Australian Superannuation Tax Rules in the U.S. (Summary 2020)
U.S. Tax on Australian Superannuation Funds: The U.S tax on Australian Superannuation Funds analysis is complicated and (unnecessarily) complex. U.S. persons who own an Australian Super may have a U.S. tax & reporting requirement for their Australian Superannuation Fund. The “super” fund scheme was developed by the Australian government, as a form of retirement & pension. The IRS tax treatment rules have not been solidified for Australian Superannuation. In other words, whether or not Superannuation Fund contributions, growth, and distributions are taxable, is still being developed.
For those of you with shorter attention spans or better things to do, we published a condensed version of the article here: Australian Superannuation Tax Rules.
U.S. Tax on Australian Superannuation Funds
The U.S. Tax on Australian Superannuation Funds analysis has four (4) main components:
- Reporting (FBAR & FATCA)
For taxation purposes, the superannuation is most likely classified as a retirement fund and not social security in the U.S. While the Superannuation is comparable to both social security and pension — it is much more comparable to pension. The U.S. Australia tax treaty does not classify supers, and Australia has its own social security aka social assistance program.
SSA and Foreign Social Security Classifications
Just because the SSA (Social Security Administration) refers to super as “privatized social security” has no bearing on the IRS for tax treatment. The SSA also categorizes the CPF as privatized social security, but the IRS takes the position that both the employer pre-tax contributions and growth are taxable. See our own comparison of superannuation as pension vs. social security.
In general, the Super is a foreign retirement fund comparable to other foreign retirement funds, such as a Singaporean CPF or Hong Kong MPF. Since there is a tax treaty between the U.S. and Australia (which we have summarized), the Super should receive some tax benefit, as opposed to the U.S. tax treatment of other foreign retirement plans in non-treaty countries — such as the CPF
What is an Australian Super?
In Australia, it is mandatory for most employers and employees to participate in the Superannuation scheme and received a future tax deferred treatment. As provided by ATO:
Superannuation, or ‘super’, is money put aside by your employer over your working life for you to live on when you retire from work.
Super is important for you, because the more you save, the more money you will have for your retirement.
You can only withdraw your super money in certain circumstances – for example, when you retire or turn 65 years old.
While an Australian superannuation is comparable to a U.S. 401K, a 401K is not mandatory.
Reporting the Superannuation
In addition to U.S. tax and IRS tax treatment rules, the Superannuation is also reportable as foreign account. It is typically reported on the FBAR (FinCEN Form 114) and FATCA Form 8938. We have a separate article for your convenience, on how to report an Australian Super in the U.S.
In recent years, the IRS has developed aggressive offshore reporting strategies for offshore accounts, assets, investments and income. If you have not properly reported your Australian Superannuation on the FBAR, you may be issued FBAR penalties, which can be significant. But, the IRS has developed various offshore amnesty programs — collectively referred to as Voluntary Disclosure.
Australian Superannuation Tax Treatment Rules Q &A
Since there is no definitive tax rule, we have prepared a detailed summary of common questions and answers to assist you with answering some of the more basic tax questions:
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.
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
These questions we receive tend to be a bit more complex:
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. Instead, form 8938 is used to report the Super. (Exceptions, exclusions, and limitations apply). Learn more about Supers being treated as Foreign Grantor Trusts.
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.
Is Your Super out of U.S. Tax & Reporting Compliance?
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.
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