Dealing with Australian Superannuation has come up frequently at Brock, sometimes on the FATCA and Australia page and sometimes on various other threads.
JakDac suggested we have a post for this specific topic, so people can post helpful information (or ask questions) on Superannuation in one location, so people won’t have to search throughout the site.
We’re kicking it off with a text by JakDac, who asks that you remember these are suggestions, unless verified.
JakDac writes:
“If you’re in a standard fund (industry fund or retail fund), and all of the contributions are employer contributions then it is probably classified as a 402(b) plan for US tax purposes. This means: Contributions are taxed by the US on the way in. A portion of withdrawals is taxed on the way out. No tax on current earnings inside super. (this is my understanding of the law, not tax advice – I am not a tax professional)
“You might note the gift allowance to non-US spouse of $145,000k per year to help move money around Should WE be doing this ?
“Australian dividends. The US does not recognise Australian franking credits. May best in non-US person name.
“All not double taxation prevented.
“If super is classified as a 402(b) plan (and this depends on the facts and circumstances, but should apply to most corporate and industry funds, and many retail funds), then contributions are taxed, but income inside the fund is not taxed until withdrawn. I don’t know whether you need to be careful about transferring between funds as this may change it from a 402(b) plan to something less favourable.
‘Karen says
April 13, 2016 at 10:51 pm‘@StressedinAus – forewarned is forearmed, or something like that. It is possible to live as a US tax compliant Australian resident with very little US tax paid — at least until you retire.
‘For super – don’t make any contributions over the 9.25% super guarantee (well, you could possibly make more pre-tax/salary sacrifice contributions, but you need to run the numbers first). And definitely no after-tax (non-concessional) contributions. If you’re in a standard fund (industry fund or retail fund), and all of the contributions are employer contributions then it is probably classified as a 402(b) plan for US tax purposes. This means: Contributions are taxed by the US on the way in. A portion of withdrawals is taxed on the way out. No tax on current earnings inside super. (this is my understanding of the law, not tax advice – I am not a tax professional)
‘outside of super – no managed funds (or REITs or ETFs), house in your name, make sure the total value of accounts (bank accts plus brokerage accts) he is named on is no more than US$10,000. If he wants to save more than that, he should try to find a US-based account (pretty hard to do, but possible) – of course, that exposes him to currency risk.
‘And I second what Bubblebustin and others have said — use the opportunity of being compliant to freely advocate for change.’ ”
Self-Managed Super Funds (SMSF) – for those who actually want to have some control in their financial lives, rather than leaving their retirement up to people in suits (who don’t care if you eat cat food in your old age) – are treated as trusts by the IRS, as I understand it. They will be taxed to every inch of their lives, losing any and all tax incentives given by the Australian government. This hits the self-employed hard.
No bloody way will I send any money to the US after I was kicked out of my IRA and forced to pay tax and penalties. Eating cat food is the more palatable choice, in my opinion.
Superannuation: generally 9.5% of earnings, with reduced tax on the way in and along the way (15% for most), with $0 Australian tax on the way out during retirement. One major party in Australia wants to raise contributions to 12%. It sounds like Canada does not have such a mandated retirement savings vehicle but accounts to which one may put money into to get reduced Canadian tax benefits.
US law does not recognise Australian Superannuation contribution tax, and Australian tax along the way as any sort of credit against US tax – they are just treated as an expense to the fund. Australia will not recognise any US tax as, according to the tax treaty, Superannuation is Australian source and not foreign source. Therefore, there may be no recognition of US taxes as credit against Australian taxes. It is a bit muddied as Superannuation is not considered by the US as owned by the individual but as some sort of trust (yet for Exit Tax and Estate Tax I believe consideration of Super comes into play).
Definitely you should use the $US145,000 annual gift to foreign spouse. How to use that to wiggle out of home equity is a question.
I have heard story that moving/consolidating super attracts US penalties when US rules are applied in a “politically correct” way.
In terms of Superannuation, US nonqualified pension rules apply. http://www.expatattorneycpa.com/id70.html There is a differentiation between “highly compensated” individuals those earning $US105,000 or more per year and those earning less. If “highly” then taxed on the annual USD account gain (thank goodness for dropping Australian Dollar). Such treatment discourages Australian after tax contributions (which many an Australian financial planner advise especially nearing retirement), as such contributions then get taxed by the US at the US marginal rate. So if one elects “highly” which has advantages of lining up the two systems – in retirement you may take the money out untaxed by the US, but if you leave it in then still taxed on account gains?
