The US-Australia Tax Treaty and How It Affects Superannuation Taxation

American in Australia surfing at Bondi Beach

The US-Australia tax treaty was ratified and placed into effect in 1983. At present, this treaty remains an oddity compared to treaties with similar countries. The absence and ambiguity of guidance on many complex US-Australian tax matters is unique; these issues are open to debate and interpretation. Amongst these complex matters is the treatment of the Australian superannuation. The superannuation fund is a defined contribution plan. Perhaps the best way to describe Australia’s superannuation plan is as a massive 401(k) for most Australian taxpayers.

Superannuation: How Is It Taxed?

In contrast to the US, contributions to this super 401(k) plan are primarily compulsory. Most employers are required to make contributions into the superannuation fund on behalf of their employees, while contributions made by Australian citizens are voluntary. These voluntary contributions are tax-deductible for the employee on their Australian return.

The US-Australia tax treaty treatment is almost silent regarding the superannuation fund. Given the commonality of the superannuation fund, tax preparation for most Australian-Americans is an arduous process. As a result of this ambiguity, the US tax treatment of routine Australian transactions, such as contributions and distributions, remains a contested issue among accountants. There are three popular stances taken by most tax professionals, which we’ll go over below.

Options for Reporting Superannuation

Some tax practitioners have taken the stance that superannuation funds are a form of social security. After all, employment in Australia entails an employer contributing 9.5% of your salary into a superfund account. Similarly, employment in the US requires an employer to contribute 6.2% of salary to fund social security. Although this stance is not common, there is some basis for this viewpoint. However, the difference between superannuation and social security is that social security is a defined benefit plan, while the superannuation fund is a defined contribution plan.

Most practitioners treat superannuation funds as either grantor trusts or employee trusts. The tax fund can be granted as either—depending on the level of control and percentage contributed to the fund. If the fund is determined to be an employee trust, the reporting requirements are much simpler. A grantor trust will require completing Forms 3520-A and Form 3520. Trust us, you want to skip this.

An Australian-American might obtain contrary opinions from two tax experts analyzing the same information. This US-Australia tax treaty is regarded as the worst treaty. There are over 100,000 Americans and permanent residents with Australian ties, and virtually all of them have a superannuation fund. This situation creates an apparent tax problem. Without official, definitive guidance or an update to the US-Australia tax treaty, these taxpayers will remain in limbo regarding the annual filing of their US tax return. This is the reason there is a big push to change the treaty.

In comparison, tax treaties with other nations have clear and concise language tackling the treatment of retirement plans schemes. For example, the United Kingdom-US tax treaty provides specifics for contributions to a United Kingdom pension scheme. According to the treaty:

“5 (a) Where a citizen of the United States who is a resident of the United Kingdom exercises an employment in the United Kingdom the income from which is taxable in the United Kingdom and is borne by an employer who is a resident of the United Kingdom or by a permanent establishment situated in the United Kingdom, and the individual is a member or beneficiary of, or participant in, a pension scheme established in the United Kingdom,

(i) contributions paid by or on behalf of that individual to the pension scheme during the period that he exercises the employment in the United Kingdom, and that are attributable to the employment, shall be deductible (or excludable) in computing his taxable income in the United States; and,” is the basic gist of it.

Since this information is missing in the US-Australia tax treaty, accountants and US taxpayers will have to continue giving it their best shot.

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