US Tax of Australian Superannuation Funds

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.  Some taxpayers may take the position that it is privatized Social Security based on verbiage used by the US government and the fact that there is a totalization agreement between the United States and Australia and/or that at least the Superannuation Guarantee portion should qualify as social security. As provided in the totalization agreement:

• • • For Australia, the agreement covers “Superannuation Guarantee” (SG) contributions that employers must make to retirement plans for their employees.

Article 18 Pension and Social Security

There are different ways to analyze a Tax Treaty, but since we are focusing specifically on the pension issue, a good place to start will be Article 18.

• • 1. Subject to the provisions of Article 19 (Governmental Remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

    2. 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.

    3. Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that State.

    4. The term “pensions and other similar remuneration”, as used in this Article, means periodic payments made by reason of retirement or death, in consideration for services rendered, or by way of compensation paid after retirement for injuries received in connection with past employment.

    5. The term “annuities”, as used in this Article, means stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).

    6. Any alimony or other maintenance payments, including payments for the support of a minor child, arising in one of the Contracting States and paid to a resident of the other Contracting State, shall be taxable only in the first-mentioned State.

Summarizing Article 18 For Distributions

Social Security

If Super qualifies as social security, it would only be taxed by Australia.

Pension

Paragraph one provides that a pension paid to someone who is a resident of one of the contracting states in consideration of past employment shall only be taxable in that state. The subsequent paragraphs help clarify the information about pensions and other payments/annuities.  Thus, from an initial review of Article 18(1), it would appear that a US citizen who resides in Australia and receives Australian superannuation would only be taxed in Australia on that income. Since Australia does not tax the distributions, the argument would be made that the US citizen would not be taxed on that income.

But, then there is the Saving Clause to deal with as well.

Saving Clause, Article 1

• • • (3) Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals electing under its domestic law to be taxed as residents of that state, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force. For this purpose, the term “citizen” shall, with respect to United States source income according to United States law relating to United States tax, include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax, but only for a period of 10 years following such loss.

Summarizing the Saving Clause

The Saving Clause is a weaselly little clause found in many tax treaties, that basically provides that despite any information contained within the tax Treaty, the United States and Australia each retain the right to tax individuals the same way they would text them had the treaty not been in force. So then expanding on the paragraph above regarding pension, it means that even if a US citizen resides in Australia and earns private superannuation payments, the US reserves the right to still tax that income subject to the worldwide income tax rules. This is despite the fact that Article 18 of the treaty says that only the country in which the person resides should have the right to tax the income.

Saving Clause, Article 1 (4) Exceptions

• • • “(4) The provisions of paragraph (3) shall not affect:

      • the benefits conferred by a Contracting State under paragraph (2) of Article 9 (Associated Enterprises), paragraph (2) or (6) of Article 18 (Pensions, Annuities, Alimony and Child Support), Article 22 (Relief from Double Taxation), 23 (Non-Discrimination), 24 (Mutual Agreement Procedure) or paragraph (1) of Article 27 (Miscellaneous); or

      • the benefits conferred by a Contracting State under Article 19 (Governmental Remuneration), 20 (Students) or 26 (Diplomatic and Consular Privileges) upon individuals who are neither citizens of, nor have immigrant status in, that State (in the case of benefits conferred by the United States), or who are not ordinarily resident in that State (in the case of benefits conferred by Australia).”

Notably absent from the saving clause exceptions is Article 18 (1), which refers to pensions. Thus, a private pension would not be excluded from the saving clause  — which means the IRS could still tax the income.

In other words, if the Superannuation is considered to be a type of pension, then it is taxable by the U.S., but if the Superannuation is considered to be Social Security, then the U.S. would not have the right to tax that income.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.