If you are an American expat living in Australia, you might have lots of questions about superannuation or “supa” as the Aussies so fondly call it. If you are filing US taxes abroad in Australia, you might be wondering what you should do if you have Australian superannuation and how that affects US filing requirements as a citizen or US resident. And to add on a layer of complexity, you could be considered a “highly compensated employee” and might have questions about what that means and how that affects both your Superannuation and your US expat tax filing requirements. Let’s take a closer look at how superannuation is taxed by the US and Australia and also what it means if you are a highly compensated employee.
Superannuation is the fund for Australians to save for their retirement. The money comes from contributions made into a super fund by their employers and hopefully, contributed to with individuals’ own money as well. Sometimes the government will add to it through co-contributions and the low income super contribution. Australian superannuation funds are typically run like trusts and treated like that by the US government. 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 12% under current legislation. An employee’s 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 isn’t black or white. The IRS isn’t able to and doesn’t want to review all foreign pension plans to provide clear tax guidance on each type of plan. And because of this, you may find varying opinions on how this income should be taxed on your the US return. In most cases, Australian superannuation is considered 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.
It is important to note 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. So when you are thinking about saving for retirement, make sure you take this into consideration.
How Does Being a Highly Compensated Employee Affect Superannuation?
As we talked about above, the large majority of Australian superannuation plans are treated as employee benefits trusts. If you are contributing or considering contributing to a trust like this, you first need to figure out whether you are a “highly compensated employee” in order to know what is and is not taxable in the current year for US tax purposes. According to the Internal Revenue Service, a “highly compensated employee” is defined as:
An individual who:
- Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of how much compensation that person earned or received, or
- For the preceding year, received compensation from the business of more than $115,000 (if the preceding year is 2014; $120,000 if the preceding year is 2015 or 2016), and, if the employer so chooses, was in the top 20% of employees when ranked by compensation.
The amount of earnings is adjusted annually. For this purpose, the “business” is actually the superannuation fund itself.
If You Aren’t a Highly Compensated Employee
If you are not considered a highly compensated employee, you will include only the contributions that you make to the plan in your annual US taxable income. This would include both your own contributions, as well as any contributions that your employer makes on your behalf. Keep track of these contributions each year though, as they will create basis in the fund that will be US tax-free to you upon distribution.
If You Are a Highly Compensated Employee
If you are considered a highly compensated employee, you will be taxed not only on the contributions to the plan, but also the earnings within the plan during the calendar year. Getting all this info might be a bit tricky, as it is often provided on the Australian calendar year basis (June 30 year end, versus US calendar year basis) so it’s important to keep quarterly statements from the superannuation fund. Earnings within the plan will include interest, dividends, gains from stock (whether realized or not) and any other income arising from within the fund. While taxable in the current year, these earnings will also create a basis in the fund that will tax-free when distributed.
Another important factor to consider when reviewing US tax implications of your Australian superannuation plan is that of Passive Foreign Investment Companies (PFICs). Read more about what a PFIC is here. If a PFIC is held within your superannuation plan, you will have a separate annual reporting requirement for individual investment on Form 8621. PFICs will generally include foreign-based mutual funds, partnership, other pooled investment vehicles and some exchange traded funds.
Also keep in mind that an Australian superannuation fund should be considered when valuing total foreign assets reportable on FATCA Form 8938. It is a good idea to consult with a tax advisor for more information on the thresholds that require the reporting of foreign financial assets on this form.
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.
Help Filing Your US and Australian Taxes
Greenback can help you file both your US and Australian taxes. Our Greenback accountants can expertly prepare your expatriate tax return and ensure all appropriate forms are filed to report superannuation. We can also recommend an Australian accountant who specializes in Australian tax preparation. Please contact us today or click here to get started on your US taxes!