# Reporting Australian Superannuation on US taxes



## csd440

Ok this is driving me nuts. Ive searched and searched for information on this without much luck. It is my understanding (based on an response from the IRS some years ago) that Australian Superannuation is treated as wages for the purpose of filing tax US taxes. But this raises a few other questions:

1. Does this mean that it can also be included as Earned Income on form 2555 Line 19 (total wages etc) AND on Form 1116 (foreign tax credit) line 1a (gross income - general category)
ie. there is no differentiation between employer superannuation contributions and regular salary that would require it to be reported as a separate amount anywhere on US taxes?

2. As superannuation employer contributions are taxed upfront by the super fund, can the tax paid be treated as foreign taxes paid?

3. Ive seen it mentioned here and there that unrealised earnings on super funds MAY need to be listed as income. Can anyone enlighten me on this? 

4. From what I can tell, the US may tax distributions from Superannuation accounts once we hit retirement age. Is there anything in the AU-US tax treaty that prevents this? Also does this mean that capital gains need to be calculated on this money, and if so I cant even begin to imagine the record keeping that needs to be maintained to properly report this. 

Ive searched and searched on this information but its next to impossible to find clear instructions on how to report it. I think I need to get professional advice on this to make sure there are no surprises in 20 or so years, but thought I would see if anyone has any experience/suggestions.


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## BBCWatcher

csd440 said:


> Does this mean that it can also be included as Earned Income on form 2555 Line 19 (total wages etc) AND on Form 1116 (foreign tax credit) line 1a (gross income - general category) ie. there is no differentiation between employer superannuation contributions and regular salary that would require it to be reported as a separate amount anywhere on US taxes?


Employer payments to you for your services are wages. It doesn't matter whether the employer pays you in Australian dollars to your bank account, Australian dollars to some other account (called "superannuation"), or in Bitcoins. (Hopefully not Bitcoins. ) Earned income is earned income. Since the superannuation account is in your name, and your personal holding (not a "traditional" defined benefit pension held by the company, as a counterexample), then I think you're correct in treating that employer contribution as earned income received when made, not deferred income.

Please note that you cannot take both the Foreign Earned Income Exclusion and Foreign Tax Credit on the _same_ income.



> As superannuation employer contributions are taxed upfront by the super fund, can the tax paid be treated as foreign taxes paid?


Yes, if you're taking the Foreign Tax Credit on that income. If you're taking the FEIE on that income then those income taxes help determine your foreign tax rate if you're earning enough to take the Foreign Tax Credit on income above the FEIE/FHE limits, in order to calculate the FTC properly. But that's as far as it goes.



> Ive seen it mentioned here and there that unrealised earnings on super funds MAY need to be listed as income. Can anyone enlighten me on this?


It depends on how your super is invested. If they're invested in anything like a foreign mutual fund or foreign unit trust, they're likely PFICs from the IRS point of view, and you have to treat them as such. If you can invest them in such a way to avoid PFIC complications, that'd be great. For example, as I understand it, if you invest your super funds directly in bank and insurance company stocks (equities), then you don't trigger PFIC treatment. Direct holding of individual government and/or corporate bonds (not bond funds) is OK, too, as I understand it.



> From what I can tell, the US may tax distributions from Superannuation accounts once we hit retirement age. Is there anything in the AU-US tax treaty that prevents this?


Before retirement age as well. If Australia limits withdrawals, that's Australia's business. But if you somehow get income at any point in time, not just at retirement age, it's (probably) U.S. taxable. Remember: the U.S. doesn't care that Australia labels it "retirement." "It's just another foreign account."

I'm not aware of anything in the treaty. But let's skip the treaty for now and just think about how it works normally.

Above you've decided to treat the employer contributions as in-year earned income, foreign taxed in that year. (And then you take either the FEIE or FTC on that income.) That's perfectly fine -- I see no problem with that. Let's assume only employer contributions for now. Let's also assume you have no PFIC complications.

OK, years later you sell some stock. (You don't actually have to _withdraw_ the funds in this example.) Let's suppose, to keep it simple, you directly hold shares in National Australia Bank (NAB), and (again to keep it simple) let's suppose NAB pays no dividends. You bought 100 shares at $10 each (AU$1000), and you sell the shares in 2028 at $20 each (AU$2000). At that point in time you will have an AU$1000 capital gain, and you'd pay U.S. capital gains tax on that amount, less any Australian income tax paid. Unless the tax treaty says otherwise, of course.

Yes, you have to keep records of your transactions in order to understand your cost basis.

Another example: you buy a bond for AU$1000. To keep it simple, let's assume the bond pays no interest until maturity, and it matures in the year 2030. Upon maturity you receive AU$1500. Thus in tax year 2030 you would have AU$500 of interest income, taxable in the U.S. less any Australian income tax. Unless the treaty says otherwise.

In short, it doesn't matter what a foreign government calls their tax-advantaged account. It's just a foreign account from the U.S. point of view, unless a tax treaty says otherwise.

