U.S. Taxation of an Australian Superannuation Fund (2019 Update)
- 1 What is a Superannuation Fund?
- 2 U.S. Tax on Australian Superannuation Funds
- 3 U.S Tax Treatment of Australian Superannuation
- 4 Is An Australian Superannuation Taxed in the U.S.?
- 5 How is a Superannuation Taxed in the U.S.?
- 6 What Does the U.S. – Australian Treaty Say about Supers?
- 7 Superannuation and U.S. Tax Treaty Language
- 8 Is Australia Superannuation Social Security or Pension for U.S. Tax?
- 9 Isn’t a Superannuation just like U.S. Social Security?
- 10 SSA Says Superannuation is Privatized Social Security?
- 11 Is a Super considered a Private Social Security under U.S. Tax Laws?
- 12 Let’s Compare a Super to Foreign Retirement which the IRS has Issued Memoranda
- 13 Superannuation vs. CPF
- 14 Conclusion
- 15 What Can You Do If You are Out of Compliance?
- 16 How do you Vet out Potential Attorneys?
- 17 We have Represented Hundreds of Clients from Australia
- 18 Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
- 19 Beware of Copycat Law Firms
U.S Taxation of an Australian Superannuation Fund (2019 Update)
U.S Taxation of an Australian Superannuation Fund: Superannuation is a (generally) mandatory retirement scheme for Australian employers. Employees may make also voluntary contributions.
If a U.S. Person has a Super or multiple supers they, may have to pay U.S Tax on Australian Superannuation Funds — even if they reside out of the United States.
What is a 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.
U.S. Tax on Australian Superannuation Funds
When it comes to IRS compliance, U.S. Person Taxpayers with Superannuation Funds have two main issues to contend with:
- Reporting the Super, and
- U.S. Taxation of the Super
U.S Tax Treatment of Australian Superannuation
If you have a Superannuation Fund in Australia, it is reportable in the U.S. on various forms, including the FBAR (FinCEN 114) and Form 8938 (FATCA) –there may be various other reporting requirements as well.
In addition to reporting the fund, A common question we receive is “How is Australian Superannuation taxed in the U.S.”
The U.S. tax treatment of an Australian Superannuation is difficult, but don’t worry — we can help!
After countless hours of research online you realize your superannuation is definitely reportable on your U.S. Tax Return — but what are the IRS Tax Treatment rules involving U.S. Tax on Australian Superannuation Funds?
Don’t worry — we’ve got you covered.
Is An Australian Superannuation Taxed in the U.S.?
In the United States, a superannuation fund would be considered a hybrid of Social-Security and Private Pension.
Of course, the United States and Australian Tax Treaty is silent on the specific issue of Superannuation Funds — although it does provide details on the taxation of pensions and retirement, generally.The purpose of this summary is for our readers to get a better (basic) understanding of the general rules involving U.S. Taxation of Australian Superannuation Funds.
*This analysis was prepared exclusively by Golding & Golding and no portion of it (including examples and comparisons) has been authorized for use or reproduction on any other blog or website.
Please feel free to report any unauthorized use to email@example.com.
Superannuation Tax Basics
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).
Australia Superannuation Funds – In General
We work with many clients from Australia who have various issues involving their Superannuation Fund. For some of our clients, they may be self-employed or highly compensated employees (HCE) with millions of dollars in their Australian superannuation fund, and getting close to retirement – only to realize they have not been properly reporting or disclosing the information properly on a U.S. Income Tax Return, FBAR, etc.
It can be a very scary ordeal to think you may only be a few years away from retirement, only to learn that the IRS wants to penalize you a significant portion of the value of your superannuation fund — solely because you did not know you were required to report it.
Therefore, we want to provide a summary on the Australian superannuation fund with respect to US tax law.
*Please note, each case is different and this is not legal advice you can rely upon for making a decision about how to act in your particular case – it is a summary for you to have an idea of what the issue should be and where you fall on the spectrum of reporting.
**In hopes to provide a general understanding of the laws, we are purposefully keeping it less technical and more informative – we hope.
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).
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)
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.
**Example: (excluding more complex basis/amortization issues) 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.
What Does the U.S. – Australian Treaty Say about Supers?
The United States has entered into tax treaties with upwards of 60 different countries, including Australia. The tax treaties are used to determine certain benefits for individuals with income, investments, assets, etc between the two countries so that citizens/residents of each country will have an idea of their tax liability – as well as receive some additional benefits such (as no double taxation, and reduced tax rates for investments between the two countries).
In other words, the U.S. enters into tax treaties (typically) with countries it “likes,” and wants to foster an ongoing positive relationship with.
Superannuation and U.S. Tax Treaty Language
In order to keep it nice and confusing, the Australian Tax treaty does not make any specific reference to superannuation funds. Even though the superannuation fund scheme has been in place for many years, the treaty simply does not directly reference superannuation funds.
*For example, some treaties have a very expansive description of retirement, pension, and/or Social Security – such as the tax treaty with the UK.
Nevertheless, in accordance with the Australian treaty, it would seem that the United States has the right to tax pension payments received by an individual residing in the United States (even from an Australian Employer) unless it is a government or public pension issued for service performed in Australia (in which Australia would have the right to tax the public/government pension).
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).
Foreign Retirement Pension
See below under Article 8 for discussion regarding CPFs (a foreign retirement pension).
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)
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.
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.
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)
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)
What Can You Do If You are Out of 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.
Get Into Compliance with Experienced Counsel
Offshore Disclosure is complex. It is a specialty area of tax law, which requires a experience firm that specializes exclusively in IRS Offshore Disclosure.
How do you Vet out Potential Attorneys?
Three words: Credentials, Experience, Education.
What is the Board Certified Tax Law Specialist Credential?
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
- Extensive tax law experience
- 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.
We have Represented Hundreds of Clients from Australia
IRS tax rules involving Superannuation Funds is a very common International Tax question we receive often, and we’re here to help!
U.S. Tax Treatment of Australian Superannuation varies extensively, based on:
- Type of Super (Managed Fund vs. SMSF)
- HCE (Highly Compensated Employee)
- +50% voluntary contributions from the employee
- 3520-A vs. 8938
- Foreign Trust Analysis
- Treaty Analysis.
We have worked with hundreds of citizens and residents from Australia on Superannuation related issues (and other issues such as Franking Credits, 8833, and Closer Connection Test analyses).
Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)
IRS Offshore Disclosure is ALL we do.
Our Managing Partner, Sean M. Golding, JD, LLM, EA earned 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, and authorizes him to represent clients nationwide.)
Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.
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.
*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.
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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