U.S. Tax on Australian Superannuation Funds

Foreign Nationals & Expats

Houston Tax Attorney

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U.S. Tax on Australian Superannuation Funds

An Australian superannuation fund is a partly compulsory pension program put in place by the Government of Australia. The employer contribution rate has been 9.5% since 1 July 2014, and as of 2015, was planned to increase gradually from 2021 to 12% in 2025.

An individual can withdraw funds out of a superannuation fund when the person meets one of the conditions of release, such as retirement, terminal medical condition, or permanent incapacity.

U.S. taxation of these plans can be confusing.

Classification of Australian supers for U.S. tax purposes

An Australian superannuation is a hybrid plan that the U.S. doesn’t have a parallel. It has characteristics of both a social security program and a private pension.

Contributions to Australian superannuation funds are treated as social security contributions in the U.S-Australia totalization agreement.

However, unlike a government social security program, an Australian super is not mandatory upon the employee to contribute.  Moreover, it’s not a public fund; it’s privatized.

Unfortunately, the IRS has not provided much guidance on this hybrid plan. Most practitioners treat them as private pensions.

We’ve heard about practitioners who take the position that they’re social security funds and completely exclude super earnings and distributions from U.S. taxation relying on Article 18 the U.S.-Australian income tax treaty:

Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

And Article 1 section 3 excepts the Savings Clause from Article 18, which otherwise would’ve subjected social security plans to U.S. tax.

To take this treaty position on Australian supers is almost certainly incorrect because Australian superannuation funds are not social security or public pensions:

  • Australia has a system of social welfare payments provided by the Government of Australia. Superannuation funds are privately managed and are not paid directly by the Government of Australia, although it could be argued that Australian employers are acting as agents of the Government of Australia. Note that in Article 18 it specifically states that the payment must be “paid by one of the Contracting States.”
  • The IRS has provided guidance on the tax treatment of similar funds such as the Singapore Central Provident Fund, which the IRS treats as a nonexempt employees’ trust.
[W]e have concluded that the Fund is a nonexempt employees’ trust described in § 402(b). It appears that contributions to the Fund generally are made as a uniform percentage of salary for the vast majority of each employer’s employees.

  • In a 2005 private letter ruling, the IRS concluded that “Under the Treaty, the payment to Taxpayer from an Australian superannuation fund is subject to U.S. tax.”

Is the growth in a superannuation taxable in the U.S.?

It depends on the plan and whether it’s considered a foreign grantor trust or an employees trust.

(1) Foreign grantor trust

A foreign grantor trust arises when more than 50% of the contributions to the fund were made by the individual. And if so, a portion attributable to the after-tax contributions would be reported on Form 3520 as a grantor trust. The earnings inside the funds would be taxed concurrently. Self-managed super funds are usually considered grantor trusts.

(2) Employees trust

If employer contributions are greater than 50%, the employer is the owner of the entire trust and the plan is considered a non-qualified employee’s trust.

In that case, it must be then determined whether the participant is highly compensated under IRC 410(B). If the participant is not highly compensated, then fund earnings are not subject to tax until distribution under IRC 402(b)(2). For highly compensated employees, the increase in the value of the plan is included as taxable income annually.

Section 414(q) defines highly compensated employees as one who:

(A) was a 5-percent owner at any time during the year or the preceding year, or

(B)for the preceding year—
(i) had compensation from the employer in excess of $80,000, and
(ii) if the employer elects the application of this clause for such preceding year, was in the top-paid group of employees for such preceding year.
The Secretary shall adjust the $80,000 amount under subparagraph (B) at the same time and in the same manner as under section 415(d), except that the base period shall be the calendar quarter ending September 30, 1996.

How are Australian supers taxed on distributions in the U.S.?

Upon distribution, the funds are taxable in the U.S. to the extent that the distributions exceed basis.

The basis in a super are amounts that were previously included in taxable income. This would include funds contributed by the employee but would not include fund-level taxes paid.

Required international information reporting forms

If the fund is a grantor trust, it’ll require Form 3520, 3520-A, Form 8621, FBAR, and Form 8938. As a non-grantor trust, only Form 8938 and FBAR are required.

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