November 9, 2022

International Tax Series Part 4: Reporting Obligations of Superannuation Accounts

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Having an Australian superannuation account can create additional U.S. tax and reporting obligations for an Australian who is a “United States Person” (generally, a U.S. citizen, tax resident, or green card holder).

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In this Part 4, we consider some IRS forms that may need to be included with the U.S. Tax Return of a “United States Person”.

The reporting obligations can depend on the balance of the account, residency, U.S. tax filing status, whether the superannuation fund is self-managed (an SMSF), and the underlying assets of the fund. Failing to file forms can result in non-compliance with U.S. tax and reporting obligations and significant IRS penalties and interest. Being non-compliant with IRS reporting can create delays for U.S. Persons seeking to expatriate, and can also significantly delay the probate of a deceased’s estate and the distribution of assets to beneficiaries.

IRS Rev. Proc. 2020-17

The IRS’s Rev. Proc. 2020-17,1 provides an exemption from the information reporting requirements for foreign trusts under section 6048 of the Internal Revenue Code (IRC), for certain U.S. persons with respect to their transactions with, and ownership of, certain tax-favored foreign retirement trusts and certain tax-favored foreign non retirement savings trusts. It is unlikely that an Australian superannuation fund would not satisfy the requirements for a Tax-Favored Foreign Retirement Trust in Section 5.03 of the Rev. Proc.

Section 5.03(3) of the Rev Proc. requires that contributions comprise only income earned from the performance of personal services. Australian capital gains tax law allows for the gains from certain businesses to be “rolled over” and paid into superannuation.2 The income earned in these cases is from the sale of businesses owned or controlled by the contributing individual, rather than from personal services/employment.

It is also unclear whether the contribution limits in Section 5.03(4) of the Rev. Proc. apply to pre-tax, or post-tax contributions. 

IRS Form 8938 – Statement of Specified Foreign Financial Assets: 3

This form generally must be submitted by U.S. Persons with significant foreign financial assets, depending on the balance of that account, and U.S. tax filing status. For example, the reporting requirement applies to unmarried taxpayers if the balance of the specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 during the tax year. For married taxpayers who file jointly, the requirement applies if the balance of those assets is more than $100,000 on the last day of the tax year or more than $150,000 during the tax year.

Form 8938 requires, several foreign assets to be reported, including:

  • Overseas bank accounts with foreign banks
  • Interests in foreign pension plans
  • Interest in foreign trusts and foreign estates
  • Stock and securities in foreign corporations
  • Foreign financial instruments, including loans with foreigners

Report of Foreign Bank and Financial Accounts (FBAR): 4

This form must be submitted by U.S. Persons with foreign financial accounts where the balance exceeded US $10,000 in the tax year.

Financial Accounts can include: 5

  • Bank accounts such as savings and checking accounts, and time deposits
  • Securities accounts, such as brokerage accounts, securities derivatives accounts, or other financial instruments accounts
  • Derivatives accounts
  • Insurance or annuity policies with a cash value
  • Mutual funds
  • Foreign retirement accounts

IRS Form 3520 6 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts 

IRS Form 3520 is required for reporting transactions with foreign trusts, ownership of foreign trusts under the grantor trust rules of IRC sections 671-679, and reporting receipts of large gifts or bequests from certain foreign people.

In Part 3, the IRS treats superannuation funds as foreign trusts.7 The Internal Revenue Code states that a trust is a foreign trust unless it meets the “Court Test” and the “Control Test”.8  A trust will meet the Court test if “a court within the United States is able to exercise primary supervision over the administration of the trust”.9  A trust meets the Control Test if “one or more United States persons have the authority to control all substantial decisions of the trust with no other person having the power to veto any of the substantial decisions”.10

In the superannuation context, this form may have to be filed to report:

Transfers (contributions) to a superannuation fund
Ownership of any part of a foreign trust during the tax year
Distributions from a superannuation fund

Ownership of a foreign trust may be considered to occur where the U.S. grantor trust rules 11 is triggered.  These rules could apply to an SMSF if the members of the SMSF are seen to “control” and “own” the trust fund of the SMSF. As the members of an SMSF are usually husband and wife, with both being the members and trustees of the fund, they are seen to control the fund – making all decisions in relation to the fund, without the approval or consent of a party adverse to them. 12

IRS Form 3520-A - Annual Information Return of Foreign Trust with a U.S. Owner 13

This form is required where a foreign trust has a U.S. owner.

A U.S. citizen or a green card holder who is a member of an SMSF could be regarded as a U.S. owner of a foreign trust.  In such instances, the U.S. owner may need to file form 3520-A yearly to provide information about:

the SMSF  its U.S. beneficiaries (members), and themselves – as a U.S. person who is treated as an owner of any part of the foreign trust.

IRS Form 8621 - Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund 14

This form must be filed by U.S. Persons with a direct or indirect shareholder interest in a passive foreign investment company (PFIC). The PFIC rules usually apply to foreign companies and mutual funds that derive over 75% of their income from passive sources, such as capital gains and dividends. The rules are exceedingly complex and require reviewing the underlying assets and income of the PFIC.

Completion of the IRS forms requires careful consideration of a taxpayer’s individual circumstances. Failure to file forms can result in significant penalties of $10,000 (or greater) and even criminal penalties.  

The ensuing discussion is for general informational purposes only. It is not intended to constitute tax or legal advice, or a recommended course of action, and does not create an attorney-client relationship between the reader and Altman & Associates, a division of Frost Law.

Footnotes

  1. https://www.irs.gov/pub/irs-drop/rp-20-17.pdf
  2. https://www.ato.gov.au/Business/Small-business-entity-concessions/Concessions/CGT-concessions/Small-business-retirement-exemption/
  3. https://www.irs.gov/forms-pubs/about-form-8938
  4. https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar
  5. https://www.irs.gov/pub/irs-pdf/p5569.pdf
  6. https://www.irs.gov/pub/irs-pdf/p5569.pdf
  7. https://www.irs.gov/forms-pubs/about-form-3520
  8. IRS private Letter Ruling 201538008 https://www.irs.gov/pub/irs-wd/201538008.pdf; IRS private Letter Ruling201538007 https://www.irs.gov/pub/irs-wd/201538007.pdf; IRS Private Letter Ruling 201538006 https://www.irs.gov/pub/irs-wd/201538006.pdf
  9. IRC sections 7701(a)(31)(B) and 7701(a)(3)(E)
  10. IRC section 7701(a)(30)(E)(i)
  11. IRC section 7701(a)(30)(E)(ii)
  12. IRC sections 671-679
  13. IRC section 677 - This could expose the SMSF to tax in the U.S. on the contributions and earnings of the SMSF.
  14. https://www.irs.gov/forms-pubs/about-form-3520-a13 https://www.irs.gov/forms-pubs/about-form-8621
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