Superannuation

There is much uncertainty in the “correct” way to include superannuation on a US tax return. This uncertainty affects not only US citizens and green-card holders living in Australia, but also any Australian citizen or permanent resident currently living in the US who accumulated Superannuation when resident in Australia. The current Australia/US Tax Treaty does not even mention superannuation. More recent US Tax Treaties contain provisions that respect the tax deferral of “foreign” retirement plans. See, for example, Articles 17 and 18 of the 2016 US Model Tax Treaty.

There are two main theories currently used in the reporting of Superannuation on a US tax return:

The most favourable theory to Australian Residents is that Superannuation is equivalent to US Social Security, and therefore excluded from US taxation under Article 18 paragraph 2 of the tax treaty. Even among professionals who espouse this theory, there is uncertainty as to whether the treaty exemption covers only the Superannuation Guarantee contributions (the 9.5% contributions mandated by Australian law) and associated earnings or whether additional concessional or non-concessional contributions are also included.

The second theory, used by the majority of US tax professionals, is that Superannuation is a non-qualified retirement plan under the US tax code. This can generate a number of different results depending on the nature of the superannuation fund receiving the contributions and its connection to the employer. For funds that meet the qualifications of an employee’s trust under 26 USC 402(b) the likely outcome is that contributions to the fund are taxable in the US as they go in, earnings inside the fund are tax-deferred, and withdrawals are taxable as they come out with a deduction for an allocation of any contributions previously taxed. However, there are special fund eligibility requirements for highly compensated individuals, which will cause many higher income individuals to be required to include not only contributions in their current US taxable income, but also the earnings inside their superannuation fund. Furthermore, if personal contributions exceed employer contributions, then the entire balance is treated as a foreign grantor-trust – requiring all income to be taxed currently on the US return in addition to several extra information returns, each of which carry a minimum penalty of USD10,000 for failure to file. Self-managed super funds (SMSFs) are particularly dangerous for US taxpayers as they are almost always seen as a foreign grantor-trust. Finally, since superannuation is not a qualified US retirement plan, any movement of super balances between funds is treated as a taxable distribution. This includes consolidation of fund balances or rollovers when changing employment, all of which are tax free transactions under Australian tax law.

Any US tax paid on superannuation contributions, earnings, or rollovers will not be offset by a tax credit for Australian tax paid because these are tax-free transactions in Australia. Similarly, any US tax due on distribution to a retiree over the age of 60 will not have an offsetting credit for Australian tax paid.

One of the biggest frustrations of US taxpayers currently or previously resident in Australia is the uncertainty of the US tax treatment of superannuation. Even before a new treaty is negotiated it is important that this uncertainty be resolved. Best would be for the IRS (possibly at the urging of the ATO) to make a ruling on how super is to be treated for US tax. In the event the IRS rules that super is taxable in the US, then this will provide impetus for urgent renegotiation of the treaty. Given the pension provisions in the current US model treaty, it is possible the IRS will be willing to rule that super is not taxable on a US tax return.

Just to be clear, the preceding paragraphs are talking about US tax on superannuation accounts of Australian citizens living in Australia who happen to also be taxed as US Persons. US tax on Australian superannuation is contrary to the interests of Australia – it reduces the ability of Australians to save to fund their retirement and increases the probability that the affected Australian citizens will be reliant on the Australian government for Age Pension once they retire.

Superannuation is one of the key areas that needs fixing in the Australia/US Tax Treaty.

RESOURCES elsewhere on this website:

36 thoughts on “Superannuation”

  1. I’m married to a US national – we’re both retired and spend 6 months in the US and 6 months in AU.
    I pulled my Green Card application – lost the fees – when I found out my Superannuation and assets in AU was going to be taxed by the US.
    The whole things crazy.
    I’ve written my local member (twice now) and requested she raise the issue with Treasury.

    1. You need to also be careful of US Snowbird rules whereby you spend enough time in the US over multiple years then the US may – under the regulations – want to tax you as if you are a US resident.