A big mystery is what happens say you are not “highly” compensated, then become “highly” then perhaps later not “highly,” then on into retirement. I think the rules were not formulated with this in mind but for a Homelander going to work overseas for a few years then coming back, or most probably the rules were formulated to discourage “nonqualified” vehicles in the US. And as we know, the US treats all US Persons as living in the US with only tax treaties between these persons and the US taxation – thus “nonqualified” but nonUS country mandatory vehicles get discouraged as well.
@Lisa How were you kicked out of your IRA? I thought most funds were saying that you could not invest any more.
Here is the ongoing effort by Jak Dac:
Letter out to MP and also Senator:
http://isaacbrocksociety.ca/wp-content/uploads/2016/04/JakDak-Correspondence-to-and-answer-from-Australian-MP-Ross-Vasta.pdf
Letter back from Senator Lindgren (including quote from reply from Treasurer Scott Morrison). and reply from JakDac.
http://isaacbrocksociety.ca/fatca-and-australia/comment-page-32/#comment-7521504
I have a reply in the works that covers not just Superannuation.
Disclaimer: I am not a tax professional, though I do have a background in finance. The discussion below is not advice and does not take into account any unique facts in your own personal circumstances – please check any of this information with your own research and/or by consulting a professional.
Most employer plans should qualify as 402(b) plans as JakDac says. My understanding is that these are non-grantor trusts as long as EMPLOYER contributions are less than half of the total contributions. If EmployEE contributions are more than half, then plan becomes a grantor trust – requiring extra forms and causing the gain INSIDE the fund to be taxed in the US currently. This is the reason I advised against non-concessional contributions (which come from outside money and are, therefore, employee contributions).
However, be careful about what is considered Employer and Employee – this may not be the same under US law. I think there is a case for treating salary-sacrifice contributions as Employer contributions, since under a salary-sacrifice arrangement you are contracting with the employer to receive a lower salary in return for additional employer superannuation contributions. This may not be how the contributions are identified on your statement.
Self-employed US taxpayers in Australia are stuck – I don’t see any way to avoid grantor-trust status. As there is no requirement in Australia (as far as I’m aware) for self-employed to contribute to super, it may be better on an overall tax basis to avoid super and put your savings into direct investments (shares and/or property). At least that way you get capital gain treatment on US tax. (A smallish super account may reduce overall tax as Australian tax rates are higher than US tax rates). As any super account for a self-employed individual will probably be considered a grantor-trust, an SMSF probably isn’t any worse than a retail fund.
Rollovers and consolidations are probably taxable in the US – since you’re transferring out of a non-qualified plan and into another non-qualified plan. Plus, the amounts rolled over would likely be considered non-employer contributions, increasing the likelihood of the plan being treated as a grantor trust.
Be very careful about following advice of Australian financial planners unless they are specifically taking US tax into account. It may be that the Australian tax saved more than offsets the extra US tax liability, but unless you actually do that computation you don’t really know.
@JC – my understanding of the rules for non-qualified plans and “highly compensated” individuals is that the less advantageous rules kick in only if the plan discriminates in favour of highly compensated employees. Where an employee is in the default employer plan, the fact that most/all employees are covered by the same plan will mean that the plan can still be treated as a non-grantor trust (providing all other criteria are met), so the gain inside won’t be taxable currently.
@JakDac – re dividends (in original post)
Yes, the US does not recognise the franking credit. However, only the cash dividend is taxable in the US, and you will get a credit for any Australian tax paid in excess of the credit (actually, the way the allocation works for passive vs employment income for FTC, the credit gets spread across all income). So, I don’t think owning direct shares with franked dividends is really a problem.
For those of you who aren’t in Australia – we have an imputation tax system. This means that corporate tax is treated as a pre-payment of shareholders’ individual tax. Franked dividends are dividends that come with a tax credit attached. If you receive $70 in cash dividends, there will be a $30 tax credit. You are taxed in Australia on the total of cash plus credits ($100) at your personal tax rate, and then you subtract the $30 credit. If you’re on the 37% tax rate, you end up paying only $7 in tax. For US purposes you would have $70 in passive income and an additional $7 in FTC.
@Karen – so you are saying the link I provided in regards to “Highly” compensated does not apply? Clear as mud as is said.
In terms of franking credits. If you are in the 45% bracket there is mostly “wash” as the 15% extra personal tax paid will offset the 15% US tax. If your personal tax is just below the 32.5% threshold at just below $AU 37,000 then no additional Australian tax on dividends (actually some credits), but then zero “foreign” tax credits against the US 15% rate. Also there may be some nastiness at just below the Australian tax free threshold which is higher than the US tax free threshold. Just thinking retirement scenarios. Maybe for someone in finance to chart how it works with Australian imputation and US cash basis.
