What Is Superannuation?
Published on March 11, 2024
by Seth Hertz
Seth Hertz, a tax professional with 33 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.
Table of Contents
How do short-term US expats deal with superannuation in Australia?
Short-term US expats in Australia often face mandatory superannuation contributions from their employers, with limited exemptions available based on specific employment scenarios. Usually, it’s with a professional’s support that they can optimize their superannuation strategy while complying with both Australian and US tax laws.
What is the superannuation guarantee program?
Superannuation in Australia is a compulsory scheme, contrasting with the voluntary nature of 401k contributions in the US. This system ensures that all employees, including US expats, contribute to their retirement savings.
Typically, a fixed percentage of an employee’s earnings is contributed to the superannuation fund by the employer. This percentage is set by the Australian government and may vary over time. It is currently set at 11% for the 2023/2024 Australian tax year.
In addition to employee contributions, Australian employers are also required to contribute to their employees’ superannuation funds, further adding to retirement savings.
Are there any exemptions to superannuation contributions?
While most employers must contribute to superannuation, there are limited instances where exemptions apply. High-level executives (C-suite) may sometimes be exempt, but this is rare and specific to individual circumstances.
Exemption Scenarios
- C-Suite Executives: High-level executives, such as CEOs and CFOs, may qualify for exemptions under certain conditions. This is often due to the nature of their employment contracts and international work arrangements.
- Income Thresholds: In some cases, exemptions might be linked to income thresholds, where some low-earning individuals do not generate a requirement for their employer to make a superannuation guarantee contribution on their behalf.
- US Payroll and FICA: Another exemption scenario involves US expats who remain on US payroll while in Australia. In such cases, if they are still subject to US FICA (Social Security and Medicare) taxes, their employer can obtain a certificate of coverage from the Social Security Administration. This certificate can exempt the employer from making superannuation contributions in Australia.
Can I withdraw my superannuation on departure?
It depends. Withdrawing superannuation funds upon leaving Australia depends on the type of visa held. If on a temporary visa, individuals may access their superannuation through the Departing Australia Superannuation Payment (DASP). However, if they have transitioned to a permanent visa or citizenship, early withdrawal is typically not possible, except under specific circumstances like medical emergencies.
I want to know more about US taxes abroad
What happens when I withdraw my superannuation before retirement?
There are two things to take note of:
- High Withholding Tax: Withdrawing superannuation as a DASP incurs a steep withholding tax of 35%, significantly reducing the net amount received. This high tax rate reflects Australia’s intent to encourage superannuation funds to be used for retirement.
- US Tax Considerations: Additionally, US expats need to consider the US tax implications of receiving a DASP. This includes potential US taxation and the requirement to file additional informational forms with the IRS, depending on the individual’s tax situation.
Are there any strategies short-term expats in Australia can take regarding superannuation?
- Seeking Exemptions: For those expecting to stay in Australia for only a short period, such as one or two years, exploring the possibility of obtaining an exemption from employer contributions through a certificate of coverage is advisable. This approach can prevent funds from being locked in a superannuation account.
- Considering Permanent Residency: Alternatively, pursuing permanent residency in Australia might be a strategic choice. While this means superannuation cannot be accessed immediately, it ensures the funds are preserved for retirement, aligning with the original purpose of superannuation.
- Get Professional Advice: Given the complexities, US expats are advised to seek professional guidance to understand their superannuation obligations and potential exemptions fully.
What happens when I roll my superannuation funds to another superannuation account?
When you roll your superannuation funds to another superannuation account in Australia, it’s typically treated as a transfer, not a taxable event under Australian law. However, for US expats, this action may have complex US tax implications, potentially being viewed as a distribution and a contribution, which could affect your tax liabilities.
Here are some key takeaways from the article ahead:
- Proactive Planning: US expats should engage in proactive planning and consultation with tax professionals before making decisions regarding their superannuation funds.
- Understand Tax Impacts: Being aware of the US tax implications of superannuation contributions, distributions, and rollovers is essential for effective financial management.
- Seek Professional Advice: Consulting with financial planners and tax advisors can help navigate the complexities of superannuation for US citizens in Australia, ensuring compliance and optimal financial outcomes.
What should I know about superannuation as a US expat?
In Australia, superannuation contributions are mandatory, unlike the voluntary 401k contributions in the US. This can lead to complications for US citizens who only plan to stay in Australia for a short period.
Additionally, there are very few scenarios where US expats can be exempted from superannuation contributions. High-level executives might qualify for exemptions, but these are rare and specific to individual circumstances.
- US expats remaining on US payroll and subject to US FICA taxes may be able to get their employer to apply for an exemption from making superannuation contributions in Australia by obtaining a certificate of coverage.
What challenges do I face if I self-manage my super funds or have additional super accounts?
- Tax Implications: Opening additional super accounts or self-managed super funds will often create filing complexities for US citizens due to the complex US tax treatment of these funds.
- US Tax Perspective: The US does not recognize Australian superannuation funds as qualified retirement vehicles, leading to potential tax liabilities on contributions and earnings.
- Reporting Requirements: Employer contributions to superannuation funds are considered income for US tax purposes and must be reported accordingly. Additionally, informational forms like FBAR and Form 8938 may be required.
How do I manage my superannuation funds?
- Employee Benefit Trust: If the majority of contributions to a superannuation fund come from an employer, the US typically views it as an employee benefit trust, simplifying US tax reporting requirements.
