Taxation of Australian Superannuation Funds in the US

U.S. Tax of Australian Superannuation Funds: The United States Government has not officially classified Australian Superannuation for U.S. tax purposes. Therefore, exactly how the IRS taxes contributions, growth, distributions, and reporting is still up for debate. With that said, there are some general accepted positions on how the U.S. Taxation of Australian Superannuation Funds is treated.

In general, U.S. persons who own an Australian Super(s) may have both a U.S. tax & reporting requirement for their super funds.

We have developed a detailed summary on the potential tax treatment consequences of a U.S. Superannuation for U.S. Persons.

For those of you seeking a condensed version, we have that available as well.

We have separate articles for Australian Superannuation on the following:

Prefer a Short Bullet-Point Summary?

We also prepared a summary of the key points that may be easier to digest.

What is Superannuation?

The superannuation fund scheme was developed by the Australian government, as a form of retirement & pension.  In general, the Super is a foreign retirement fund comparable to other foreign retirement funds, such as a Singaporean CPF or Hong Kong MPF.

While the U.S and Australia have entered into a bilateral tax treaty, it is silent on the issue of Superannuation.

When it comes to U.S. Taxation of Australian Superannuation Funds, the analysis has four (4) main components to it:

  • Contributions
  • Growth
  • Distributions
  • Reporting (FBAR & FATCA)

For taxation purposes, the superannuation is most likely classified as a retirement fund and not social security in the U.S., although an argument can be made that it takes on some characteristics of social security.

While the Superannuation is comparable to both social security and pension — it is much more comparable to pension. 

Moreover, Australia has its own social security.

Therefore, while the U.S. Taxation of Australian Superannuation Funds and classification is in flux, the safest method would be to treat a Super as a retirement fund.

US Taxation of Australian Superannuation

US Taxation of Australian Superannuation

SSA Classification of Super as Privatized Social Security

Just because the SSA (Social Security Administration) refers to super as “privatized social security” is not conclusive for IRS 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.

*Since there is a tax treaty between the U.S. and Australia, 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.

Is Superannuation Reported on a U.S. Tax Return?

Yes, you include an Australian Super on your tax return.

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

Are Employer Contributions Taxed?

When it comes to US Taxation of Australian Superannuation Funds, a key component is how contributions are 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.

Presuming that the Super is a pension instead of Social Security, then unlike the US/UK Tax Treaty for example, 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. Thus, contributions made by the AU employer on behalf of a US Person into a Super is probably taxable (absent an 8833 treaty position, if applicable).

Undistributed Gains 

The big question will be how are non-distributed gains in your superannuation fund taxed in the United States.

The general proposition is that the growth is not taxable, unless distributions are being taken, or 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

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.

Are Withdrawals 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 Withdrawals 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.

Reporting on a Tax Return to the IRS

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. 

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.

Is it Treated as Foreign Grantor Trust (Form 3520)?

The general position that the Super is an employment 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 and possible 3520-A exemption under Rev.Proc. 2020-17.

Is it Treated as a Form 8621 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.

Is it Reported on Form 8938?

Yes, an Australian Superannuation Fund would qualify as a FATCA Form 8938 Foreign Financial Asset.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and Australian Superannuation.

Contact our firm today for assistance with getting compliant.