What is superannuation?

U.S. Tax Help When You’re An Expat In Australia ➥ Superannuation

Superannuation Explained

Superannuation is an organizational pension program created by a company for the benefit of its employees. It is also referred to as a company pension plan.
In Australia, superannuation, or just “super”, is compulsory for all people who have worked and reside in Australia. The balance of a person’s superannuation account, or for many people, accounts, is then used to provide an income stream when retiring.

What are the main issues around superannuation that you should be aware of?

One of the biggest challenges that we have for expats in Australia is that when the IRS looks at the superannuation set up, they don’t really see a qualified US retirement plan, as it is not an exact match for a 401(k).

Therefore, things you need to look at are:

What your level of income is.
Whether you are over or under a high salary threshold.

On a basic level your employer’s contribution (or the ‘super guarantee’ that you receive) is typically going to be included in your income each year. In addition, the superannuation fund will be reported on the FBAR and perhaps the 8938 form, if required. One thing that is always worth considering is how much you are putting into your superannuation fund and how much your employer is putting in; if you’re putting more in than your employer, you could end up triggering additional, more complicated requirements.

What happens to any investment earnings in the superannuation itself?

Whilst there are ways that this can be captured for US tax purposes, the most common thing that can happen is a situation where a superannuation fund is viewed by the IRS as a grantor trust and the impact of this from a US point of view is probably three-fold:

You need to file the 3520 form every year.
You need to file the 3520-A form every year.
There’s flow through from the earnings within the trust down to the individual taxpayer on their return.

It’s important to understand these contribution levels and whether the employee contributions have exceeded the levels of the employer contribution. It is recommended that employee contributions do not exceed those put in by the employer.

However, you shouldn’t assume that a grantor trust is the end of the world. Sometimes getting taxed on the earnings on your superannuation now, instead of later, may lead to a better match up in ensuring that the US taxation is going to be as low as possible; sometimes the extra paperwork isn’t a bad thing!

At the heart of the issue is whether you are a US citizen or green card holder at the time you start to receive money from your superannuation account. If you are, there will be a taxable event on the US side of things.

When people are getting to retirement age and looking to take out a chunk of superannuation, should they expect to be paying some tax to the IRS on that money?

It depends. The level of compensation an employee earns can also dictate how much is captured for income under superannuation. The US has a fixed threshold that’s never really been adjusted for a highly compensated individual (which is set at $120,000 USD): if you earn below that amount, the contributions will be taxed, but the earnings within that fund may not be. If you earn above that mark, then the value of the superannuation fund from one year to the next is captured as an additional taxable income. In that latter scenario you can still end up in a situation later, when distribution takes place, where the full value of the fund has already been captured as taxable income. This is not necessarily a bad thing: it doesn’t mean there has been much, if any, US taxation as far as a liability to pay.

How important is it to report your superannuation from the get-go, rather than late in the day?

Think of it as establishing a cost-basis – so just like any other share or stock that you have – every time you go and include the income or the growth in the superannuation on your annual tax return, you’re building up this cost-basis. By doing this, when you ultimately receive distribution you’ve got something there that the IRS can’t touch. However, if out of nowhere you suddenly pulled a large sum of money out of your Australian superannuation – say $300,000 – that’s suddenly $300,000 that has zero cost-basis attached to it which can be quite problematic.

Ultimately you want to have the least impact possible on your money and the best way to achieve this is to file every year and manage your superannuation effectively.

Should you consolidate your superannuation funds into one?

This seems to be quite regularly encouraged by Australian employers. Most people will experience changes to their employment, moving from one employer to another. In those situations, you may have different superannuation funds, those held by previous employers and those held by your current employer. While you might be encouraged to keep your superannuation in one place, moving money in superannuation funds can have unintended consequences on the US taxation side of things. Those issues can actually be quite infuriating for the US tax resident, so you need to think carefully when moving money around.

This is often unexpected, as it isn’t the same in the US. If you look at a qualified plan in the US, where you have a 401(K) with one employer, then you move to a new employer who has their own 401(K) in a different place, you can join the two so they’re in the same place. In the US, there’s no issue, as there has been no taxable event. However, it’s sadly not the same for Australia.

Hopefully in the future an agreement can be formed at treaty level between US and Australia to add clarity into this area. Until then, careful consideration is needed before taking the step to move money across.

So, what about the Income Tax Treaty and Totalization Agreement between Australia and the US? How does that affect these superannuation issues?

The income tax treaty between Australia and the US has been around for ages. It was revised in 2001 but didn’t address this issue around superannuation. This is not the case in all countries, as in places like the UK and Canada, equivalents of these agreements and treaties have been updated more recently and are certainly more modern.

Interestingly enough though, the totalization agreement is less than 20 years old. Superannuation isn’t truly social security when it comes right down to it, so Australia probably belatedly came to the party in terms of doing things like this. However, the totalization agreement is not really a taxation agreement in this respect so hasn’t fixed this particular problem – the best solution would be for a change in the income tax treaty, but this unfortunately hasn’t happened yet.

Three important take away points:

If your superannuation is considered an employee trust, employer and employee contributions are taxable from a US perspective.
Look to keep the IRS informed of your superannuation from the start – this helps to avoid any complications down the line. So, report it as income on your annual tax return.
It is recommended to keep your contributions lower than those of your employer where possible.