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Tax Treatment of Superannuation for US Based Expats – the topic of how Australian expats living in the US manage and declare their Australian superannuation to the IRS causes a lot of confusion and we meet Australian expats on a daily basis who are still either ignoring their obligations or treating their superannuation accounts incorrectly.

In this article we run through some of the most common questions that relate to tax on Australian superannuation accounts for US based Australian expats.

Do I need to report my Australian superannuation fund to the IRS (Internal Revenue Service)?

In most instances, an individual considered a US resident for tax purposes will be required to report their Australian Superannuation Fund account to the IRS when filing their Federal Income Tax Return each year.

Who is a US resident for tax purposes?

A US resident for tax purposes includes US citizens, Green Card holders (i.e. permanent residents), and individuals who meet the ‘substantial presence test’ in any US tax year (i.e. from 1 January to 31 December).

You meet the ‘substantial presence test’ if you are physically present in the US on at least 31 days during the current year (tax year), and 183 days during the 3-year period that includes the current year and the 2 years immediately before that. This test will capture most Australian expats visiting the US on a temporary visa such as an E-3, L, or H1B (list not exhaustive).

What are the different tax treatments of my Australian superannuation fund?

If you are a resident for tax purposes in the US, your Australian Superannuation fund will likely be treated as one of the following foreign trusts:

  • Employee Benefits Trust under Sec. 402(b) of the Internal Revenue Code (IRC)
  • Foreign Grantor Trust under Sec. 671-678 of the Internal Revenue Code (IRC)

In either case, there will be an obligation to declare the superannuation fund on your US tax return (Form 1040) as an information item to satisfy tax compliance. Of the two foreign trusts designations above, the Foreign Grantor Trust is the less favourable treatment, as it results in greater US tax implications for the individual and reporting on the underlying investments options of the super fund, which can be extremely complex.

It is important to note too that where a super fund is treated as an Employee Benefits Trust, there is a provision under Sec. 402(b) where if an individual meets the definition of a ‘Highly Compensated Employee’ (HCE), and their superannuation fund is seen as a ‘Discriminatory Plan’, the tax treatment by the IRS can be more punitive. An individual meets the criteria of an HCE if they received compensation from their employer greater than USD $80,000 in the preceding income year. Additionally, the super fund will in most cases be considered discriminatory as the individual is considered to be the only participant in the super fund for testing purposes.

Is my Superannuation an Employee Benefits Trust or a Foreign Grantor Trust?

The determining factor for making the designation is control, and the extent to which an individual has within their super fund. This can be quite subjective and is open to interpretation in most cases. Where substantial control exists, there is a high chance the super fund will be treated as a Foreign Grantor Trust. Some examples of control in the context of your superannuation fund:

  • The ability to choose where an individual invests their super fund balance, which all members of an Australian super fund have.
  • The power to make decisions on the investments in a superannuation fund. As such, any fund where you have this type of control, such as a Self-Managed Superannuation Fund (SMSF), would be deemed to be a foreign grantor trust.
  • The choice to make contributions to the super fund, such as pre-tax or post-tax member contributions. Generally, if an individual has made more than half (50%) of the contributions to their super fund during the income year (i.e. your contributions exceeded your employer’s contributions), the super fund would likely be deemed a foreign grantor trust for US tax purposes.

We have summarised the US income tax and reporting obligation for each type of foreign trust in the following table:

Treatment Criteria US Taxation by Super component Entitlement to FTC in the US? PFIC Risk Form required
    Contributions (Employee and Employer) Income and Capital Growth      
Employee Benefits Trust Member contributed less than 50% of the contributions received by the fund during the tax year (i.e. less than their employer did). Taxable by the IRS as ordinary taxable income. Tax-deferred until a distribution (withdrawal) is made, at which point taxation occurs. Yes, a Foreign Tax Credit (FTC) will be available for tax paid by the Super fund. Underlying investments in the fund are not required to be reported to the IRS each year. Form 1040

Form 8938*

Form 114 (FBAR)**

 

Employee Benefits Trust – Highly compensated employee (HCE) Member contributed less than 50% of the contributions received by the fund during the tax year but meets the criteria of an HCE^. Taxable by the IRS as ordinary taxable income. Taxable by the IRS as ordinary taxable income. Yes, a Foreign Tax Credit (FTC) will be available for tax paid by the Super fund. Underlying investments in the fund are not required to be reported to the IRS each year. Form 1040

Form 8938*

Form 114 (FBAR)**

 

Foreign Grantor Trust Member contributed greater than 50% of the contributions received by the fund during the tax year, OR plan is a Self-managed Super Fund (SMSF) Taxable by the IRS as ordinary taxable income. Taxable by the IRS as ordinary taxable income. Yes, a Foreign Tax Credit (FTC) will be available for tax paid by the Super fund. PFIC investments held within a foreign grantor trust must be reported separately on Form 8621 on an annual basis#. Form 1040

Form 8938*

Form 114 (FBAR)**

Form 8621

Form 3520

Form 3520A

 

*Form 8938 is only required if total foreign assets are greater than USD $50,000 on the last day of the tax year, or greater than USD $75,000 at any time during the tax year.

**FinCEN Form 114, also known as the FBAR (Foreign Bank Account Reporting) is only required if you have a financial interest in one or more overseas financial accounts and the total value of all the financial accounts combined was $10,000 or more during any point during the tax year. While foreign pensions (such as super) are currently exempt from FBAR, it remains prudent to continue reporting all superannuation interests here to future proof against any ruleset changes.

^An individual would meet the definition of an HCE if they received compensation from their employer greater than USD $80,000 for the preceding income year.

#this will result in further reporting requirements and additional taxation on the underlying investments of the super fund. Passive Foreign Investment Companies (PFICs) are outside the scope of this fact sheet.

 

 

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