Tax Treatment of Australian Superannuation Funds in US

Tax Treatment of Australian Superannuation Funds in the US: The analysis of U.S. Tax on Australian Superannuation Funds is complex. It is a multi-layered analysis which involves the taxation of Super Contributions, Growth, and Distributions. In addition, there is also the issue of IRS reporting the Superannuation on the FBAR and FATCA Form 8938.

Common questions involve:

  • Whether the growth within the fund (non-distributed) is taxable?
  • Are the contributions and distributions taxed
  • Do I report it on the FBAR, FATCA, or as a Foreign Grantor Trust.

While the IRS has not developed firm reporting guidelines for Supers, the Internal Revenue Service has been aggressively pursuing offshore tax and foreign accounts reporting compliance.

For individuals who have not properly reported the superannuation to the IRS, they may become subject to fines and offshore penalties, such as FBAR Penalties.

These penalties can be avoided or reduced by submitting to one of the FBAR amnesty programs – collective referred to asvoluntary disclosure.” This includes the Streamlined Domestic and Streamlined Foreign Offshore Procedures.

We will summarize the US tax treatment of Australia Superannuation Funds.

What is Australian Superannuation?

The U.S. Taxation of Australian Superannuation works best when approached in small steps.

Australian Superannuation has several U.S. tax components to it. A super is a form of deferred compensation and for many employers and employees in Australia, a compulsory form of retirement. 

Many countries have Superannuation Funds, but the Australian Superannuation 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.”

IRS Tax Treatment of Australian Super

To date, the IRS has not issued definitive memoranda for the tax treatment of Australian Superannuation Funds. For comparison purposes, you may consider how 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).

SSA (Social Security Administration) Tax Classification

The SSA or Social Security Administration has summarized the foreign social security programs worldwide, include the Australian superannuation. But the IRS is not bound by the classification. While the SSA has deemed the Super as a form of privatized social security, they also classified the Singaporean CPF as privatized social security. And, with the CPF, the IRS has determined both the contributions and growth are taxable during the growth or accumulation phase.

In addition, Australia has its own form social security, which is referred to as “Social Assistance.” The Australian social assistance program is different than the U.S. social security system, but still considered social security nonetheless. Therefore, chances are that the income in the superannuation will be treated as foreign retirement.

How Are Supers Classified for U.S. Taxation?

Unlike the U.S. and U.K. tax treaty, which has a very detailed section on retirement and pension, the U.S. and Australia tax treaty does not  specifically refer to the Australian Superannuation tax treatment.

The reasons why most experienced specialists refer to Superannuation income as pension vs. social security as as follows:

– 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.

– 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 Income Growth Inside a Superannuation taxable in the U.S.?

The United States and Australia have a tax treaty. And, generally, foreign retirement growth is not taxed (presuming the retirement is in a qualified fund) until it is distributed. Of course, there are various exceptions, exclusions, and limitations to this rule. But, under most circumstances, the income growth within the superannuation is most likely not taxable.

FBAR Australian Superannuation & FATCA Form 8938

While the specific tax rules involving the United States, IRS and Superannuations are not yet concrete — the FBAR reporting rules are pretty clear. The Super is an account for FBAR purposes (simply because neither the IRS nor FinCEN have excluded the Super from reporting).

Therefore, if the balance in the Superannuation (or aggregate balances of all superannuations and other accounts owned by a filer) exceeds $10,000 — then all the Supers must be reported on the FBAR. If the FBAR is filed late, incomplete, or just not filed at all, there may serious FBAR penalties issued.

These penalties can be reduced and even avoided by applying to one of the FBAR Amnesty programs, before the IRS finds you first.

Additional reporting forms may include:

Less Common Super Tax Treatment Issues

These issued involving superannuations are less common, but equally important:

Superannuation Treatment as a Foreign Grantor Trust

Generally, a Superannuation is not going to be classified as a Foreign Grantor Trust. This is primarily due to the Super being a foreign employment trust, as opposed to a general trust, funded by a non-employer grantor. If the employee ends up depositing too much money into the trust, so that the employee has contributed more than 50% of the funds, the rules may changes – and the super may morph into a Foreign Grantor Trust.

*See new IRS Revenue Procedure 2020-17

Form 8833 (Tax Treaty Position)

Form 8833 is used to take a treaty position. Some practitioners believe that proper Tax Treatment of a Super should be foreign social security, and therefore exempt under the treaty.

A Form 8833 may be used to take this type of tax position.

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