Moving to the United States as an Australian expat is an exciting step, but it also comes with a range of financial and tax implications that can be confusing.
One of the most significant concerns we encounter for Australians relocating to the U.S. is how their Australian superannuation is treated. Unlike other investments, superannuation has unique tax and reporting requirements that can significantly impact your financial position.
This article explores how your Australian superannuation is treated in the U.S., the disclosures and forms you need to file, the consequences of contributing to super while living in the U.S., and what happens when you access your super while residing in America.
How Is Your Australian Superannuation Treated In The U.S.?
Superannuation is a cornerstone of retirement planning for Australians, but once you move to the U.S., its classification under American tax law becomes complicated.
The main challenge arises from the fact that the U.S. does not recognize Australian superannuation as a tax-deferred retirement account like a U.S. 401(k) or IRA. Instead, the U.S. views superannuation in one of two ways:
- Foreign Trust – The Internal Revenue Service (IRS) may consider your super fund as a foreign grantor trust, subjecting it to complex U.S. tax and reporting requirements. This classification may lead to additional tax liabilities, particularly when earnings inside the super fund are realized.
- Foreign Pension – In some cases, the superannuation fund may be classified as a foreign pension, which can offer a more favorable tax treatment. However, there is no definitive IRS guidance on this, leading to inconsistent application of tax rules.
Taxation Of Superannuation In The U.S.
Regardless of its classification, the U.S. generally taxes superannuation in ways that differ from Australian tax laws. While contributions and earnings may grow tax-free in Australia, the U.S. may tax contributions, earnings, and distributions differently. Key considerations include:
- Employer Contributions: Employer contributions to your super fund may be considered taxable income in the U.S. in the year they are made.
- Investment Earnings: Earnings within your superannuation fund, such as dividends and capital gains, may be subject to annual U.S. taxation, even if they are not distributed.
- Withdrawals and Distributions: The tax treatment of superannuation withdrawals varies, but in many cases, distributions may be taxed in the U.S. as ordinary income, even if they are tax-free in Australia.
The range of outcomes noted above depends on the type of superannuation fund you have.
Self Managed Superannuation Funds
For expats in the USA that have a ‘Self-Managed Superannuation Fund’ urgent attention is needed toward restructuring your Superannuation Fund BEFORE you move to the USA.
Remaining the Trustee of an Australian Superannuation Fund after you move to the US – even inadvertently – causes a number of serious tax issues both in Australia (not the focus of this article) and the USA.
One of the major issues is that you are personally taxable on the income of the Australian Self-Managed Superannuation Fund as it arises. This can add materially to your USA tax bill and should be avoided.
What Disclosures And Forms Do You Need To File?
As an Australian expat living in the U.S., you must comply with stringent reporting requirements related to your superannuation.
Failure to do so can result in significant penalties. Some of the key forms and disclosures include:
- FBAR (Foreign Bank Account Report) – FinCEN Form 114
- If the total value of your non-U.S. financial accounts (including superannuation) exceeds $10,000 at any time during the year, you must file an FBAR.
- Superannuation accounts are generally considered foreign financial accounts and should be included in the FBAR filing.
- Form 8938 (Statement Of Specified Foreign Financial Assets)
- If the total value of your foreign financial assets (including superannuation) exceeds certain thresholds ($50,000 for single filers, $100,000 for married filers living in the U.S.), you must file Form 8938 with your tax return.
- This form is in addition to the FBAR and provides the IRS with detailed information about your foreign financial accounts.
- Form 3520 (Annual Return To Report Transactions With Foreign Trusts)
- If your superannuation is classified as a foreign trust, you may need to file Form 3520 to report contributions and distributions.
- Form 8621 (Passive Foreign Investment Company – PFIC) Reporting
- If your superannuation fund holds certain types of investments (e.g., managed funds), you may have to file Form 8621 to report Passive Foreign Investment Company (PFIC) income.
Consequences Of Contributing To Super While Living In The U.S.
If you continue making superannuation contributions while residing in the U.S., you may face unintended tax consequences:
- U.S. Tax on Contributions: Since the U.S. does not recognize super contributions as tax-deferred, employer contributions may be taxable to you in the year they are made.
- Double Taxation Risks: While contributions may be tax-free in Australia, they may be taxable in the U.S., leading to double taxation.
- Compliance Burden: Additional contributions increase the complexity of reporting and could result in higher U.S. tax compliance costs.
- Potential Loss of Benefits: Depending on how your super fund is classified, additional contributions could subject you to PFIC rules, leading to unfavorable tax treatment.
What Happens When You Can Access Your Super And Are Living In The U.S.?
When you reach preservation age and become eligible to withdraw your superannuation, you must consider how the U.S. will treat these withdrawals:
- Australian Tax Treatment – In Australia, lump-sum withdrawals from super after the age of 60 are typically tax-free.
- U.S. Tax Treatment – The U.S. may treat these withdrawals as taxable income, potentially subjecting them to ordinary income tax rates.
- Foreign Tax Credits – You may be able to offset some U.S. tax liability by claiming foreign tax credits, but this depends on the tax treaty’s applicability and how your super is classified.
- State Taxes – If you live in a U.S. state that imposes income tax, super withdrawals may also be subject to state taxation.
Strategies For Managing Your Super As A U.S. Based Expat
To minimize your tax burden and compliance obligations, consider the following strategies:
- Pause Contributions While In The U.S.
- Avoid making new contributions to super to prevent triggering additional U.S. tax and reporting obligations.
- Review Your Super Investments
- Assess whether your super fund contains investments subject to PFIC rules, and consider adjusting your investment mix.
- Work With A Tax Professional
- Given the complexity of superannuation taxation in the U.S., consult a tax advisor experienced in cross-border taxation.
- Plan For Withdrawals
- If you intend to withdraw super in the future, explore tax-efficient withdrawal strategies to minimize your U.S. tax liability.
Key Takeaways For Australians Living In The USA With Superannuation
Navigating superannuation as an Australian expat in the U.S. is challenging due to differing tax treatments and complex reporting requirements.
Understanding how your super is classified, ensuring compliance with U.S. tax laws, and proactively planning for contributions and withdrawals can help you avoid unnecessary tax burdens.
Given the nuances of cross-border tax regulations, seeking advice from an international tax firm is essential to optimize your financial situation while living in the U.S.
By staying informed and proactive, you can ensure that your superannuation remains a valuable asset for your retirement, regardless of where you reside.