U.S. taxation of Australian superannuation funds is one of the more complex areas of expat tax, largely due to a lack of direct IRS guidance. Unlike American retirement accounts, Australian superannuation accounts, which are considered foreign pension plans, don’t automatically enjoy tax-deferred status under U.S. tax law. This can leave U.S. expats unsure about their reporting obligations, particularly when it comes to trust classifications, filing requirements, and eligibility for exemptions. Let’s explore how superannuation might be treated under U.S. law, focusing on the grantor vs. non-grantor trust classifications, reporting requirements, and the impact of key IRS revenue procedures.
What is an Australian Superannuation Fund?
An Australian superannuation fund, commonly known as “super,” is a mandatory retirement savings account set up by the Australian government to help individuals build funds for retirement. Australian employers are required to make contributions to their employees’ super accounts as part of their compensation package, and employees can make additional personal contributions. Superannuation funds are structured to grow over time through both employer contributions and investment returns, and they typically become accessible upon reaching retirement age.
There are different types of superannuation accounts available to Australians, each with varying levels of management and investment options:
- Public Sector Funds: Available to government employees and managed by public sector organizations.
- Corporate Funds: Typically provided by private companies for their employees, offering investment and benefit options suited to corporate staff.
- Industry Funds: Industry-specific funds available to workers within certain fields, often not-for-profit and tailored to specific industries.
- Retail Funds: Super funds managed by financial institutions and available to the public, offering a range of investment choices.
While superannuation funds are seen as tax-advantaged accounts in Australia, they do not automatically receive the same treatment under U.S. tax law.
Understanding U.S. Taxation of Australian Superannuation Accounts
The IRS doesn’t formally recognize superannuation funds as tax-deferred accounts, and it may view them as foreign trusts or investment accounts instead. Contributions to these accounts are generally not deductible in calculating taxable income for U.S. tax purposes, leading to complexities in tax reporting. This leaves U.S. expats in Australia uncertain about what they need to report, how their superannuation growth will be taxed, and which forms may be required.
Without treaty-based tax deferral for superannuation, the IRS may treat these accounts as foreign trusts, which introduces further ambiguity. This classification often means that U.S. taxpayers need to determine if their superannuation is a grantor trust (requiring annual income reporting) or a non-grantor trust (potentially taxed upon distribution). Forms 3520 and 3520-A might also apply, with Form 3520-A carrying an automatic $10,000 penalty for failure to file.
However, not all U.S. expats with superannuation accounts need to file these forms, especially those whose accounts qualify for an exemption under IRS Revenue Procedure 2020-17. For many of our clients, these reporting requirements are simpler than they seem and do not require every form mentioned. The goal is to clarify what is necessary without adding unnecessary paperwork, ensuring expats are compliant without additional stress.
1. Classification of Superannuation as a Trust: Grantor vs. Non-Grantor
The IRS may view Australian superannuation accounts as foreign trusts due to the structure and nature of these funds. Under U.S. law, a “foreign trust” generally refers to any trust formed outside the U.S. (Internal Revenue Code [IRC] § 7701(a)(31)). Since foreign entities administer superannuation accounts, the IRS may classify them as foreign trusts, requiring compliance with foreign trust reporting rules, particularly for those with ownership or beneficiary interests.
Grantor Trusts vs. Non-Grantor Trusts
- Grantor Trust (IRC § 671-679): If the U.S. taxpayer (you) has control or ownership over the assets in the superannuation, or if contributions are funded directly by you, the IRS may treat the account as a grantor trust. In this case, any income generated within the superannuation is taxable annually, regardless of whether it is withdrawn.
- Non-Grantor Trust: If an employer funds the superannuation account, and you have limited control over contributions and investments, it may be treated as a non-grantor trust. This classification typically defers taxation on income within the account until distributions are made. However, it is essential to understand that the IRS rarely provides a formal classification of superannuation accounts, and as such, many tax advisors recommend conservative treatment as a grantor trust to avoid penalties.
2. Reporting Requirements: Forms 3520 and 3520-A
Given that superannuation may be classified as a foreign trust, the following forms could apply:
- Form 3520 (Annual Return to Report Transactions with Foreign Trusts): This form is required if a U.S. taxpayer has certain transactions with a foreign trust, including contributions or distributions (IRC § 6048). Contributions made by you to a superannuation could trigger this requirement.
