Do I have to report it as a Foreign Trust on IRS Forms 3520 and 3520-A?
Americans living and working in Australia typically have contributions made to their Super accounts by their employees. However, there may be some confusion about whether they must declare these to the IRS.
These revenue procedures can be quite annoying for most people, as many of these foreign trust filings are complicated and expensive. Obviously, for American citizens working around the world, there are various retirement funds and the IRS needs to know about them.
With over 17 years of experience in dealing with U.S. taxes for expats, Andrew explains how you must report Australian Superannuation to the IRS.
Australian Superannuation account holders usually don’t pay tax or may be liable for a very small amount. This is because they have already been taxed under Australian tax laws, but that doesn’t mean that they won’t ever need to file an IRS tax return disclosing their Super accounts.
Superfunds are compulsory for anyone employed in Australia
By law, every employer in Australia pays 9.5% Superannuation Guarantee (SG) contributions for their employees. There are three superfund arrangements in Australia:
- Self Managed Super Fund (SMSF).
- Retail Super Fund.
- Industry Super Fund.
An SMSF is when employees can opt to manage their own superannuation. The IRS will take into consideration employer contributions, how many members are in the superfund, and the type of control that you can exert over your fund.
I want more information about Australian Superannuation
Background on Superannuation Funds
Super funds are usually money saved toward retirement and they are usually not in your name but are held by fiduciaries as trusts. That is one reason why the IRS considers them as foreign trust accounts.
Retirement plans (401K) created in the U.S. are treated differently to those coming from Australia because, in Australia, many people opt to use their Super fund to pay their life insurance premiums, and even if they don’t, they have the option to. This option alone crosses the line within the IRS tax laws or codes (Internal Revenue Codes section 671-679) immediately making them liable for tax filing in the U.S.
Who qualifies for a 402 B Exemption?
According to the IRS Revenue code 402, if funds going into your Super account are paid by your employer, you are one of a large number of members, and you have no control of the flows of money or the investment returns then you don’t have to file the foreign grantor trust reporting.
Also, if the employee contributions are less than the employer, then they usually meet the exemption for the Foreign Grantor Trust filings too.
Most people in Australia don’t usually put their own money into their Super funds. They rely on their employer contributions, so they don’t breach the 50% “individual contribution” threshold that requires Foreign Grantor Trust Filings.
For those that are investing in their Super accounts, it’s important that they keep their personal contributions to a maximum of 50% of the overall contribution, otherwise, they can expect to have to file Foreign Trust Returns.
Which Americans have to file Foreign Grantor Trust to the IRS?
On the other hand, people who have SMSFs will have to report them because through these they can buy shares, property, etc. Members of these funds can easily breach the conditions that make other funds exempt and they can also draw money from them to pay their insurance premiums. Within these Super funds, the members (which can be up to 4) are also trustees of the fund and they can tailor the funds to meet their needs.
Unfortunately, to meet compliance the paperwork for the IRS is heavy going, and most will have a zero-tax liability, but they must be submitted.
Foreign trust reporting should be done by an expert because even though there may be no tax liability if they are filed incorrectly or late, mistakes can be expensive to correct.
IRS 402-B Contribution Limitations
The IRS limits contributions to retirement funds to US$50,000 per year OR a lifetime contribution limit of $1 million.
If your retirement account allows for more than that, you can’t count on the 402-B exemption from Foreign Trust filing.
Australians have two types of contributions they can make into their funds:
- Concessional – that is the employer contribution of 9.5%.
- Non-concessional – which is after-tax money and the amount here will depend if someone is putting in one year’s contribution or more. In this case, they may fail the limit as set by the IRS.
In the event of termination payment, Australians pay less tax on this money (about 15%) and it is often a good proposition to put the money into a Super fund. This is because the money has been taxed before going into the fund, any income on it will be taxed, but when it is withdrawn it is tax-free.
Are there limits in what contributions can be made to Super funds?
Australian Super funds don’t qualify for a tax deduction in the US like they do in Australia. However, Americans with Australian contributions are often worried that they will pay tax in the US because these contributions are taxable there. Even though the amounts are subject to tax by the IRS, because income tax is so high in Australia, there is generally always enough leftover (known as a foreign tax credit) and these are good for 10 years. These Foreign Tax Credits, used to best advantage can be used up to cover these taxes on an annual basis.
What happens if no IRS filings have been made for years and someone is about to retire?
According to Andrew, Superannuation money will be liable for tax so he recommends that people use the current tax amnesty to catch up and get tax credits before they reach what is called Superannuation Pension Phase in Australia. If they do without having filed, they may find that they have a tax liability in the U.S.
Superannuation tax is mandatory, but it also helps you create the basis that allows you to get money back from your taxes.
Penalties for missed filings are quite steep and can be $10,00 per filing or a penalty of between 5 and 35 % of the value of the fund.
What happens where there is a one-off big payment into a fund, but the rest are employer contributions?
According to IRS regulations, the trust can then be split into two sections, the one where reporting must be done and one where it doesn’t have to be. And often, a one-off contribution may never breach 50% and tax won’t be owed.
Conclusion: Who is liable for reporting on 3520 and 3520-A?
- If you have SMSFs you are most likely liable for the extra reporting.
- Most people who are in a retail fund will be liable if they are contributing more than 50% of the money going into their fund.
- Industry funds, which are less common to typical expats, do have some options even if they are putting in more than half the funds.
An expert will look at a Super fund statement to ascertain:
- Employer contributions.
- Salary sacrifice contributions.
- Personal contributions.
These are separated on the statement as taxable and non-taxable payments and from these, an expert will be able to advise you on how to file to the IRS.
It is always easier to ensure that breaches are not made sooner rather than later, and according to Andrew, it is always more difficult to correct things later.
Contact us at Expat US Tax for more information.