November 9, 2022

International Tax Series Part 1: U.S. Consequences of an Australian Superannuation Retirement Account

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Retirement accounts can be an integral part of wealth accumulation and estate planning. In this blog series, we consider the issues in Australian superannuation (retirement) accounts.

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Many Australians live in the US on E-3, O-1, and EB-2 visas, or as U.S. green card holders, or citizens. These U.S.-based Australians, have likely, accumulated retirement benefits in large Australian industry or retail superannuation funds with thousands of members, or in private “self-managed superannuation funds” (SMSFs) with up to five members.  Correspondingly, there are many U.S. citizens living and working in Australia. These Australian-based U.S. citizens would be accumulating superannuation benefits if employed by Australian employers, or, if they have established an SMSF.

The U.S. taxes a “United States person” on their worldwide income. 1) The definition of “United States person” includes U.S. citizens and resident alien individuals (green card holders and those satisfying the “Substantial presence test”) 2) this, therefore, affects both US-based Australians and Australian-based US citizens. For these persons, having an Australian superannuation account can create additional U.S. tax and reporting obligations. Many are unaware of these obligations or are only ​becoming aware. Knowing how to remediate prior year tax reporting in the U.S. and addressing these obligations appropriately, is imperative. The IRS can otherwise impose significant penalties and interest, for undeclared income consisting of contributions, earnings within the fund (sometimes), distributions; and also, undisclosed account balances.

What is Superannuation?

A “superannuation fund” is a trust established, and administered, under the Superannuation Industry (Supervision) Act 1993, and the Superannuation Guarantee (Administration) Act 1992 (SGAA). Australian employers are mandated under the legislation, to contribute funds (as of 1 July 2022, 10.5% of an employee’s ordinary time earnings) into an investment fund then used to pay pension benefits to eligible participating employees. Employees may, in addition, contribute to superannuation by “salary sacrificing” pre-tax income (“concessional contributions”) or after-tax income (“non-concessional contributions”). Member interests are pooled and invested by the fund’s manager.

There is no U.S. retirement plan equivalent to an Australian superannuation fund. The concept of the superannuation fund is loosely, a mix of the U.S. defined-benefit plan (to which employers contribute, with retirement payouts being based on a formula considering, an employee’s salary, age, and tenure), a defined-contribution plan (such as a company-sponsored qualifying 401(k) plan that employees contribute to, and employers may “match” contributions up to a certain percentage), and a 403(b) plan (being a tax-sheltered annuity/retirement plan for employees of public schools and 501(c)(3) tax-exempt organizations).

Why is the U.S. tax treatment of superannuation controversial?

The controversy stems from several factors – there is no U.S. equivalent to a superannuation fund: the need therefore to evaluate the funds based on the U.S. entity classification rules; and depending on the structure of the fund, the employee trust rules, foreign grantor trust rules, and passive foreign investment company (PFIC) rules. The US-Australia income tax treaty 3 (Treaty) does not mention superannuation.

Adding to these factors is the lack of guidance on the appropriate tax treatment of superannuation for U.S. tax purposes – to date, despite the recent high-profile case involving Alan Dixon 4, there has been no definitive IRS opinion, legislation, or case law that has clarified how superannuation should be treated in a U.S. tax return. This has led to a misinterpretation of the laws by practitioners, and confusion and misinformation as to how contributions to, earnings in, and distributions from, Australian superannuation funds ought to be treated.

Footnotes

  1. IRC sections 1 and 61
  2. IRC sections 7701(a)(30) and 7701(b)
  3. Double Taxation Taxes on Income - Convention Between the United States of America and Australia  (Treaty) https://www.irs.gov/pub/irs-trty/aus.pdf
  4. Dixon v. Commissioner, No. 13874-19 (T.C. filed July 25, 2019). Dixon v. The United States, No. 20-1258T (United States Court of Federal Claims filed January 18, 2022).
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