Australia Superannuation FBAR, FATCA and PFIC Reporting Rules

The Taxation of Australian Superannuation (Pension/Retirement)

US Taxation of Australian Superannuation Funds

One of the most complex aspects of international tax law is trying to apply foreign income tax rules and laws to the United States Tax Code. This becomes a major problem in matters involving pensions and other types of retirement plans sourced in a foreign country. That is because, in a foreign country, the income is usually tax-exempt – or subject to a reduced tax rate. In addition, in most foreign countries the employer contributions are pretax, and the taxpayer does not become subject to income tax until they begin receiving distributions from the foreign pension plan.  While the taxation of Australian Superannuation is very complicated, it is only one part of the US compliance equation. Therefore, in addition to summarizing the tax implications of a super, we have developed additional resources specifically for reporting a superannuation (FBAR, FATCA, 3520) and understanding how the US/Australia Tax Treaty applies to Australian superannuation. Let’s dive in and explore the basics of the Australian Super and US tax rules.

TL; DR

Pressed for time?

In general, Superannuation is reportable for FBAR and Form 8938 (FATCA). It may be reportable for Form 3520/3520-A but that depends on your take on Revenue Procedure 2020-17 and whether the Superannuation is SMSF or not. Most Taxpayers take the position that Superannuation more closely resembles Pension than Social Security and there are different views as to whether the income is taxable only when it is distributed (prevailing view) or if it is taxable during the growth phase — and this too may vary based on whether it is a Private Super, Public Super or SMSF.

Is Superannuation Pension, Social Security, or a Hybrid?

In general, Australian superannuation most closely resembles pension or retirement plans. For example, Superannuation designates an individual account number for each person who has superannuation. Likewise, the same individual may have multiple superannuation plans depending on how many employers they have had. There is a balance amount associated with each superannuation account – and under certain circumstances, the full amount or a large portion of the superannuation can be cashed out. This is not like U.S. Social Security in which a person reaches an age (or disability) and then receives a certain amount of annual payments depending on how much money they have contributed. US taxpayers do not receive a lump sum payment and do not have multiple Social Security pots — even if they have had multiple employers. 

Is Your Australian Super Treated as U.S. Social Security?

No, Australian superannuation is not the same as U.S. Social Security and the U.S. does not (yet) recognize the Australian Superannuation system as equivalent to the U.S. social security systems; in fact, Australia has its own social assistance system. Instead, the IRS treats Australian Super as a pension. However, since there is a totalization agreement between the United States and Australia, there is the argument that at least the superannuation guarantee (SG) portion should be considered social security equivalent but the IRS has never ruled to date that Australian superannuation should be treated as Social Security for U.S. tax purposes.

How are Employer Contributions Taxed?

Unlike several other foreign countries, contributions made into the Australian superannuation by an Australian employer are not deductible on the U.S. tax return. For example, while the tax treaty between the United States and the United Kingdom allows for employer contributions to be deducted similar to a 401K, unfortunately, the superannuation was created after the US/Australian tax treaty was enacted and no reference to Superannuation is made with within the treaty — or reference to deducting employer contributions from gross taxes on the U.S. tax return.

Are Voluntary Contributions Taxable?

Depending on whether the voluntary contributions are concessional or non-concessional — and post-tax dollars vs. pre-tax dollars will impact the U.S. taxation rules for voluntary contributions. Essentially, voluntary contributions that are made with pre-U.S. tax dollars do not avoid U.S. taxes (e.g., U.S. income taxes on the earnings that were then used to make voluntary contributions to the Superannuation). Stated another way, a person cannot contribute their pre-U.S. income tax dollars into Australian superannuation similar to the employee’s portion of pre-tax contributions in a 401K, and receive tax-deferred treatment on those contributions.

Australian Superannuation Withdrawal/Distribution Taxes

The general rule is that withdrawals and distributions are taxable. There may be some room for nuance depending on whether there is any step-up value to the superannuation depending on when the person became a U.S. person and whether the portion being withdrawn is from before the person became a U.S. person — but the general rule is that withdrawals are taxable (this also leads to potential forensic accounting issues). Another factor that may impact the taxation of distributions or withdrawals is whether the Taxpayer qualifies to make a treaty election to be treated as a non-resident alien for tax purposes.

Super Foreign Tax Credits for Growth

In Australia, superannuation is taxed within the actual superannuation itself while it grows (which makes it distinct from a 401K or U.S. social security). Since technically it is not the Taxpayer who is paying the foreign taxes but rather taxes are being withheld within the superannuation itself, these credits cannot be applied as foreign tax credits.

Is Superannuation Reported as a Foreign Trust  (Forms 3520/3520-A)

While superannuation is technically considered a trust and therefore may be reportable on Form 3520 or Form 3520-A various exceptions, exclusions, and limitations may apply. For example, the U.S. government developed Revenue Procedure 2020-17 that limits having to report certain foreign retired and non-retirement deferred savings trusts as foreign trusts for Forms 3520/3520-A. This is further supported by the recently proposed foreign trust regulations which were issued in 2024. Noting, that even though the foreign trust may not be reportable on Forms 3520 and 3520-A, it is still reportable for the FBAR and Form 8938.

Is Superannuation Reported on the FBAR (FinCEN Form 114)

The FBAR is used to report Foreign Bank and Financial Account forms. Foreign pension plans are a type of financial account that is reportable on the FBAR, which would include the Australian Superannuation. As provided by the IRS:

• • • Example: Canadian Registered Retirement Savings Plan (RRSP), Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro) and Mexican Administradoras de Fondos para el Retiro (AFORE) are foreign financial accounts reportable on the FBAR.

Is Superannuation Reported on  Form 8938 (FATCA)

Form 8938 was developed in accordance with FATCA, which is the Foreign Account Tax Compliance Act. The Australian Superannuation is required to be reported on Form 8938 as it would qualify as a foreign pension plan. As provided by Form 8938 instructions:

• • • Value of an Interest in a Foreign Estate, Foreign Pension Plan, and Foreign Deferred Compensation Plan

      • • If you do not know or have reason to know based on readily accessible information the fair market value of your interest in a foreign estate, foreign pension plan, or foreign deferred compensation plan during the tax year, the value to be included in determining the total value of your specified foreign financial assets during the tax year is the fair market value, determined as of the last day of the tax year, of the currency and other property distributed during the tax year to you. If you received no distributions during the tax year and do not know or have reason to know based on readily accessible information the fair market value of your interest, use a value of zero for the interest.

Form 5471

While generally Form 5471 would not be required when reporting superannuation, if it is a Self-Managed Superannuation Fund with a PTY Limited associated with the Super or the management of the Super, then the PTY Limited may require a Form 5471.

Form 8621

While generally a Form 8621 is required in situations in which there is a Passive Foreign Investment Company – there are some exceptions and exclusions in situations in which the PFIC is being held within a pension plan within a treaty country.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.