Editor’s Note: This post was originally published in 2015 and has been updated for accuracy and comprehensiveness.
So you have Australian superannuation and you also have a US expatriate tax filing requirement as a citizen or US resident: what do you do? Let’s take a closer look at how superannuation is taxed by the US and Australia so you know what to expect come tax time!
Australian superannuation funds are generally run as trusts. All employees over 18 are required to contribute to superannuation in Australia unless the foreign employee is exempt because there is a certificate of coverage in place. The superannuation guaranteed contribution rate in Australia is currently 9.5% and will increase to 10% by 2021. Your investment in superannuation is both funded and vested.
Superannuation on the US Expatriate Tax Return
As with most foreign pension plans, the taxation of superannuation is a gray area. The IRS does not have the means or inclination to review all foreign pension plans to provide clear tax guidance on each type of plan. As such, you may find varying opinions on how this income should be taxed on your the US expatriate tax return. Most often, Australian superannuation is treated as either a grantor trust or an employee benefits trust. The US tax treatment of your ownership in a superannuation trust depends on a number of factors.
One thing all tax accountants should agree on is that superannuation is not a US qualifying fund, like a US 401k. This means that, unfortunately, the contributions are not deductible in calculating taxable income. There is also no tax deferral clause in the US-Australia tax treaty to effectively allow US qualifying fund treatment for superannuation.
Employee Benefits Trust
Unless your superannuation is considered a foreign grantor trust, most superannuation will be treated as an employee benefits trust. As an employee benefits trust, the income is reported directly on Form 1040 and ownership needs to be reported on Form 8938 if you meet the threshold requirements. (See this article to learn more about the thresholds for filing FATCA Form 8938.) For some taxpayers, only the contributions are taxable from a US perspective, for others the growth (including contributions) in the fund is taxable.
Whether you are taxed on the contributions or growth depends on whether you are considered a highly-compensated employee. A highly-compensated employee is anyone who earned more than $120,000 and/or owned more than 5% of the interest in the business.
- If you are not a highly-compensated employee, your calendar year superannuation contributions are taxable as compensation on your expatriate tax return.
- If you are a highly-compensated employee, your calendar year superannuation growth, realized or not, including contributions, are taxable as compensation on your expatriate tax return.
Superannuation is not qualifying income for the Foreign Earned Income Exclusion so you will not be eligible to use the exclusion for superannuation income. You can instead use Foreign Tax Credits to offset the US taxes on this income.
Passive Foreign Investment Company (PFIC) investments held within an employee benefits trust do not need to be reported separately on Form 8621 on an annual basis.
The contributions or growth taxed on the US expatriate tax return becomes your US basis in the fund. At distribution, this basis is not taxable on the US return.
Foreign Grantor Trust
As a grantor trust, superannuation ownership and income needs to be reported on Form 3520 and 3520A, respectively for all years of ownership. On Form 3520A, realized and unrealized income (growth) plus contributions are reported and then taxed on the US return.
Also, PFIC investments held within a foreign grantor trust must be reported separately on Form 8621 on an annual basis.
Sound complicated? Unfortunately, it really is!
What Makes a Superannuation Fund a Foreign Grantor Trust?
The answer is control.
Unfortunately, control can be a very difficult term to define. Control could be deemed to be the ability to choose where to invest your superannuation, which all employees in Australia have the right to do. Control could be deemed to exist when you have the choice to make contributions, as in self-employed persons or additional after-tax contributions. As the IRS has not made any rulings on what constitutes control for superannuation, it is not clear that either of these would be deemed to be control.
The power to make decisions on the actual investments in a superannuation, however, is usually considered control and causes a superannuation fund to be a foreign grantor trust. As such, any fund where you have this type of control, like a Self-Managed Superannuation Fund (SMSF), would be deemed to be a foreign grantor trust. This applies even if you do not actually exercise this control. The ability to make these decisions is sufficient.
Superannuation and the FBAR
FBAR regulations are not as clear as they used to be about reporting of foreign employee benefits trusts. However, there is an exemption for reporting trusts on the FBAR where the individual owns less than 50% of the assets in the trust. Arguably, if you are a part of a large fund, you are unlikely to own more than 50% of the overall fund’s assets. As such, you may not have a FBAR reporting requirement for superannuation.
Whether to report your superannuation on your FBAR or not is a decision you should make with your tax advisor as the regulations are not as clear as they could be. However, as a foreign grantor trust, superannuation does need to be reported on the FBAR.
Even though this is a gray area, we tend to lean on the side of caution and report superannuation on the FBAR, even in instances when it is an employee benefits trust.
Overview on Your Reporting Requirements
- Report your superannuation as income on your annual tax return
- Report your superannuation of Form 8938 if you have a filing requirement based on the thresholds
- Report your superannuation on the FBAR as applicable
Do You Need Help Filing Your Expat Taxes?
Greenback can help! Our team of expat-expert CPAs and IRS Enrolled Agents can expertly prepare your US expatriate tax return and ensure all appropriate forms are filed to report superannuation. Get started today on your US taxes!