- Form 3520-A (Annual Information Return of Foreign Trust with a U.S. Owner): This form provides the IRS with information on the trust’s financials and activities. Generally, if a foreign trust is classified as a grantor trust, Form 3520-A must also be filed by the U.S. taxpayer under IRC § 6048(b).
Additionally, if the superannuation account holds investments that qualify as a Passive Foreign Investment Company (PFIC), further reporting requirements may apply.
Exceptions under Revenue Procedure 2020-17
The IRS released Revenue Procedure 2020-17 to reduce the compliance burden for U.S. taxpayers with foreign trusts used for retirement or medical savings. According to 2020-17, certain foreign trusts are exempt from Forms 3520 and 3520-A if:
- The trust is a retirement or medical savings fund,
- The contributions are mandatory (e.g., by the employer or law), and
- The taxpayer has limited control over the trust.
Application to Superannuation:
- Employer-Funded Accounts: If your superannuation account is employer-funded and mandatory (such as corporate and public sector super funds), it may qualify for the 2020-17 exemption from Form 3520/3520-A filings.
- Retail Super Funds: These accounts generally allow more control and flexibility over investment options, so they may not qualify for the exemption, thus requiring Forms 3520 and 3520-A.
Best Practice: If your superannuation does not clearly qualify under 2020-17 due to control or personal contributions, filing Form 3520 and 3520-A conservatively may avoid IRS penalties.
3. Form 8938 (Statement of Specified Foreign Financial Assets) and FBAR (FinCEN Form 114)
Regardless of trust classification, if the total value of foreign financial assets exceeds certain thresholds, you must report superannuation on Form 8938 and FBAR. The growth income generated within these accounts may be subject to U.S. taxes, depending on the classification of the superannuation fund. These forms are separate from foreign trust requirements and aim to report any foreign financial assets over the threshold.
- Form 8938 (IRC § 6038D): This form is required if the total value of your foreign financial assets (including superannuation) exceeds $200,000 on the last day of the tax year (for single filers). Form 8938 is filed with your federal income tax return and includes foreign assets, including retirement accounts, that meet the reporting threshold.
- FBAR (FinCEN Form 114): The FBAR must be filed if your combined foreign account balances exceed $10,000 at any point in the year. While FBAR reporting typically applies to bank accounts, the IRS and FinCEN interpret this requirement broadly to include foreign retirement accounts, including superannuation.
Best Practice: Even if you qualify for the 2020-17 exemption, ensure that you file Form 8938 and FBAR for superannuation accounts meeting the reporting thresholds.
Is My Superannuation an Employee Benefits Trust or a Foreign Grantor Trust?
To determine if your Australian superannuation is an employee benefits trust or a foreign grantor trust, follow these steps:
Self managed superannuation funds (SMSFs) are particularly relevant in this context, as they often involve significant personal contributions and control over investments.
Step 1: Identify if the Superannuation is Entirely Employer-Sponsored
Ask yourself:
- Does my employer fully fund this superannuation account with mandatory contributions only?
- In Australia, employer contributions are required by law (currently 11% of your salary).
- If the account only includes these employer-mandated contributions and you don’t contribute additional personal funds, it’s more likely to be classified as an employee benefits trust.
If yes:
- You’re likely dealing with an employee benefits trust, especially if you have minimal control over investment choices. Under Revenue Procedure 2020-17, employee benefits trusts with mandatory contributions and limited control may be exempt from filing Forms 3520 and 3520-A.
If no:
- If you’ve made personal contributions or have significant investment control, continue to Step 2.
Step 2: Evaluate the Level of Control and Contributions
If the account allows you significant control over investments or includes personal (non-mandatory) contributions, it likely falls under the foreign grantor trust classification. Here’s how you can determine this:
- Do you have investment control?
- If the account allows flexible investment choices (e.g., a retail or self-managed superannuation account), it indicates higher control.
- Have you made voluntary personal contributions?
- If you’ve contributed any additional funds beyond what your employer is required to contribute, it may be considered a foreign grantor trust.
