The Superannuation Tax Treatment Under Australia/US Treaty

The Superannuation Tax Treatment Under Australia/US Treaty

Australian Superannuation Tax Treaty Treatment 

While the United States and Australia first entered into a bilateral tax treaty back in 1982/1983 — which was updated in part by the 2001 protocol — it is still relatively bear on matters involving superannuation pension/retirement. Since the inception of the US/Australia tax treaty, superannuation has moved to the forefront of Australian pension and retirement schemes. In addition, with the globalization of the U.S. economy, it is very common for an Australian citizen who is now either a dual citizen of the United States or a Lawful Permanent Resident to have a sizable Australian superannuation. Unfortunately, unlike other more robust tax treaties such as the US/UK tax treaty – the overall tax implications for Australian superannuation have not been effectively laid out by the US government. Let’s walk through the basics of how Australian superannuation would generally be treated under the US-Australia tax treaty.

Is Superannuation Pension, Social Security, or a Hybrid?

In general, Australian superannuation most closely resembles pension or retirement plans. For example, here is an individualized account for each person who has superannuation. The same individual may have multiple superannuation plans depending on how many employers they have had. There is a set amount of money within the superannuation per person – and under certain circumstances, the full amount or a large portion of the superannuation can be cashed out. This is not like U.S. Social Security in which a person reaches an age, and then receives a certain amount of money each year depending on how much money they have contributed. US taxpayers do not receive a lump sum payment and do not have multiple Social Security pots — even if they have had multiple employers.  Some taxpayers may take the position that it is privatized Social Security based on verbiage used by the US government and the fact that there is a totalization agreement between the United States and Australia, but there is concern that the US government would disagree with that position so that is something to consider before going that route—since unwinding the position can be costly.

Article 18 Pension 

There are different ways to analyze a Tax Treaty, but since we are focusing specifically on the pension issue, a good place to start will be article 18 which specifically identifies pensions.

      • Subject to the provisions of Article 19 (Governmental Remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

      • 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.

      • Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that State.

      • The term “pensions and other similar remuneration”, as used in this Article, means periodic payments made by reason of retirement or death, in consideration for services rendered, or by way of compensation paid after retirement for injuries received in connection with past employment.

      • The term “annuities”, as used in this Article, means stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).

      • Any alimony or other maintenance payments, including payments for the support of a minor child, arising in one of the Contracting States and paid to a resident of the other Contracting State, shall be taxable only in the first-mentioned State.

Summarizing Article 18

Working through the language of Article 18, first, it is important to note that governmental remuneration, which also includes pensions, is exempt from this definition and instead identified under Article 19. Paragraph one provides that a pension paid to someone who is a resident of one of the contracting states in consideration of past employment shall only be taxable in that state. The subsequent paragraphs help clarify the information about pensions and other payments/annuities, but pension generally refers to periodic payments that come as a result of prior employment, death, or injury.

From an initial review of Article 18(1), it would appear that a US citizen who resides in Australia and receives Australian superannuation would only be taxed in Australia on that income. Since Australia does not tax the distributions, the argument would be made that the US citizen would not be taxed on that income.

*While (some) superannuation growth is taxable within the superannuation, we are focusing on distributions and not the taxation of the growth.

Saving Clause, Article 1

      • (3) Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals electing under its domestic law to be taxed as residents of that state, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term “citizen” shall, with respect to United States source income according to United States law relating to United States tax, include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.

Summarizing the Saving Clause

The Saving Clause is a weaselly little clause that basically provides that despite any information contained within the tax Treaty, the United States and Australia each retain the right to tax individuals the same way they would text them had the treaty not been in force. So then expanding on the paragraph above regarding pension—it means that even if a US citizen resides in Australia and earns private superannuation payments, the US reserves the right to still tax that income subject to the worldwide income tax rules. This is despite the fact that Article 18 of the treaty says that only the country in which the person resides should have the right to tax the income.

Saving Clause, Article 1 (4)

      • (4) The provisions of paragraph (3) shall not affect:

        • the benefits conferred by a Contracting State under paragraph (2) of Article 9 (Associated Enterprises), paragraph (2) or (6) of Article 18 (Pensions, Annuities, Alimony and Child Support), Article 22 (Relief from Double Taxation), 23 (Non-Discrimination), 24 (Mutual Agreement Procedure) or paragraph (1) of Article 27 (Miscellaneous); or

        • the benefits conferred by a Contracting State under Article 19 (Governmental Remuneration), 20 (Students) or 26 (Diplomatic and Consular Privileges) upon individuals who are neither citizens of, nor have immigrant status in, that State (in the case of benefits conferred by the United States), or who are not ordinarily resident in that State (in the case of benefits conferred by Australia).

Summarizing the Saving Clause Exception

Article one paragraph four provides exceptions to the saving clause. In other words, the tax treaty provides for how certain income should be treated for tax purposes. Then, the saving clause provides that despite what the treaty says, each country reserves the right to tax income how they would ordinarily tax income as if the tax treaty was not in place. Then, the exceptions to the saving clause provide that despite the saving clause, the following articles within the tax treaty will be treated according to how it was written in the tax treaty.

Notably absent from the savings clause is Article 18 (1). The portion that are exempt that are crucial for citizens would be Social Security (2) (so that a US citizen residing in Australia would not get double taxed on their Social Security and only the United States were tax that income).

Treaty Elections and Planning

Taxpayers who are Australian citizens or previously Australian citizens with sizable superannuation will want to plan properly if they are considering becoming a US person. Sometimes it is better to remain on the E-2, L-1, H-1B or Australia Treaty Visa (E-3) or other work/investment visa and avoid becoming a dual citizen with the United States and/or becoming a Lawful Permanent Resident who then becomes a Long-Term Lawful Permanent Resident and has to deal with the expatriation and exit tax rules.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

About Our International Tax Law Firm (Golding & Golding)

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

Contact our firm today for assistance with getting compliant.