There has not been enough push on this: Consideration of entire income and “foreign” tax paid across all possible categories. Then that would be where the way higher Australian rates than US rates would apply as credits. I did see this on the draft to the Democrats Abroad Platform. Hopefully they come out with it and push it. The tax treaties work best at preventing double taxation in the cases of nonresident aliens, for whom consideration of all foreign income and tax would not be beneficial or necessary.
What happens when you roll over one super account into another? I have done that when I have changed jobs. What happens if you have multiple super accounts from having worked many jobs and you forgot about that super account you had when you where 20 and worked for only 3 months during the summer holiday at University? There are heaps of Super accounts that are not connected to their owners.
@JC – re 402(b) plans – I think the discussion at the page you linked is incomplete. Under 402(b)(4), the rule for highly compensated individuals only kick in if the plan is discriminatory (due to compulsory super, very few Australian plans would be discriminatory). See also http://www.thetaxadviser.com/issues/2012/mar/clinic-story-01.html
Re dividends – the application of FTC isn’t quite so simple. Because FTC is allocated based on average tax rates (not marginal tax rates), the net effect will depend on whether there is other income. Those who are still employed will probably have plenty of FTC to cover US tax on dividends. For retirees with little Australian taxable income other than franked dividends, it could be a problem. Of course, retirees also have the problem of US tax on at least some of their superannuation distributions (which have zero Australian tax after age 60). Best to renounce before you retire.
I am stuffed if I admit to being a “US person”
Being a non-goverment worker I got paid less than if I worked the private sector. So I thought I was being smart by contributing to my super with after tax money. The Australian government encouraged it by coming up with the Low income super contribution scheme. Now the US Government is discouraging good saving habits.
https://www.ato.gov.au/Individuals/Super/In-detail/Growing/Low-income-super-contribution/
“What is the low income super contribution?
The low income super contribution (LISC) is a government superannuation payment of up to $500 to help low-income earners save for retirement.
If you earn $37,000 or less a year, you may be eligible to receive a LISC payment directly into your super fund.”
I didn’t think using before or after tax contributions would affect LISC. The page you linked said the $37,000 limit was ATI (Adjusted Taxable Income), which includes all before-tax super contributions. So, making contributions before or after tax will not affect ATI.
Even if you made enough after-tax contributions to turn your super fund into a grantor-trust for US tax purposes, the USD gain inside the fund may not have been very high in the past few years due to the falling AUD. It may be worth computing the US tax due to see if it makes sense to file streamlined and renounce.
@Ellen — rollovers are a big problem. The treaty needs to be fixed to allow them to be tax free in the US. (If anyone knows how to do a rollover or consolidation of Australian super without triggering US tax, feel free to chime in. I would love to be proved wrong here.)
Actually – the treaty needs to be fixed, full stop. Until that happens, renouncing may be the only way to plan for retirement in Australia.
Better yet – the US should stop taxing non-resident citizens.
@Karen
Sorry I meant the Super co-contribution:
https://www.ato.gov.au/individuals/super/in-detail/growing/super-co-contribution/
“The super co-contribution is intended to help eligible people boost their retirement savings.
If you are a low or middle-income earner and make personal (after-tax) super contributions to your super fund, the government also makes a contribution (called a co-contribution) up to a maximum amount of $500.
The amount of government co-contribution you can receive depends on how much you contribute and what your income is.”
I got the two schemes confused.
This is also posted on the FATCA and Australia site, but still valuable (though you have to dig through it).
‘Foreign Retirement Plan Account Information from IRS’ documents at;
https://www.bragertaxlaw.com/foreign-retirement-plan-account-information-from-irs.html
This is NOT an endorsement of the tax lawyer firm that is the source of the info obtained via Freedom of Information requests re emails and other IRS materials that detail the IRS treatment and confusion over how to treat Australian superannuation (and other ‘foreign’ retirement accounts).
For ex. see this series of emails from within the IRS;
https://www.bragertaxlaw.com/files/lbi_responsive_docs.pdf
And also read this:
http://www.taxproblemattorneyblog.com/2016/03/brager-tax-law-group-receives-foia-documents-australian-superannuation-accounts-foreign-retirement-plans.html
‘Even the IRS is Confused About Australian Superannuation Accounts’
http://www.taxproblemattorneyblog.com/2016/03/even-irs-confused-australian-superannuation-accounts.html
Following.
oops I posted this in the wrong place
here is an article on the way the US taxes Australian superannuations https://www.linkedin.com/pulse/us-taxation-australian-superannuation-fund-roy-berg
Teresa Creamer commented on FATCA and Australia.
