Superannuation accounts can be complicated, especially for Americans in Australia who have no idea how it works. You’d want to read this one! I know that there are a lot of questions going through your mind, and you’ll see that as you progress, you will find your answers. Let’s start with the basics.
How Australian Superannuation funds impact tax filings for American expats
Superannuation is the Australian version of a 401K or a retirement plan. Your employer has to put at least 9.5% of your annual salary into this fund and one you reach the minimum age requirement for retirement, then you can take money out of the fund so as to enable your retirement.
Is my Superannuation fund also a foreign grantor trust?
The requirements of a foreign grantor trust are laid out as a list of rules in internal revenue codes 671 to 679. These codes all look at the control and ownership of your superfund, as well as how the use of the funds are impacted by the control and ownership of them. Typically, there is one code in Australia that makes almost all Australian superfunds count as foreign grantor trusts. This code asks if it is possible to use your fund to pay for insurance premiums. This causes problems, as for many Australians, a popular form of superannuation fund management is to use income from the fund to pay for life insurance. Additionally, because the language of the code requirement asks if it is possible, your superannuation fund will still be compliant with this code even if you do not personally use your account to pay for insurance premiums. If your superfund meets any one of the internal revenue codes’ 671 to 679 requirements then it is technically a foreign grantor trust and as such has specific US tax filing laws.
What is the purpose of a Superannuation fund?
The main function of a superannuation fund (also referred to as a superfund) is as a tool in retirement planning, ensuring that those who are retired from the workforce still have a source of income. These retirement funds are not held under the name, or usually even the control of, the beneficiary, and are instead held with a trustee, also known as a fiduciary. As the trustee has partial or full control of the account and it’s investment decisions for the majority of superfunds, a superannuation fund is a foreign trust in the eyes of the IRS.
Why are superannuation accounts not on a standard tax return?
Under the foreign tax compliance act, (also known as FATCA), US taxpayers holding financial assets outside of the US need to report these assets and funds to the IRS on form 8938. Interestingly, most Superannuation funds do not need to fill out this specific form due to their status as a retirement fund.
Any US company sponsored retirement plan such as the 401K differs from an Australian superannuation account as a superannuation account is not created in the US. This means that it violates form 401K for retirement funds and is therefore technically not tax compliant under US law.
I want more information about Australian Superannuation
FREQUENTLY ASKED QUESTIONS
Why don’t all foreign grantor trust owners have to fill in forms 3520 and 3520-A?
There are three types of superfund, a self managed superfund, a retail fund, which is what the majority of Australians hold, and an industry fund, which is only accessible to Australians working in certain industries. Part of the annual tax returns for the owners of a foreign trust are the forms 3520 and 3520-A, which look at the ownership and beneficiaries of these accounts as well as the transactions that they have and all large sums of money put in and taken out. This provides the IRS with more information about American expat’s financial situations. The three types of superfund all have differing levels of control over their accounts, and as such they don’t all have to fill in these forms.
The IRS can choose to not make you fill out these forms depending on the conditions of your superfund. If your superfund is with a large financial institution such as Australian Super, your employer contributes significantly to your account and you have little control over how your funds are invested, then it is likely that you may not have to fill out these forms. This is provided that the contributions by the employee (the beneficiary of the account) pays less than the employer, or less than 50% of the total money in the account. This is known as incidental payments. As it is common practice in Australia for the employee to not pay into their superfund, this typically doesn’t cause any issues.
Self Managed Super Funds
Self managed super funds can cause many problems when it comes to American tax season. This is because a self managed superfund allows you to trade the funds from your account on the stock market, explicitly choosing what shares you want to purchase and you even have the option to invest in real estate, provided that you do not benefit financially from this decision until your retirement. For example, you can act as a landlord, with any profits going into your superfund. However, there is still a minimum age requirement, and a self managed superfund cannot be used in place of an investment bank account, where you can take money out whenever you please. If you have a self managed superfund, then you will need to file forms 3520 and 3520-A annually.
One of the internal revenue codes 671 to 679 that we discussed above outlines a retirement fund set up on your behalf. If you have this type of fund, typically an industry fund, you may not have to file the forms that a foreign grantor trust requires, even if you end up paying more than the incidental amount into your superfund. However, this is rare as the very few American expats living in Australia have an industry fund as opposed to a more standard retail fund.
Paying into a superfund
In Australia, money can be placed in a superfund through concessional, by your employer, and non-concessional, by the employee, payments. One area where this can become problematic is if you were to choose to leave your employer or your contract was terminated. This could result in a large lump sum payment, which would typically have a low level of tax attached to it, making it an attractive prospect to place this into your superfund, wherein it would still be counted as a non-concessional payment. Additionally, due to the differences in American and Australian tax laws, wherein Australia taxes money before it goes into the fund and America taxes money after it leaves the fund, it is likely that this money could be double taxed. Fortunately, this doesn’t usually happen in practice due to tax credit layovers.
What is a foreign tax credit layover?
Because Australian taxes are comparatively quite high, Americans living in Australia can end up with what are called foreign tax credits. These act as money that is taken off of their American taxes due to the IRS. You can use these tax credits on payments for your superannuation fund, which is why in practice American expats do not get double taxed on their superannuation accounts. Foreign tax credits accumulate every year if you do not use them, but they become invalid after 10 years, so it is important to use them up.
I haven’t been filing US tax returns
You may not have yet been penalised for not filing the taxes on your superannuation fund. This does not mean that you should continue to fail to file them. If you were to take money from the trust after your retirement, then any money that you remove would be subject to taxation for as long as you have been failing to file your taxes (up to 10 years). This means that it is very important that you do pay your American taxes as it ensures that you do not receive any unwelcome fees on your savings. The Streamlined Tax Amnesty Fund allows you to rectify this by submitting tax returns for up to the last 10 years.
What if I fail to file these forms?
Although your superannuation fund may not have to file for every single form mentioned above, you still need to file the forms that are required, as well as putting your superannuation fund on your personal tax return form. If you do not do this you are in contempt of the IRS and can then have significant penalties placed against you. These penalties can be up to 35% of your fund, as well as £10,000 for every incorrect filing.
What professional help can I receive?
It is recommended that you consult with a professional as an American expat before trying to file your taxes. These professionals will be able to tell you exactly which forms to file and when the deadlines for submitting them are. This will help you to save time, money and above all avoid the financial penalties put into place by the IRS.
Contact us at Expat Tax Online for more information.