# Another Australian Superannuation question (hoping BBCWatcher weighs in)



## OnceDownUnder

Greetings!

I joined this board after reading BBCWatcher's very helpful comments and suggestions to the gentleman who had the $40,000 Australian superannuation fund that had gone unreported on the FBAR for 14 years. My wife and I are in a similar situation.

We lived in Australia from 2000 - 2006. We filed the FBAR each year while living in Australia to report our Commonwealth Bank of America account, but our U.S. tax advisor in Sydney never instructed us to file our superannuation accounts on the FBAR. Consequently, when we returned to the U.S. in early 2007, we didn't have a clue that the super accounts were FBAR reportable. Nor did our CPA (who was aware that we had these Australian retirement accounts ... but has never filed an FBAR on behalf of any clients).

We have only become aware of our filing requirements over the past couple of months. We're now working with a CPA who heads the International Tax practice for a respected accounting firm. We're filing the FBAR for 2013 and back-filing to 2007. We had absolutely no clue that this filing was required ... and that's what we'll communicate in the box that allows 750-characters to explain the reason for a late filing.

My wife has had a "buy and hold" position in her two separate share funds since 2003. Value of the account is currently AUS $105,000 and goes up and down with the market. She is unable to access funds in this account until 2036 (when she is 67 years old). 

My super account has a current value of AUS $175,000. I will have access to the fund in 2024. Like my wife's fund, the value goes up and down since the funds are unitized products. I had "buy and hold" positions in four separate funds from 2000 until November 2013 (when two of the funds were redeemed by the fund managers). The redemption/sale of those two funds after all these years grossed AUS $49,000 with a net gain of less than AUS $1500. The proceeds of the entire redemption have since been re-invested in another fund by the superannuation trust advisor.

I have a question re. the filing of form 8938. Australia and the U.S. have just signed an Intergovernmental Agreement re. FATCA. The agreement was only recently posted on the U.S. Department of the Treasury website (I am unable to post the web URL of the PDF since this is my first post). There is specific mention of Superannuation funds (PDF pages 38 and 45), but it appears to refer to reporting requirements of the financial institutions that hold superannuation funds (not U.S. citizens or residents who are beneficiaries of a fund). 

That said, section V. “Accounts Excluded from Financial Accounts” (PDF p. 45) lists retirement accounts as being “excluded from the definition of Financial Accounts and therefore not treated as U.S. Reportable accounts.” 

The definition of an Australian retirement fund is on PDF p. 38: 

“Any plan, scheme, fund, trust, or other arrangement operated principally to administer or provide pension, retirement, superannuation, or death benefits that is a superannuation entity or public sector superannuation scheme (including an exempt public sector superannuation scheme) as defined in the Superannuation Industry (Supervision) Act 1993, or a constitutionally protected fund as defined in the Income Tax Assessment Act 1997.”

Could this have any impact on our situation in terms of the requirement to file Form 8938? Just makes me wonder, especially taking into consideration that the most recently updated IRS directive (16 January 2014) re. “Types of Foreign Assets and Whether They are Reportable on Form 8938” makes no mention of foreign retirement or pension funds. And the FATCA webpage (most recently updated 02 - June 2014) says FATCA focuses on reporting “By U.S. taxpayers about certain foreign financial accounts and offshore assets.” One could certainly interpret the U.S. - Australia FATCA agreement as specifying Australian superannuation accounts do not fall into the category of “certain foreign financial accounts and offshore assets.” 

If we ARE required to file form 8938, are there tax consequences as concerns fund growth? Unlike a Canadian RRSP (which can be accessed at any time), we don't have access to our funds until 2024 and 2036, respectively. There's never been a "transfer" from the Australian superannuation accounts to any other account in the U.S. or elsewhere because it's not allowed by Australian law. 

My superannuation account has generated $150 in income since 2007 plus the $1500 gain re. the redemption of the closed-out funds in late 2013. If the U.S. treats superannuation as though it's a regular brokerage account (since it's not a qualified retirement plan), how would it treat this? And how would it treat wife's "buy and hold" positions over the past 7 years. 

I just have a hard time wrapping my head around the possibility of incurring an income tax obligation on the accounts' growth when there has been no constructive receipt. As far as I can understand , the IRS doctrine of constructive receipt “holds that a person has income subject to taxation at a time before it is actually paid or received if the income is credited to the taxpayer, set aside for the taxpayer, or made available to the taxpayer so that the person can draw on the amount at any time and the taxpayer’s control of the amount is not subject to substantial limitations or restrictions.”

In our case there ARE substantial limitations and restrictions ... seeing as how I can't access my fund until 2024 and my wife can't access her fund until 2036.

