Trying to understand and comply with the different income tax rules is already complex for an American expat. Not only do they need to understand the laws that apply in the country they are residing in, but they also need to know how it applies and relates to the United States Tax Code. This issue is especially true when it comes to pensions and retirement plans, such as Australian superannuation. Australian Superannuation is complicated in itself, but you also need to know how to report it and how the US/Australia tax treaty applies to it.
We break down the basics for you below, but if you have any specific issues or questions, it’s always best to contact an expat tax professional.
Whether you work full-time, part-time, or on a casual basis, you are eligible for the ‘super guarantee’. The super guarantee is a compulsory payment made by your employer into your chosen superannuation fund. These are pre-tax contributions similar to a 401(k).
Employers are required to pay 10.5% of an employee’s ordinary time earnings whenever the employee is over 18 years old. Ordinary time earnings include not only the gross amount that you would earn for your base hours worked, but also things like annual leave loading, bonuses, allowances, and commissions.
The IRS often considers this super guarantee to be equivalent to Social Security, so it’s not always included in your income on your US tax return. Though making additional, voluntary contributions to your superannuation fund will be included in your gross wages.
There are other non-concessional contributions that both Australians and US citizens living in Australia can make into their super fund, but for the most part, the contributions come largely from employment income.
In its most basic form, a totalization agreement is implemented to prevent taxpayers from being required to make contributions to two separate social security systems. Australia is one of 25 countries that holds a totalization agreement with the United States, and it specifically covers the Superannuation Guarantee (SG) that is made by employers.
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How the US/Australia Tax Treaty Applies
While making contributions to your super fund is a great low-tax investment and a low-risk way to prepare for retirement, superannuation is not covered under the US-Australia tax treaty. Issues can arise when your own voluntary contributions (such as salary sacrifice and after-tax contributions) are more than the compulsory super paid by your employer. This will essentially make your super fund a ‘Foreign Grantor Trust’ in the eyes of the IRS and will be treated as such on your US tax return. This makes any contributions taxable at the personal tax rate, canceling out any advantages that the Australian super system may provide.
There is also no direct reference in the US-Australia tax treaty to superannuation growth and the income earned from this growth. This can get a little complicated from a US tax perspective, and different tax professionals may hold different opinions about it. The general consensus is that the growth is not taxable until it is distributed, though even the IRS may take a different position as, technically, the superannuation is not a qualified fund.
If you were only on a temporary visa and you permanently leave Australia, you will be able to apply to have your superannuation paid to you as a departing Australia superannuation payment (DASP). If you leave Australia and your visa has ceased to be in effect, and you have failed to claim your DASP, your super fund will transfer your super money to the Australian Tax Office (ATO) as unclaimed super money. The tax rate on this payment is up to 65% of the withdrawn value.
How does it affect my US tax return?
The taxation of superannuation is a gray area, like most foreign pension plans. The IRS doesn’t have the inclination to review all foreign pension plans to provide clear tax guidance, and as such, you may find varying opinions on how this income should be taxed on your US tax return.
Most of the time, Australian superannuation is treated either as a grantor trust or an employee benefits trust. How your superannuation is taxed depends on which one of those two options the IRS considers your fund to be.
My superannuation is considered an employee benefits trust:
If your superannuation is considered an employee benefits trust, both employer and employee contributions are taxable from the perspective of the IRS. However, the growth on the super fund is only taxed if you are considered highly compensated and if it’s a discriminatory plan.
These superannuation funds are reported directly on Form 1040. Ownership must also be reported on FATCA Form 8938 (if you meet the threshold requirements). You may also need to report your super on the FBAR.
The contributions taxed on your US tax return become your US basis in the fund. This means that it will not be taxable at the time of distribution.
My superannuation is considered a foreign grantor trust:
If your superannuation is considered a foreign grantor trust, all contributions and all growth income will be taxed in the US. You’ll use Form 3520 and 3520A to report ownership and income for all years you have the trust. Additionally, your superannuation must be reported on the FBAR.
How do I know which one I have?
The determining factor here is control. If you, the employee, have made more contributions than your employee, that is a sign of control, and your fund will most likely be considered a foreign grantor trust. It also lies in the question of the kind of control you have over the investment decisions of your super fund, even if you do not exercise that control. But even considering these factors, the IRS has no definite rulings or guidelines for what constitutes control for superannuation, and it’s not always clear.
Even the most basic tax returns are complicated when you’re an expat, and dealing with your retirement fund or superannuation is just another thing to consider when you’re filing your return each year. To get the most out of your superannuation and avoid any mix-ups or double taxation, specialist tax advice is absolutely recommended in these situations, particularly if you have a self-managed superannuation fund (SMSF).