- Grantor Trust Considerations: If individual contributions exceed employer contributions, the fund may be treated as a grantor trust, necessitating complex US tax filings and consideration of individual investments within the fund.
- Reporting Requirements: Both types of trusts necessitate specific reporting on US tax returns, with grantor trusts often requiring more detailed disclosures.
- Tax Planning: Understanding the tax implications of your superannuation contributions and the fund’s structure is crucial for effective tax planning and compliance.
- Seeking Professional Advice: Consulting with a tax professional knowledgeable in both US and Australian tax laws is essential to navigate these complexities and ensure proper management of your superannuation funds.
Can I transfer my funds between superannuation accounts?
Yes, you can. However, transferring funds between superannuation accounts can have significant US tax implications, as it may be treated as two separate transactions—a distribution and a contribution.
When funds are moved, the US may treat the withdrawal from one superannuation fund account as a taxable distribution and the deposit into another as a new contribution, each with distinct tax implications. Understanding this distinction is crucial, as it can affect your overall tax liability and reporting requirements, making it important to consider the potential tax consequences before initiating such transfers.
Here’s what you can do before considering moving your funds:
- Review Tax Implications: Understand how tax applies to rolled-over amounts to another complying super fund.
- Consolidate Super Funds Efficiently: Be aware of whether consolidation can lead to the creation of a grantor trust.
How can the Streamlined Tax Amnesty Program help US citizens in Australia?
The Streamlined Tax Amnesty Program, also known as the Streamlined Foreign Offshore Procedure, offers US citizens in Australia a way to catch up on overdue tax filings without facing penalties.
It allows them to file up to three years of back taxes and six years of FBAR (Foreign Bank and Financial Accounts Reports), providing relief from potential fines for non-compliance. This program is particularly beneficial for those who were unaware of their US tax obligations while living abroad.
However, despite its growing recognition, many US expats are still unaware of the program and their need to file US tax returns. Additionally, eligibility for the program can be impacted by prior knowledge of US tax obligations.
What’s more is that for US citizens with Australian companies (PTY Limited), the program potentially involves more than just a three-year catch-up. It requires going back further in time, especially if the company existed and was profitable in 2017.
What is GILTI and Transition Tax?
GILTI (Global Intangible Low-Taxed Income) and the Transition Tax are significant areas of US tax law affecting American expats with foreign companies treated as Controlled Foreign Corporations (CFCs).
What is GILTI?
Introduced in the Tax Cuts and Jobs Act of 2017, GILTI taxes US shareholders of CFCs on their share of a foreign company’s net income, exceeding a set return on tangible assets. This tax applies even if the income is not distributed, impacting US expats with stakes in profitable Australian companies.
However, it’s important to note that US expats may be able to offset some of the GILTI tax burden using foreign tax credits.
What is Transition Tax?
The Transition Tax, also part of the 2017 tax reform, targets undistributed, accumulated earnings of foreign companies owned by US taxpayers. It’s a one-time tax intended to transition the US to a territorial tax system.
While it’s often associated with large corporations, the Transition Tax also affects small business owners and individual shareholders, potentially leading to significant tax liabilities.
Understanding and planning for GILTI and Transition Tax liabilities are crucial for US expats involved in CFCs, this is why seeking professional help is important, as they can provide advice for necessary careful tax planning and potential restructuring of business holdings.
What should I know about filing for the Streamlined Program?
- Extended Filing Period: For US citizens owning CFCs, the program requires filing Form 5471 for each year the company existed since 2017. This extended filing period ensures compliance with US tax laws regarding foreign business ownership.
- Transition Tax Calculation: Participants must calculate and report the Transition Tax on their 2017 tax return. This involves a detailed analysis of the foreign company’s earnings and profits up to the end of 2017.
- Corporate vs. Individual Filings: The program distinguishes between corporate and individual tax filings. While individual returns cover three years, corporate filings on Form 5471 may extend back further, increasing the compliance burden.
- Comprehensive Reporting: The program requires comprehensive reporting of foreign assets, income, and taxes paid, including detailed information about the foreign company’s operations, ownership structure, and financial statements.
- Professional Assistance: Given the complexity of these requirements, seeking professional tax advice is highly recommended to ensure accurate filings and to navigate the intricacies of US tax law as it applies to foreign business ownership.
What should I do as a US business owner in Australia?
- Stay Informed on Tax Obligations: Regularly update your knowledge of both US and Australian tax regulations, especially those affecting foreign business ownership, such as GILTI and Transition Tax.
- Maintain Accurate Records: Keep detailed and accurate financial records for your business. This includes tracking all income, expenses, and investments, which are crucial for tax reporting purposes.
- Seek Professional Tax Advice: Consult with tax professionals who have expertise in US and Australian tax laws. They can guide tax planning, compliance, and strategies to minimize tax liabilities.
- Consider Streamlined Tax Amnesty Program: If you have fallen behind on US tax filings, explore the Streamlined Tax Amnesty Program. It can help you become compliant without facing penalties, but requires understanding its eligibility criteria and filing requirements.
- Plan for Dual Taxation: Develop strategies to manage the impact of dual taxation, leveraging mechanisms like foreign tax credits and understanding the tax treaty benefits between the US and Australia.
- Regular Compliance Checks: Periodically review your tax compliance status, especially about changes in tax laws or your business operations.
