If you are living and working in Australia, you are likely contributing to Superannuation. Wondering how the US treats these contributions? You may be surprised. David McKeegan, Co-founder of Greenback Expat Tax Services explains everything you need to know.
Hi everybody. I’m David McKeegan with Greenback Expat Tax Services. Our question this week is, How are Australian superannuation funds treated by the IRS?
From the Australian perspective, a superannuation fund works very similar to a traditional 401K plan in the US. However, the Australian superannuation fund is not considered a qualified retirement plan by the IRS, and therefore, the contributions, capital gains, interest, dividends, may be taxable in the year that they’re made (meaning they’re not deferred until retirement). What you are taxed on specifically depends on whether you’re considered a ‘highly-compensated employee’ – which is categorized as anyone who earned more than $120,000 and/or owned more than 5% of the interest in the business.
- Fall into the highly-compensated employee category? Your calendar year superannuation growth, realized or not, including contributions, are taxable as compensation on your expatriate tax return.
- Not a highly-compensated employee? Your calendar year superannuation contributions are taxable as compensation on your expatriate tax return.
The employer superannuation fund contributions are taxable in the year they’re earned, but they’re not eligible for exclusion under the Foreign Earned Income Exclusion. This is because the superannuation funds are not considered qualified funds. The contributions are taxable under Section 402(b) of the Internal Revenue Code. Section 911 specifically states that income under Section 402(b) is not eligible for exclusion under the Foreign Earned Income Exclusion.
Obviously, that’s not great. You can’t exclude it under the foreign income exclusion section. However, the employer contributions are considered foreign income and you may be able to use a foreign tax credit on Form 1116 to reduce your US taxes on employer contributions.
So, to sum it up, employer contributions, interest, dividends, capital gains in superannuation funds may be taxable in the year that they’re either contributed or earned (which of those you’re taxed on depends on whether you’re a ‘highly-compensated employee’ or not), and will need to be reported on your US taxes.
Thank you very much. If you have any questions, please let us know.
Learn More About Expat Taxes While Living in Australia
For more details about US expat taxes while living Down Under, check out this article which outlines all you need to know about both US and Australia tax laws.