If yes to either control or personal contributions:
- The account is more likely a foreign grantor trust, requiring annual reporting of income, Forms 3520 and 3520-A, and possibly tax on earnings within the account each year.
If no (employer contributions only, limited control):
- The account is more likely an employee benefits trust.
How Does the U.S. Tax Australian Superannuation Distributions?
General U.S. Tax Treatment
When you, as a U.S. citizen or resident, take distributions from an Australian superannuation fund, the IRS treats these distributions as taxable income. This means that:
- Entire Distribution is Taxed: Regardless of the type of contributions (employer or voluntary), when you receive a distribution from your superannuation, the IRS generally taxes the full amount as ordinary income. This includes:
- Employer contributions (Superannuation Guarantee – SG)
- Voluntary contributions
- Earnings and growth within the account (such as interest or capital gains)
Ambiguity in Classification
The IRS hasn’t issued clear guidance on whether superannuation is a pension or Social Security-type system. However, in practice:
- Most Tax Preparers Treat Superannuation as a Pension: Because superannuation is funded throughout your working life, often through both employer and personal contributions, it most closely resembles a pension or retirement plan under U.S. tax law. This means the IRS will tax it as pension income, which is fully taxable when distributed.
- Social Security Argument: There is some argument that employer SG contributions should be treated similarly to U.S. Social Security, especially because the U.S.-Australia Totalization Agreement recognizes SG contributions as part of the Australian social security system. However, the IRS typically does not apply this interpretation when taxing superannuation distributions, so the entire distribution—including employer contributions—is generally treated as taxable income.
U.S.-Australia Tax Treaty (Article 18)
The U.S.-Australia Tax Treaty provides general guidance on how pensions and social security are taxed, but the Saving Clause overrides many of the treaty’s protections for U.S. citizens:
- Pensions (Article 18): Under Article 18 of the tax treaty, pensions should only be taxed in the country of residence. This would mean that if you are a U.S. citizen living in Australia, the superannuation distribution should only be taxed by Australia.
- The Saving Clause (Article 1): However, the treaty’s Saving Clause allows the U.S. to continue taxing its citizens on their worldwide income, which includes superannuation distributions. This means that even though the treaty suggests that superannuation should only be taxed in Australia, the U.S. still taxes U.S. citizens on these distributions.
Double Taxation Risk
Because Australia does not tax superannuation distributions once you reach retirement age (60), there is no Australian tax credit available to offset the U.S. tax. This can result in double taxation, where the U.S. taxes the full amount of the distribution even though Australia does not.
How Do I Report My Australian Superannuation Account on My US Tax Return?
Superannuation Cheat Sheet: Determining U.S. Tax Forms
Step 1: Determine Superannuation Classification
- Is this an employer-sponsored superannuation account with mandatory contributions only?
- Yes → Proceed to Step 2.
- No → If there is significant control or personal contributions, consider this a retail superannuation and proceed to Step 3.
Step 2: Apply Revenue Procedure 2020-17 Criteria for Exemption
- Does the account meet the following criteria:
- Mandatory Contributions Only: Contributions are either employer-mandated or required by law.
- Limited Control: There is minimal control over investments or fund allocation.
- Yes → Likely Exempt from Forms 3520/3520-A; File Form 8938 (if asset threshold is met) and FBAR if combined foreign accounts exceed $10,000.
- No → Proceed to Step 3.
Step 3: Non-Exempt (Retail) Superannuation with Personal Contributions or High Control
- For retail superannuation or accounts with high control/personal contributions:
- Forms Required: File Form 3520 (transactions) and Form 3520-A (annual information report), along with Form 8938 and FBAR if thresholds are met.
Step 4: Special Considerations for 8938 and FBAR
- Does the account exceed the following thresholds?
- Form 8938: File if total foreign financial assets exceed $200,000 for single filers.
- FBAR: File if the combined foreign accounts exceed $10,000 at any point in the year.
Get Clarity on Your U.S. Tax Obligations with Free Tax Advice
Dealing with the U.S. tax implications of Australian superannuation can be complicated, but you don’t have to navigate it alone. Our team at 1040 Abroad is here to help you understand your tax obligations and ensure you’re compliant without overpaying.
We offer free tax advice via email, so feel free to reach out with any questions. Contact us today and let us make your tax process easier!
