- 1 Treaty Based Return for Superannuation as Social Security
- 2 Form 8833 Tax Treaty Position for Superannuation
- 3 Treating a Super as Social Security Exempt from U.S. Tax
- 4 Superannuation as Exempt Social Security
- 5 8-Step Roadmap of the Analysis
- 6 Foreign Pension Tax Treaty Positions
- 7 U.S. Tax on Super Contributions vs. Growth as Pension
- 8 Still Inclined to Report a Form 3520-A?
- 9 Golding & Golding: About Our International Tax Law Firm
Treaty Based Return for Superannuation as Social Security
Form 8833 Australian Superannuation: When it comes to foreign pensions, the IRS has very complicated tax rules. These tax rules are amplified when there are issues involving U.S. Persons and foreign pension or retirement. That is because while foreign pensions are generally treated as tax deferred in the country of source, the IRS may not agree with the foreign country’s tax deferral position.
Today’s focus will be the Australian Superannuation Fund.
Form 8833 Tax Treaty Position for Superannuation
Can a Taxpayer take a treaty position regarding superannuation?
Of course. The benefit would be to avoid issues such as Form 3520/3520-A for trust reporting, since social security would not be a trust — although the Super may be exempted anyway under Rev. Proc. 2020-17.
Should a Taxpayer take a treaty position?
It depends on the treaty position, and some treaty positions are more complex than others.
Treating a Super as Social Security Exempt from U.S. Tax
A Treaty Position Form 8833 is not required in every situation in which a Taxpayer relies on a Tax Treaty.
As provided by the 8833 form instructions, one of the exceptions involves foreign pension:
“That a treaty reduces or modifies the taxation of income derived by an individual from dependent personal services, pensions, annuities, social security, and other public pensions, as well as income derived by artists, athletes, students, trainees, or teachers;”
Despite the exception noted above, when a U.S Taxpayer takes the position that the U.S has no legal right to even tax the income, since it is considered social security, this will probably not fall within the exception listed above (or any other exception contained in the instructions).
Because this position is more specific, and does not just seek to reduce or modify the taxation rules, but seeks to completely eliminate any right by the U.S. to have any right to tax the Super.
Superannuation as Exempt Social Security
Can Superannuation in Australia be exempt as Social Security instead of Pension?
Let’s go through our analysis:
What is a Superannuation?
The Australian Superannuation is a form of pension. It is funded through employment, along with other voluntary contributions.
The SG mandatory contributions for employees is similar to social security, but based on the all the voluntary contribution exceptions (non-concessional) it more resembles a 401K than it does social security.
- Australia already has its own form of 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 social security.
Is it Privatized Social Security by the SSA?
Expanding the definition of Australian Social Security to include Superannuation has not been accepted by the IRS or expressly applied to the U.S. Australia Tax Treaty.
The SSA is the Social Security Administration.
“The Social Security Administration assigns Social Security numbers, and administers the Social Security retirement, survivors, and disability insurance programs. They also administer the Supplemental Security Income program for the aged, blind, and disabled.”
While the SSA does identify the Australian Superannuation as Privatized Social Security, this definition has not been accepted by the IRS, and is not currently defined in the bilateral income tax treaty between the U.S. and Australia, as applicable to Article 18.
Moreover, the SSA refers to three different laws involving the regulatory framework of Australia:
- Social Security
- Family Tax
Therefore, the SSA distinguishes between the Social Security and Superannuation Administration, and does not lump them together into a single general definition, since social security in Australia is not funded through employment.
What is a Totalization Agreement?
As provided by the SSA:
Totalization Agreements, also referred to as bilateral agreements, eliminate dual social security coverage (the situation that occurs when a person from one country works in another country and is required to pay social security taxes to both countries on the same earnings).
Each Totalization Agreement includes rules intended to assign a worker’s coverage to the country where the worker has the greater economic attachment.
The agreements generally ensure that the worker pays social security taxes to only one country, provided the worker and the employer meet the procedural requirements under the agreement for obtaining an exemption from the other country’s social security taxes.
The goal of a Totalization Agreement: To avoid a taxpayer from having income withheld in each jurisdiction for employment.
U.S & Australia Totalization Agreement
For Australia, the agreement covers “Superannuation Guarantee” (SG) contributions that employers must make to retirement plans for their employee.
But, this statement in the agreement comes with an important clarification by the SSA, on Page 1 of the Totalization Agreement:
“Australia’s Social Security program, which is separate the SG program, is supported by general tax revenues not covered by the agreement.”
The above referenced clarification relates to the fact that the totalization agreement refers to Australia Superannuation Contributions and not Australian Social Security, since the Australian Social Security is not employment funded.
