U.S. Tax on Australian Superannuation Funds

An Australian superannuation fund is a partly compulsory pension program put in place by the Government of Australia. The employer contribution rate has been 9.5% since 1 July 2014, and as of 2015, was planned to increase gradually from 2021 to 12% in 2025.

An individual can withdraw Funds out of a superannuation fund when the person meets one of the conditions of release, such as retirement, terminal medical condition, or permanent incapacity.

U.S. taxation of these plans can be confusing.

Classification of Australian supers for U.S. tax purposes

An Australian superannuation is a hybrid plan that the U.S. doesn’t have a parallel. It has characteristics of both a Social Security program and a private pension.

Contributions to Australian Superannuation Funds are treated as social security payments in the U.S-Australia totalization agreement.

However, unlike a government social security program, an Australian super is not mandatory upon the employee to contribute.  Moreover, it’s not a public fund; it’s privatized.

Unfortunately, the IRS has not provided much guidance on this hybrid plan. Most practitioners treat them as private pensions.

We’ve heard about practitioners who take the position that they’re social security funds and completely exclude super earnings and distributions from U.S. taxation relying on Article 18 the U.S.-Australian income tax treaty. Here’s the section in Article 18:

Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

To take this treaty position on Australian supers is almost certainly an incorrect tax position. They’re not social security plans.

In fact, Australia has a system of social welfare payments provided by the Government of Australia. Superannuation funds are not public funds and are not paid by the Government of Australia. Note that in Article 18 it specifically states that the payment must be “paid by one of the Contracting States.”

Is the growth in a superannuation taxable in the U.S.?

It depends on the plan. A portion of the superannuation may be considered a grantor trust if less than 50% of the contributions are after-tax contributions. And if so, a portion attributable to the after-tax contributions would be reported on Form 3520 as a grantor trust.

The earnings inside the funds would be taxed concurrently. Self-managed super funds are usually considered grantor trusts.

For the non-grantor trust portion, it must be determined whether the participant is highly compensated under IRC 410(B). If the participant is not highly compensated, then fund earnings are not subject to tax until distribution under IRC 404(b)(4)(B).

For highly compensated employees, the increase in the value of the plan is included as taxable income annually.

How are Australian supers taxed on distributions in the U.S.?

Upon distribution, the funds are taxable in the U.S. to the extent that the distributions exceed basis.

The basis in a super are amounts that were previously included in taxable income. This would include funds contributed by the employee but would not include fund-level taxes paid.

Required international information reporting forms

If the fund is a grantor trust, it’ll require Form 3520, 3520-A, Form 8621, FBAR, and Form 8938. As a non-grantor trust, only Form 8938 and FBAR are required.

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