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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 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 the age of 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 10% and will increase to 10.5% by July 2022. Your investment in superannuation is both funded and vested.
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 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.
While not all tax accountants and legal professionals agree, most believe that superannuation is not a US qualifying fund like a US 401(k). This means that, unfortunately, the contributions are not deductible in calculating taxable income. The US-Australia tax treaty also does not include a tax deferral clause which would effectively allow US qualifying fund treatment for superannuation.
How your superannuation is taxed depends on whether it is considered a foreign grantor trust or an employee benefits trust.
If your superannuation is considered an employee benefits trust, the follow US tax situation will apply:
If your superannuation is considered an employee trust, employer and employee contributions are taxable from a US perspective. However, growth on the superannuation is only taxed if you are considered highly compensated and if it is a discriminatory plan.
For superannuations that are considered an employee benefits trust, the employer and employee contributions are reported directly on Form 1040. Additionally, ownership must be reported on FATCA Form 8938 if you meet the threshold requirements.
You may also need to report your superannuation on the FBAR. 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 an FBAR reporting requirement for superannuation. But because the regulations are not entirely clear, we tend to recommend expats err on the side of caution and report their superannuation on the FBAR.
Superannuation income does not qualify 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 are not required to be reported separately on Form 8621 on an annual basis.
The contributions taxed on your US expatriate tax return become your US basis in the fund. At distribution, this basis is not taxable on the US return.
If your superannuation is considered a foreign grantor trust, the following US tax situation will apply:
For superannuations that are considered foreign grantor trusts, both contributions and growth income will be taxed in the US.
You’ll use Form 3520 and 3520A, respectively, to report on ownership and income for all years you have the trust. On Form 3520A, realized and unrealized income (growth) plus contributions are reported and then taxed on your US return.
Additionally, as a foreign grantor trust, your superannuation needs to be reported on the FBAR.
PFIC investments held within a foreign grantor trust must be reported separately on Form 8621 on an annual basis.
The determining factor here is control. Unfortunately, control can be a challenging term to define. Control could mean the ability to choose where to invest your superannuation, which all employees in Australia have the right to do. On the other hand, control could occur 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. Sound complicated? Unfortunately, it really is! A great deal of the complications arise because the IRS has offered very little direct guidance on superannuation funds.
That said, a good line of reasoning is to ask the following questions regarding your superannuation:
If the employee has made more than half of the contributions, the trust will likely be considered a foreign grantor trust.
The power to make decisions on the investments in a superannuation 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.
Greenback can help! Our team of experts can prepare your US expatriate tax return and ensure all appropriate forms are filed to report superannuation. Get started today on your US expatriate taxes.