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.
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