US Citizen and The Self Managed Superfund
Published on December 11, 2024
Seth Hertz, a tax professional with 35 years of experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia.
*30-minutes US$437.
Table of Contents
How are self-managed super funds (SMSFs) taxed for US citizens in Australia?
The SMSF differs from a standard retail super fund (often set up by employers) as an SMSF is managed directly by the individual (acting as a trustee).
In most cases, a retail super fund is easier to handle from a tax perspective because you don’t have direct control over the funds and an employer often makes most of the contributions.
With these employer-sponsored funds, if you’re reporting your salary to the IRS and paying Australian tax on it, the higher tax rates in Australia usually mean there’s enough foreign tax credit to offset any US tax liability on the additional income from the employer superannuation contributions.
On the other hand, an SMSF has more complicated US reporting rules because it’s nearly always considered a “foreign grantor trust” by the IRS.
Why?
Mainly because typically you control the contributions and the management of the fund, meaning it’s essentially your own assets in a trust. That ownership triggers specific reporting rules that usually include filing US trust forms, reporting fund income, and listing the assets each year.
What if I haven’t been reporting my super for years?
This is a common scenario.
Many people don’t realize they need to report their super to the IRS, especially if they’ve been in Australia for years and only recently learned about US reporting rules for expats. If you’ve gone years without reporting your super, catching up can be a bit difficult, particularly if you consider back-filing multiple years of tax returns.
Some people choose to only report from the current year onward, though this can come with risks. The IRS could question why earlier years weren’t reported, especially if there were significant contributions or rollovers in those years.
It’s a balancing act, as catching up on multiple years of filings can be expensive and expose you to additional inquiries, but it’s often easier to manage ongoing compliance if you report from year to year.
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What happens if I roll over an SMSF and don’t report it?
Let’s say you rolled over a retail superannuation fund into your SMSF in 2023. The IRS sees this differently than Australia does.
While it might seem like a simple transfer, the IRS likely would interpret it as if you’ve taken a distribution out of the retail fund and then recontributed it. This can cause unintended tax consequences.
If you weren’t reporting your super to the IRS up until that point, a rollover can result in the unreported income being treated as a taxable distribution in the US.
Not to mention, the penalties for late filings on trust forms can be steep—starting at US$10,000 or more.
What’s the “Ideal Scenario” when reporting my super?
In an ideal situation, you’re reporting your SMSF each year to the IRS, even if there’s no extra US tax owed because of Australian taxes you’re already paying. If you report contributions and fund earnings annually, it can make a big difference.
When both contributions and earnings from your SMSF are included on your US return each year, you’re creating a record that makes it easier to avoid tax surprises when you start making withdrawals during your retirement.
