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How Is Australian Superannuation Taxed in the US?

One of the most interesting aspects of working in international tax is figuring out the tax treatment of various investment vehicles. This becomes especially important when multiple countries are involved, and also when there is no direct equivalent to a certain foreign investment plan or foreign asset in the U.S. 

Throw in international tax treaties and all the incorrect advice floating around on the Internet, and you have a potentially volatile situation that needs to be handled carefully and professionally.

Fortunately, we are well-equipped to handle these challenges for our clients. Especially when it comes to Australian superannuation. Often referred to as Australia’s equivalent to a 401(k) plan, a superannuation plan actually has no equivalent in the U.S. This makes for some fascinating yet perilous implications. Superannuation isn’t a typical pension plan. And neither is it really equivalent to a 401(k) account.

But how is Australian superannuation taxed in the U.S.? There are three phases in the tax treatment of a superannuation plan: the contributions phase (where contributions are made to a fund); the investments phase (where contributions are invested and the earnings accumulate); and the benefits phase (where the contributions and the accumulated earnings are distributed from the fund).

Regarding the contributions to a superannuation fund, contributions made to Australian superannuation plans once a taxpayer has become a U.S. person may be taxable. Generally, any contributions made by a taxpayer to a non-exempt trust (which is the default treatment of Australian superannuation in the U.S.) are considered to be taxable as compensation to the taxpayer in the U.S. if the benefits are “substantially vested”. The benefits will be substantially vested if the contributions are not subject to a substantial risk of forfeiture. 

It turns out that most contributions made to modern Australian superannuation plans will not be subject to a substantial risk of forfeiture because the plan balance will be payable to the taxpayer upon retirement, incapacity or to a nominated beneficiary upon the death of the taxpayer. Accordingly, there is no risk that the benefit will be forfeited to the superannuation provider. Therefore, if contributions are made to an Australian superannuation fund after an Australian citizen becomes a U.S. person (or a U.S. citizen becomes an Australian resident), the contributions may be taxable in the U.S. under section 402(b)(1) of the IRC. However, from our experience, many Australians who are living in the U.S. no longer have an employer back home who is making contributions to their superannuation plan. And neither is the taxpayer making contributions to their superannuation plan. Therefore, many Australians who have a superannuation plan and who live in the U.S. will not be taxed on contributions, since no contributions are occurring while they are living in the U.S. 

In regard to the earnings in the superannuation fund, if the personal contributions made by a taxpayer exceed the employer contributions made by their employer, then the earnings derived within the superannuation plan attributed to the personal contributions that the taxpayer has made (while it is in benefits phase) will be taxable in the U.S., even though the taxpayer cannot access the accumulating income until they retire. Generally speaking, however, this is not the case for many Australians who are living and working in the U.S., and also many Australians who have off-the-shelf packages (with providers such as AustralianSuper, BT Super, and so forth), and so therefore, the earnings phase is generally not taxable in the U.S.

Finally, regarding the benefits phase, Australian superannuation benefits of a U.S. person will be taxable upon such a person attaining 60 years of age (the Australian retirement age). The taxpayer will first be liable for tax in Australia, receive foreign tax credits in the U.S. (creditable only against U.S. federal income tax) for the Australian tax paid (which will be nil, if the account is in the benefits phase), and in the event of any shortfall, pay further federal, state and city income tax (where applicable).

However, please note that to ensure that certain phases of your Australian superannuation plan are not taxable in the U.S., you will have to take a tax treaty position and cite the U.S./Australia tax treaty. Additionally, in terms of reporting requirements, superannuation plans will need to be reported on Form FinCEN 114 (FBAR) and/or Form 8938. 

With all these requirements and the complexity of the laws behind this, we do not recommend going it alone. Further, things become even more complicated if you hold a self-managed superannuation fund (SMSF). In this scenario, you will have even more reporting requirements, such as a Form 3520 and/or Form 3520A, as a SMSF is treated as a foreign grantor trust in the U.S.

Fortunately, you need not go it alone, as we are experts at reporting Australian superannuation and helping our clients legally avoid taxes while meeting their compliance responsibilities when it comes to reporting Australian superannuation. If you own a superannuation plan (whether an off-the-shelf package or a SMSF), please get in touch today to ensure that you are meeting all the reporting requirements around this unique investment vehicle.