in response to Petros:
Posts on The Isaac Brock Society website concerning FATCA and Australia If clicking on a comment link brings you to the wrong page, click here to get on the most recent page of comments. (alternatively, to reach the most recent comment page, go to the url in the bar at the top of your […]
I found this article on the way that the Australian Superannuation funds are taxed by the United States. It looks like the author is a lawyer.
https://www.linkedin.com/pulse/us-taxation-australian-superannuation-fund-roy-berg
Forum sent to
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“Vasta, Ross (MP)”
@JakDac, we know that lawyer well. The information may be correct. But he is on the side of US compliance, being a recent US export to Canada – since 2011, just in time to benefit from the advent of the OVDI jihad affecting Canadians, and he appeared before Canadian Parliamentarian praising the right of the US to tax US citizens, and the FATCA IGA and urging its implementation and enforcement via laws in Canada http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=e&Mode=1&Parl=41&Ses=2&DocId=6597204#Int-8358745 . He referred to our opposition to it and fight against it as
‘jingoistic hyperbole” http://maplesandbox.ca/2014/lynne-swanson-appointed-chief-jingo-4-canada-on-fatca-hyperbolic-rhetoric/ and his business partner likes to chime in with insults as well http://maplesandbox.ca/2014/moodys-thinks-we-are-inflammatory-on-fatca/ .
He is also a DA member.
@badger
I had the pleasure of meeting him personally, as he’s now with my lawyer’s office. Let’s just say he’s as impressive in person as he was before the Standing Committee on Finance.
Oops, badger, I cross-referenced another post where Duke linked another friend of Brock’s concerning TFSA’s:
http://isaacbrocksociety.ca/2016/03/09/canadian-fatca-iga-litigation-update-we-need-more-canadian-witnesses/comment-page-36/#comment-7549422
JC commented on FATCA and Australia.
in response to Petros:
Posts on The Isaac Brock Society website concerning FATCA and Australia If clicking on a comment link brings you to the wrong page, click here to get on the most recent page of comments. (alternatively, to reach the most recent comment page, go to the url in the bar at the top of your […]
@Karen. That is my understanding of it, also as a person with no tax qualifications. The US tax is also on account gain. So with this to avoid double counting (contributions + account gain would represent double counting) then just the account gain is considered which factors in contributions. Salary + Super Account Gain and if both under the FEIE then no US tax. I don’t know the exact computation if the total goes over the FEIE, as then there may be other credits from AU tax on earnings? Yet still no credits from AU tax on Super which is just treated as an expense to the fund. So If you earn just at the FEIE, yet account gain puts you over, then “there is the rub.” I think if you earn substantially more than the FEIE then, while you can’t count tax on superannuation gain portion, you can count the much higher (than US)Australian tax rate on earnings and at some point this may also put one in a zero US tax on super position. Just guessing here.
Lets say over the past few years your super account is worth less than the previous year end in USD, because of the change in AUD/USD. Then that may be carried forward to offset future year gains, from my limited understanding.
Let’s say one retires. I am thinking that the account gain would not be covered under the FEIE while considered “earnings” it may not apply. Perhaps depends on application, yet would back why my tax person said get it all out as soon as possible. Then this also is along the lines of the “high earner” treatment of tax on the way in/along the way, as opposed to “low earner under $US105,000” not taxed along the way but taxed on the way out (at marginal rates?)
Reply Comments
@JC – I don’t think the gain in the account qualifies as earned income at any point in time (I could be wrong, do you have a cite/link for that treatment?). The contributions are earned income (if they are concessional contributions). Some US tax preparers do take the contributions tax as a Foreign Tax Credit on the US return.
The gain in the account is troublesome – if the account is treated as a foreign grantor-trust, then gain would be taxed currently (as investment income, I think), but as Australian tax paid on earnings is never disclosed separately, there would be no credit for tax paid by the fund.
When you get to withdrawing, my understanding is that to compute the portion taxable by the US, you add up all the previously taxed amounts (contributions – both concessional and non-concessional plus any previously taxed appreciation) and compute the percentage of the account balance that has already been taxed. That percentage of distributions comes out tax free, and the remainder is taxed at your marginal rate. This avoids taxing the same income on the way in and on the way out.
And, you’re right, changes in the exchange rate can make a big difference in the USD gain or taxable distribution.
I have seen several variations on how the US taxes super – some of them clearly wrong (as in ignoring the savings clause). Part of the problem is the wide variety of plans out there. I’m in an industry fund – been in the same fund for over 20 years, so no complications. Retail funds don’t have as close a tie to the employer, which may make them more susceptible to being classified as grantor-trusts rather than 402(b) plans; or, if they are 402(b) plans, they may be more likely to be considered discriminatory triggering the highly compensated rules.