      1. Yes, I’m aware of the Substantial Presence Test however I think I can defend on the basis I have a greater connection to AU as I have a home in AU , a car and all assets are held in AU.

    2. Thanks for your comment, Ed. Lucky you found out about US tax BEFORE you got the green card!

      I’ve had my MP raise the issue with Treasury. They know there’s a problem, but they are not in any hurry to fix it. As far as I’m concerned, that’s just not good enough.

      1. I’ve written twice to my local member Ann Sudmalis however have not received a reply other than a receipt acknowledgement.
        I’ve written again today and if there’s no response I’ll write to the PM as clearly Ann is not representing me as my local member.
        Maybe others should write the PM.

        1. We’ve been able to meet twice now with our local member, and I know others who have done the same. Sometimes it helps to pick up the phone and talk to whoever answers. You may have to go through a couple of staff before you actually make contact with your MP. The squeaky wheel… and all that.

          1. Got a reply – she’s looking into the issue – might seek a face to face in her office at Nowra NSW.

  2. I’m not sure if I’m interrupting Article 19 correctly – does it say government pensions paid to a recipient are not taxable under the treaty ?
    For example – Is the Australian age pension paid by the Commonwealth exempt from tax under the treaty ?

    1. My interpretation is that Article 19 is about pensions from government employment, not Age Pension. Age Pension would be considered Social Security and would be covered by Article 18 Paragraph 2 – and taxable only by the country making the payments (Australia). [Standard disclaimer here – I am not a tax professional, so do your own research as well]

  3. Just spoke to QSUPER (qsuper@qsuper.qld.gov.au)
    They said they take in consideration comments from members. Previously in one of their publications they warned US citizens of their tax issues.
    To get the word out may it be helpful to write to your Super fund and ask them to do the same. If all Supers publicize this issue and WARN US Citizens might help the Treasury negotiate the Tax Treaty

  4. Please watch our law firm’s video on the U.S. Tax Treatment of Australian Superannuation Funds: https://www.youtube.com/watch?v=c_jZiDIDojA

    To put it plainly, the current version of the treaty *does* cover and exempt Australian Superannuation Funds from U.S. taxation. The problem is the characterization of Australian Superannuation.

    1. Thanks for that. As you’re probably aware, most tax preparers working with US expats in Australia take a different approach. In fact, recent IRS emails made available through FOIA show the IRS discussing super as a 402(b) trust or foreign grantor trust. The more tax preparers who take the position that super just isn’t taxable in the US (properly documented in the returns. of course), the better. How do we get more preparers on board with this position?

      1. First, a clarification: no emails from the IRS were made available via FOIA. They were Private Letter Rulings (PLRs) issued and released by the IRS. See PLRs 201538006, 201538007, 201538009.

        Each of those PLRs specifically ended by stating that the IRS was making “no determination concerning whether [the taxpayers] are entitled to any benefits… under the income tax treaty.”

        Our firm agrees that, under domestic US tax law, Australian Superannuation Funds are grantor trusts. However, there is treaty relief. The problem is that these so-called “international tax experts” have no formal education in tax treaty law and interpretation. I earned my Master of Laws in International Taxation from Georgetown University Law Center in Washington, DC with an expertise in tax treaty law.

        The only way to get more practitioners on board is to educate them since the prevailing flat-earth opinion right now is that there is no treaty relief. The treaty doesn’t need to be fixed. The interpretation of the treaty needs to be performed correctly. We need to organize a conference to educate the professional public.

        1. I agree that we need to figure out how to get tax professionals (and the IRS) to interpret the treaty correctly.

          With regard to the FOIA documents I have referenced in several places, they are definitely emails not PLRs – and specific to Superannuation. It appears that even the IRS is unable to properly apply the treaty. Here are the links:

          https://www.taxproblemattorneyblog.com/2016/03/brager-tax-law-group-receives-foia-documents-australian-superannuation-accounts-foreign-retirement-plans.html
          https://www.bragertaxlaw.com/foreign-retirement-plan-account-information-from-irs.html
          https://www.bragertaxlaw.com/files/lbi_responsive_docs.pdf

  5. Mailed DEFAT + local member – White Paper – US/AU tax superannuation issue.
    Hope others follow as making a noise is the only way this is going to get fixed.