Unlike the U.S. Social Security Program, the Australian Social Security Program is not funded through employment. Rather, it is funded through general tax revenue.
By including this reference to Social Security in the Totalization Agreement, it serves to reiterate that the purpose of the Totalization Agreement is to avoid duplicate withholding for employees — not to make any general statement about whether SG contributions are considered Social Security of U.S. tax purposes outside for the Totalization Agreement.
Thus, the social security program in Australia is not covered by the totalization agreement, and the agreement does not expand the definition of social security to include superannuation.
As a result, the fact that the SSA refers to Superannuation as being privatized social security would not expand the definition to include social security and other public pensions as referenced in the U.S. and Australia tax treaty Article 18.
Social Security and the Tax Treaty Article 18(2)
As provided by the U.S. Australia Tax Treaty, Article 18(2)
(2) Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.
At the present time, the Social Security referred to in the tax treaty refers to “social security and other public pensions.” There is no mention of Superannuation.
Is Superannuation Social Security?
*Australia already has its own Public Social Security, and the term “Social Security Payments” in the tax treaty is further clarified as “and other public pensions…”
Is Superannuation a Public Pension?
It is employer funded and even though the government may make matching contributions for lower income wage earners, that does not make it a public pension.
8-Step Roadmap of the Analysis
While there is not set in stone conclusion by the IRS, the road map is the following:
- The purpose of the Totalization Agreement is to avoid a U.S person residing in Australia from having Mandatory withdrawals from their Australian income AND having to pay social security in the U.S. and vice versa for Australians working in the U.S.
- Since the Superannuation Guarantee is “Mandatory,” a U.S. person working in Australia and having Mandatory Withdrawals will not have to also pay U.S. Social Security.
- The Totalization Agreement clarifies that the Australia Superannuation is not “Social Security.” Rather, Social Security is handed by general revenue tax revenues not covered by the Agreement.
- Australia’s “Social Security System” referred to in the Totalization Agreement refers to the actual Australia Social Security Program, as distinguished from SG.
- In the U.S Australia tax treaty, Article 18 (2) in the U.S./Australia Tax Treaty refers to Australia (or U.S.) social security and other public pensions.
- Only Australia can tax the public social security or public pension, and vice versa for the U.S.
- The Superannuation is not the Social Security referred to in 18(2) of the Tax Treaty, and Superannuation has not been defined as a Public Pension.
- Taking an 8833 Tax Treaty Position based on the Australian Superannuation as Social Security instead of Pension may be a risky proposition.
Foreign Pension Tax Treaty Positions
This analysis is not to deter a Taxpayer from taking a Tax Treaty position that Australia Superannuation could qualify as Superannuation if they want to. It is more that the Taxpayer should carefully consider and acknowledge the risk.
Especially because it seems many individuals who take this position seem to want to undo the position later down the line — especially in light of previous issued rulings by the IRS on how Superannuation income is taxed.
In addition, each year the Taxpayer takes the position is another year the taxpayer may be subject to audit in the future.
Therefore, if a taxpayer wants to undo the treaty position, it is better they do it sooner vs. later.
U.S. Tax on Super Contributions vs. Growth as Pension
How are contributions and growth of superannuation taxed?
Contributions to Superannuation do not receive the same tax deferred treatment outright as it would under other treaties, such as the UK Treaty, and are presumably taxable.
That is because the treaty does not per se eliminate it as it does in the UK Tax Treaty (subject to limitations).
While the Pension is growing in a retirement fund with a treaty country, the treaty should protect the growth, since the pension is not being “paid to an individual” as the language provides in the Tax Treaty.
Form 3520/Form 3520-A
Probably not (see below).
Is a Superannuation a Trust?
By definition, it is a Trust.
At the most basic technical level:
- Grantor is the Company
- Beneficiary is the Employee
- Trustee: Is the Super Company
Is the Superannuation the Type of Trust Reported on 3520?
Generally, our position is no.
In reviewing the Form 3520-A instructions, it provides the following:
“An exception to filing is 402(b). This code section refers to Employees Trust.”
While the Superannuation does not squarely fall into 402(b), the spirit of the superannuation does – that is to exempt “employment trusts” from reporting.
Since a Superannuation starts with employment, a reasonable position can be made that a Super (and other foreign employment trusts) would be exempted from 3520 reporting.
Still Inclined to Report a Form 3520-A?
We get it, you hate risk — right?
If you are still inclined to report on Form 3520/3520-A, you may be exempted under Rev-Procedure 2020-17, which we have summarized for you in a separate article.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.