That should then help you make sense of your contributions to the account. Your contributions aren't earnings or income, it should be obvious. They may be pre-tax or post-tax from the Australian government's point of view, but that doesn't particularly matter to the U.S. since you can't take the FTC (to account for Australian income tax, if any) until that income tax is incurred. So if it's pre-tax money, and then Australia taxes you later, you have an FTC in the future, not today. If you buy something with your contributions (like a bond or shares of stock in Westpac), same thing: U.S. tax on interest, dividends, and/or capital gains _as you receive it_, withdrawal or not, less any Australian income tax (via the FTC). If you run afoul of PFIC rules -- buying the "wrong" stuff -- you run afoul and have to treat that stuff accordingly (mark to market, generally). If the tax treaty says otherwise, then you follow that.

Conceptually it's not complicated if you just get past the notion that Australia's declaration of some tax preference for a particular account has no international meaning beyond what Australia has been able to negotiate in a tax treaty, and then only if the particular provision in the U.S. tax treaty applies to U.S. citizens. "It's just another foreign account."


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## Bevdeforges

I'm not sure there IS a definitive answer to how to treat superannuation from Australia or any foreign retirement/savings system, for that matter.

However, there are some "logical" approaches. If you are still in work and paying into the superannuation, then yes, your contributions (and potentially those of your employer) are considered to be salary income and thus should be subject to the FEIE like the rest of your earned income.

And, you probably "should" be declaring income on the account when it is made - but that is clearly "passive" income and thus not subject to the FEIE.

On retirement, however, the rules for pensions and annuities takes over. Which means that you should be able to make withdrawals without declaring them for US taxes. It's as if you had been feeding a regular old savings account and now you're taking out the money for your use. As long as the contributions and earnings have already been reported for tax purposes and any taxes paid on it, the money is "capital" and you can simply shift it around as you would do with any bank
account. 

If you haven't reported the earnings on the account as they were earned, then on withdrawal, you'll have to calculate how much of each withdrawal is "earnings" vs. contributions (which have already been taxed) and report that portion as income to be taxed.

Unless, of course, there is something in the tax treaty that indicates one approach over another.
Cheers,
Bev


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## BBCWatcher

One other point.... Let's suppose you're _not_ a U.S. citizen but you move to the United States (legally or illegally) and become a tax resident there. In that case you become subject to U.S. tax from the date of your entry into the U.S. Thus your cost basis starts from that date for all your worldwide holdings, including your Australian superannuation fund. So if your 100 shares in NAB closed at $15 per share on that day, then $15/share is your cost basis upon which you calculate capital gains when you sell. Interest and dividends from the date you become a U.S. tax resident are then U.S. taxable, but not the interest and dividends attributable to the time before you became a U.S. tax resident. PFIC complications, if they apply, start to apply from that same date of entry (though they're easier to resolve if you resolve them within that first calendar year).

If you're a U.S. citizen you're already a U.S. tax resident, albeit one with certain privileges (such as the Foreign Earned Income Exclusion) if you live overseas.


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## csd440

Thank you both for the valuable information. So what I am getting is this:

1. Employer contributions to Super should be added to salary.
2. Tax paid by the Super Fund on these contributions should be added to foreign taxes paid. 
3. Upon retirement, withdrawals made may be treated the same as taking money out of the bank and not as taxable income. (I dunno but something makes me feel uneasy about this bit). 

In terms of reporting income on the fund; the fund shows an amount for Net Investment Earnings, however as the fund is unitised, this is based on the day to day fluctuations of the unit price. I had a look through all the transactions to the fund and of course there is NO credit of investment earnings, just a slew of fees and charges and taxes deducted. The only amounts credited are employer contributions. 

In terms of PFIC's I think I am safe here. Although its hard to tell really. We select investment options, mine is 60% Australian Shares, 30% International Shares and 10% Property. God only knows the breakdown of each individual investment, and they arent exactly stagnant, they could and probably do change the investment mix within each category daily. The only control I have is to allocate funds to certain investment types, the rest is up to the wise fund managers. I know in the US you can use your IRA to buy individual shares, but unless you have a self managed Superannuation Fund here you just cant do that.


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## BBCWatcher

csd440 said:


> Upon retirement, withdrawals made may be treated the same as taking money out of the bank and not as taxable income. (I dunno but something makes me feel uneasy about this bit).


Not quite. The interest, dividends, and/or capital gains are U.S. taxable unless the tax treaty says otherwise. Read on for how you'd do that....



> In terms of PFIC's I think I am safe here. Although its hard to tell really. We select investment options, mine is 60% Australian Shares, 30% International Shares and 10% Property.


You've almost certainly just described a non-U.S. mutual fund (or unit trust), and that's a PFIC, I'm afraid. Unless the tax treaty says otherwise, that's how you'd be treating this account from a U.S. tax point of view.


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