    1. Thanks, Ed. A couple people on the Facebook group also mailed in submissions. The Steering Committee looked at the DFAT consultation and decided that our issues were peripheral to what they were looking for, and that our effort would be better placed preparing for future consultation by Treasury that is more central to the tax treaty issue. Toward that end, we are working on a White Paper of our own.

      I don’t want to discourage individual submissions. The treaty issues have a direct impact on bilateral trade with the US by inhibiting the free flow of labour between our two countries, which is related to the second objective of the DFAT consultation.

  6. Just curious if anyone’s come across similar issues with NZ KiwiSaver funds? I’ve seen quite a bit of varied advice in terms of how KiwiSaver should be characterised, reported, and taxed from a US perspective. Given size of population it probably gets less coverage than AU super, but probably many overlapping issues, in addition to considering how the NZ government contributions should be accounted for.

    1. Hi Rob, Unfortunately I am not at all familiar with NZ-specific retirement plans. I hope someone else will chime in with useful information.

  7. The following are reasons to be hopeful that US law regarding Superannuation may change sooner than later:

    1. My colleague Marsha Dungog and I were recently invited to on a call with government officials to discuss problems with foreign pension funds, especially ASFs.

    2. My colleague Marsh Dungog and I have been approached by a major US tax publisher to write the definitive analysis on the US classification of the Australian Super.

    3. We understand on very good authority that a powerful US governmental organization has been hiring experts on the US taxation of foreign pension funds.

    4. The DJT administration has indicated that it will likely be releasing sweeping tax reforms this fall.

    All good stuff.. and I believe directly related to the work we all have done on raising the issue at the appropriate levels of government. High-fives are premature, but we are cautiously optimistic.

    Keep the faith and stay the course.

    Roy

    Roy A Berg JD, LLM (US TAX) | Profile
    Director, US Tax Law

    Moodys Gartner Tax Law LLP | D 403.693.5120
    210, 2020 – 4 Street SW
    Calgary, AB T2S 1W3

  8. It’s great to see someone addressing this issue. However, I would hope that Mr Berg and Ms Dungog would take on an Australian co-author to assist in understanding the Australian side of the equation. Super is not one single type of account, there are many nuances that are often overlooked by foreign commentators.

    Additionally, I think it is important to question the underlying assumption that the US has the right to tax Australian citizens and permanent residents living in Australia. I realise that there is US case law confirming the principle of citizenship based taxation, but most of this case law is from an era when dual citizenship was much less common than it is now. Furthermore, I am not aware of any Australian case law confirming the ability of the IRS to collect tax in Australia from Australian assets, especially superannuation. If anyone is aware of such a case, please let me know. Clearly, for those people with US assets, the IRS has the power to seize assets from US financial institutions, even when the tax liability is based on Australian-source income. But, for those people with no US assets or US source income, I don’t see how the IRS can legally collect tax in Australia from Australian assets.

    1. Karen, great comment and in particular noting that:

      “Super is not one single type of account, there are many nuances that are often overlooked by foreign commentators.”

      Your blog includes the tragic story of Shaun.

      As I read “Shaun’s Story” I was struck by the fact that he had a “self managed” super. This fact may have been significant in his story.

      I am convinced that the single biggest mistake is to characterize the question as:

      “How is the Super treated under U.S. tax law?”

      The correct question is:

      “How is your specific retirement program, based on its specific characteristics” treated under U.S. tax law?”

      (This of course assumes that you believe that the Super should be subject to U.S. taxation at all.)

