with getting compliant.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our international tax lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70+ different countries. Managing Partner Sean M. Golding is a Board-Certified Tax Law Specialist Attorney (a designation earned by < 1% of attorneys nationwide.). He leads a full-service offshore disclosure & tax law firm. Sean and his team have represented thousands of clients nationwide & worldwide in all aspects of IRS offshore & voluntary disclosure and compliance during his 20-year career as an Attorney.

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. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
International Tax Lawyers - Golding & Golding, A PLC

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