How the Australian superannuation fund impacts tax returns
Superannuation is the Australian version of a pension or retirement plan, wherein your employer puts at least 9.5% of your salary annually into a superannuation account, which you can then access upon your retirement.
These superannuation accounts that are available for American expats living in Australia can be quite difficult to account for on american tax returns and forms, leaving many American expats confused about where they stand.
Why do superannuation accounts sit outside of a standard tax return?
Under FATCA (foreign account tax compliance act), certain US tax payers who hold financial assets outside of the US must report these assets to the IRS on form 8938. However, the majority of superannuation accounts are actually exempt from this reporting from a banking perspective.
A superannuation account is different to a 401K (the US company sponsored retirement plan scheme) because one of the rules in the form 401K for retirement funds states that a retirement fund for US citizens must be created in the US. This means that superannuation funds are technically not tax compliant in the eyes of the IRS.
Does my Superannuation fund meet the requirements of a foreign grantor trust?
If you are unsure as to whether your superfund meets the requirements of a foreign grantor trust, the IRS has set out a list of rules in internal revenue code 671 to 679. These codes look at who has control of your superfund, and who is the owner and how these funds are impacted by this control and ownership. The code that is most commonly met in Australia asks whether you can use your fund to pay for insurance premiums, because a common form of management for these funds in Australia is to use them to pay for life insurance, superfunds will meet this code. Even if you do not personally use your superfund to pay your insurance premiums, because you have the option to, it still passes this code. If your superfund meets even one of the requirements set out in these codes, then it is classified as a foreign grantor trust. This status brings with it US tax filing requirements.
What does a Superannuation fund do?
The purpose of a superannuation fund is to aid in retirement planning. These funds are not held in the name of the recipient, but rather with a fiduciary, and, as this is a third party taking partial or full control of the funds, will make the superannuation fund a foreign trust in the eyes of the IRS.
I want more information about Australian Superannuation
Why doesn’t everyone with a foreign grantor trust have to fill in forms 3520 and 3520-A?
Tax return forms 3520 and 3520-A are forms that must be annually submitted as part of your tax return if you are the owner of a foreign trust. These forms show the transactions and ownership of a foreign trust. The reason that not everyone has to fill in the forms 3520 and 3520-A for their superfund is that there are three types of superfund: a self managed super fund, a retail fund and industry funds. These three fund types give the owner differing levels of control and have different stipulations attached to them.
The IRS can give you grace over your superfund depending on how many superfunds your financial institutions (e.g.: Australian Super) manages, how much control you have over your fund and whether your employer contributes.
If you are in a situation where your employer is contributing to your superfund, your superfund is with a large financial institution and you have little power over your fund (typical of retail funds), then as long as the employee contributions are incidental, meaning less that what your employer contributes, then filing the forms 3520 and 3520-A is not necessary. This is why the majority of Australian expats do not have to fill in the forms 3520 and 3520-A for their foreign trusts, as it is common practice for the employee to not put any money into their superfund and have little to no control over it.
Self Managed Super Funds
Self Managed Super Funds are the type of superfund that typically encounters issues with American taxation. This is because it allows you to trade your superfund on the stock market, explicitly choosing what shares that you wish to buy and in what amounts and even purchase properties with this fund. This does not mean that you can take money out and use it as a standard bank account however as there is still a minimum age requirement, but these actions are designed to grow the wealth in the account. Additionally, self managed superfunds tend to be for families rather than individuals as is typical with other types of superfunds. If you have a self managed super fund then you will have to file the forms 3520 and 3520-A, but you may not actually end up paying more tax to the IRS.
One of the internal revenue codes 671 to 679 talks about a retirement fund that has been set up on your behalf that has been having contributions made into it. This situation is more typical of an industry account and if this applies to you then there is a possibility therefore that you may not have to do the foreign grantor trust filings, even if you breach the rule about incidental payments. However, the proportion of American expats in Australia who actually have an industry fund as opposed to a more standard superannuation fund, such as a retail fund, is very low.
Putting money into a superfund
In Australia, there are two ways that money can be put into a superfund, the first being through the employer and the second being through non-concessional payments, wherein the owner of the trust fund can pay money in randomly, for example if they received an inheritance sum. Along these same lines, if you chose to leave your company, or your employment was terminated you may receive a lump sum payment. Since the tax on these lump sum payments is low, you may choose to place this money into your superfund after tax.
Additionally, the concessional inputs to your superfund by your employer are subject to American income tax, but not Australian. Although you should technically then be paying income tax to the IRS on this, this generally doesn’t happen due to foreign tax credit layovers.
Foreign tax credit layovers
Because expats living in Australia pay so much tax, they end up with what is called a foreign tax credit carry over. This is essentially money off of their American taxes, and if not all of it is used up, it can build up for 10 years until it expires. This means that there is a reduction in the amount of tax paid to the american IRS.
You can use these foreign tax credits that build up annually on your superannuation fund to avoid being double taxed, which is why in practice most expats will not be double taxed on these funds.
What if I haven’t been filing US tax returns?
If you haven’t been filing the correct US tax returns as pertaining to your superannuation fund, the IRS may not have penalised you as they do not currently know about the existence of your fund. However, if you were to take money out of the fund upon your retirement, anything that you take out would be subject to taxation, including all of the years that you have not been paying tax. This means that it is very important to ensure that you are correctly paying American tax as it ensures that you will not receive any unexpected fees on the money that you have saved. You can rectify this using the Streamlined Tax Amnesty Fund, which allows you to submit tax returns for up to 10 years ago using tax credits.
What happens if I don’t do this filing
Although FATCA may exclude superannuation funds from certain filing responsibilities, this doesn’t mean that you do not have to file as an individual. For example, you would still have to put it on your personal tax return and complete the above forms. If you do not do this then you would be found to have incorrectly filed your taxes and so would be subject to penalties. These start at a minimum of $10,000 for each filing. They can also take up to 35% of the value of your tax fund.
How can I get professional help?
Because the protocol covering tax returns for American expats is so complex, it is recommended that you consult a professional before you file your taxes. This is because it can be difficult to know exactly which laws apply to you and what you need to submit. There are large financial penalties if you submit your information to the IRS incorrectly, and professionals can help you at every step of the way, so contact a professional before filing your taxes.
Contact us at Expat US Tax for more information.