    1. My comment (also posted on the article itself):
      It is good to see someone addressing the special problems of Australian-resident US taxpayers, as normal financial planning is exceedingly difficult for taxpayers caught between two very different systems. The way the US tax code treats anything “foreign” as toxic makes ordinary business and investment decisions very difficult or impossible.

      With super, however, there is a ray of hope. The introduction to the article states:
      Absent bilateral treaty renegotiations, US expats, who are obligated to pay US taxes on their worldwide income, have no other recourse except to trundle through the byzantine tax laws of both countries in order to arrive at a defensible (though uncertain) position on why Australian superannuation funds should not subject to US taxation.

      If there is a defensible position that superannuation accounts are not subject to US tax then, a) our Australian government ought to be exhausting every possible avenue to ensure that this position prevails and is publicised among the affected community; and b) US taxpayers in Australia should seek out US tax practitioners who are willing to take this position. I would hope that someone in the Australian government would read this and realise that allowing the US to tax the superannuation of Australian-resident Australian/US dual citizens undermines the public policy goals that the superannuation system is meant to address. As stated in the article, one remedy for this situation is to re-negotiate the tax treaty.

      After that glimmer of hope, however, the rest of the article is then written from the premise that superannuation is taxable on a US return. Conceding the point that the IRS thinks the US has the right to tax superannuation, and acknowledging that even the IRS is uncertain what that means in terms of US tax law, I have a concern about the discussion of the A$1.6m Lifetime Transfer Balance Cap.

      I’m not clear on why a transfer from pension mode to accumulation mode in response to the cap is a taxable event, as there has been no change in the right of the account holder to access that money. First, the requirement to reduce a balance held in pension mode applies only to account based pensions; those with defined benefit income streams will have their transfer balance cap reduced, but are not required to commute an income stream in excess of the limit. In an account based pension, once a condition of release is met, the entire balance of the account can be withdrawn at any time (giving up the concessions of the superannuation system) – see ASIC’s MoneySmart website. Thus, an account holder has the ability to withdraw funds from an account based pension (whether to meet the $1.6m cap or for any other reason) at any time after retirement and the imposition of the cap has changed nothing in this regard. As the imposition of the cap has not changed the account holder’s rights with regard to her super balance, I don’t see how the doctrine of constructive receipt applies to this transaction.

  9. I am a 67 yo retiree (Australian Citizen) living in Australia with a SMSF in pension mode.

    There is the possibility my wife (US citizen) who works will be required to return to the US and I am concerned that my SMSF would then be required to be declared as income in the US.

    Under the current rules in Australia I am not required to pay any tax on the earnings or monthly distributions.

    Question – Having read all of the previous comments – I assume under the current US IRS regulations I would be required to declare the earnings and distributions on an US IRS Tax Return?

    1. Welcome Peter. Glad you found us.
      The US tax treatment of superannuation is far from clear. There are tax professionals who take the position that superannuation should be treated as the equivalent of social security – and not taxed on a US return. Also, if you’re not a US citizen, and not living in the US yourself, then your income need not be included in your wife’s US return (though her share of the SMSF is at issue, assuming that she is also a member of the fund).

      1. Is there a list of such tax professionals that will file returns with the position that super should be treated as the equivalent of social security and not taxed on a US return? The only one I have found is castroandco.com, and there is just not much information available to assess how viable their approach might be. Are there any others?

        I think there is another category of tax professional – the PFIC maximalists. For example https://hodgen.com/lookthrough-rules-for-mutual-funds-held-in-nonqualified-foreign-pensions/ which effectively argues that lookthrough rules require yearly PFIC treatment of super regardless of the kind of super.

        A very important resource would be a list of tax preparers categorised by their approach to super issues.

        1. While I agree that such a list would be a great resource, our focus is on educating the relevant decision makers in Australia to advocate for changes in the tax treaty and the Australian implementation of FATCA. However, if someone wants to volunteer to construct a list of tax preparers, we would be willing to arrange hosting that list on this site.

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