How Your US Expat Tax Return is affected by the Australian Superannuation
With few exceptions, those who are working in Australia must maintain a superannuation fund.
If you are an Expat who is at least 18 years old and living and working in Australia, you are required to make contributions to the Australian superannuation fund unless you have a certificate of coverage in place which makes you exempt. So how does this affect your US expat tax return?
Before we dissect the Australian superannuation, let’s first point out that it isn’t a US qualifying fund (such as a 401K). This means that contributions are nondeductible. Additionally, there are no clauses regarding tax deferral in the Australia-US tax treaty that allow the United States to treat the superannuation as a qualifying fund.
Another important fact to note is that superannuation income does not qualify to be used in claiming the Foreign Earned Income Exclusion. You can, however, use the Foreign Tax Credit to offset the foreign taxes you pay on the same income.
There is a lot of gray when determining the US tax liability on superannuation funds. The Australian superannuation is regarded by the IRS as a type of trust, and there are some variables that determine your tax liability.
When it comes to foreign pension plans, the IRS has neither the resources nor time to spend on evaluating every possible plan; so some rules will apply in some cases and would not apply in others.
The Australian superannuation can only be one of two types of trusts: The nonexempt employees' trust that is part of a deferred compensation plan or a grantor trust.
The employee benefits trust is a trust fund established by an employer on behalf of its employees in which the company is the grantor and its employees are the beneficiaries
The employee benefits trust is the most common type of trust for the superannuation. Employee benefits trust income is reported on Form 1040; and if thresholds are met, FATCA form 8938 will need to be filled out and attached to the US expat tax return.
Most superannuation funds are regarded as an employee benefits trust. The manner in which you report this income on your US expat tax return will depend on whether or not you are classified as a highly compensated employee. A highly compensated employee is anybody who has earned at least $115K and/or had owned at least 5% of the business interest.
If you are considered to be a highly compensated employee, you will pay taxes on both contributions to the account and growth on the account. Account growth is taxable no matter what you do with it.
If you are not considered a highly compensated employee, you will only be required to pay taxes on the contributions you make to your plan.
If the value of your plan exceeds certain thresholds, you will be required to file FATCA Form 8938. The following guidelines will determine whether or not you are required to file this form with your US expat tax return:
●Single taxpayers living overseas - $200K
●Married taxpayers living overseas - $400K
●Single taxpayers living stateside - $75K
●Married taxpayers living stateside - $150K
Keep in mind that the above figures are for your total value of foreign assets. If your superannuation plus one or more additional foreign accounts reaches the threshold for filing Form 8938, you will be required to report all of your foreign assets.
Another form you may be familiar with is Form 8621. If a PFIC (Passive Foreign Investment Company) is held within your employee benefits trust, you will not need to report it annually on Form 8621.
The self-managed Superannuation funds are usually treated as foreign grantor trusts. There are a few different guidelines for this type of trust.
The foreign grantor trust requires you to report income on Form 3520 and 3520A. If a PFIC is owned within this type of trust, you will be required to report it annually on Form 8621
So, what turns an Australian superannuation fund into a foreign grantor trust? The answer is simple: Control. If you have the ability to manage the fund and decide on the actual investments therein, then you are considered to have control over your superannuation fund. This is true even if you never exercise control over your superannuation. Simply the fact that you have the potential to exercise such control is enough.
These types of trusts are treated differently when it comes time to file the FBAR. With vague guidelines, knowing whether or not to file FBAR can be challenging.
Some of the reporting guidelines aren’t so clear for the employee benefits trust. If you have less than 50% ownership of the trust, then you are not required to report it on your FBAR. If you own 50% or more of the trust’s assets, then you will be required to disclose it on FBAR, FinCEN Form 114.
If you have a foreign grantor trust, your superannuation needs to be reported on your FBAR. If you are confused about what should be reported or how to report it, make sure to get in touch with an experienced US expat tax professional.
I.J. Zemelman, EA is the founder of Taxes for Expats