Kind regards,

OnceDownUnder


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## BBCWatcher

I think you're reading from the Intergovernmental Agreement between the U.S. and Australia concerning the sharing of financial data for tax compliance and other purposes.

You are correct. That agreement is between two particular governments. You are not a party to the agreement, and thus it has no affect on your personal legal responsibilities, including FBAR and FATCA responsibilities.


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## OnceDownUnder

Thanks for clarifying. 

Re. 8938 and 1040x, is the increase in the units' values in terms of growth any given year (when there was an increase ... as 2011 and 2008 involved decreases) as income? Or, just the income that is listed on the fund statement? 

If the former, for how many years should we prepare amended returns? Are we in a situation now where we have to consider OVDI?


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## DavidMcKeegan

If I were in your situation I would of course amend the FBAR's to report the Superannuation amounts. Also, if either of the Super accounts are self sponsored (it does not sound like that is the case but I wanted to mention it just in case), you may also have to file a Form 3520.

For the FATCA reporting, you must report via FATCA (Form 8938) if you are above certain thresholds. If you and your wife were still abroad, you might not even have to file as the threshold is $400K at the end of the year ($600K at any one time). However as you are in the states, the threshold drops to $100K at the end of the year ($150K highest balance)...and thus it sounds like you have met the requirement.

Since you now have a FATCA liability (as with FBAR, it is just a reporting document), you should amend the last few years of tax returns and include Form 8938 with your 1040X. You will be fine if you amend 2011, 2012 and 2013. Also, as the amending of your returns should not increase your tax liability, I don't think that the OVDP is the right choice. Quietly submitting along with an explanation may be your best bet.

Good luck!


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## BBCWatcher

Outside of FBAR/FATCA, how were treating those accounts -- from a "1040" perspective?


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## OnceDownUnder

From 2000 - 2006, all super contributions were reported on the 1040 as income on my return. My wife's 1040 filing obligation didn't come into effect until she got her Green Card and we moved to the U.S. at the end of December, 2006. 

From 2007 - 2013, no income with respect to the super funds has been reported on our joint 1040 returns. We *thought *we had the equivalent of a 401-K. We've learned, of course, over the past two months that it's certainly not the equivalent of a 401-K. We have "buy and hold" positions (with the exception of two of my funds that were closed out in late 2013). My wife's super account statement has reported zero income over this period of time (just up and down movement of the funds' units based on market conditions). My funds have reported less than $200 in income (although the redemption of the two closed out funds at the end of 2013 netted a gain of under $1500).

Our biggest nightmare/fear at this point is that we will have to report the *appreciation* of the funds' unit values from year to year as income. Just difficult to comprehend that we could incur a tax obligation on growth that appears on a paper statement (when we can't touch the funds until 2024 and 2036, respectively). When we left Australia in 2006, the aggregate value of my wife's and my funds was AUS $226,000. At the end of 2013, the aggregate value of the combined super accounts was AUS $278,000. But in 2013 alone, the increase on paper from the previous year was AUS $52,000. 

Where/how does the IRS definition of constructive receipt fit into all of this?


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## BBCWatcher

But why the shift in thinking in 2007? I'm not following that logical leap. Wouldn't one think residence in the U.S. would make those account gains more likely to be U.S. taxed, not less?

Anyway, it's water under the bridge. If those funds would be considered PFICs then you probably should have been marking them to market each year (QEF elections), yes, as you were in 2006 and prior. Unless the U.S.-Australia tax treaty says otherwise. You could file amended returns and ask the IRS for relief from the penalties. They probably won't waive the interest, though, but that's not the end of the world.

Any idea how much tax there would be for those missing years, excluding penalties and interest? Those were some rough years for equities, and you might even have a year or two of capital losses in the books. So it may not be much anyway.


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## OnceDownUnder

The shift in 2007 is due to my own very limited investment experience. The only prior investment I had before moving Down Under was a 403(b) plan through an educational institution at which I worked for 15 years. I never had any other type of investment account. And we were led to believe that a Super account was the equivalent of a 401(k) or 403(b).

My tax advisor in Sydney explained that the employer contributions to Super had to be reported as income so as to establish cost basis when I would redeem a lump sum distribution in 2024. I met with him we left the country in late 2006 - and he advised that I keep my Super in Australia so as to avoid the early exit fee of 30% (since all employer contributions were taxed at 15% before going into the fund). Nothing was said about our obligation to report the Superannuation funds upon our return to the U.S. in 2007 and beyond. Hindsight is 20/20 ... but I sure do wish we would have bitten the bullet and cashed out the Super's at that time.

There were, indeed, two very rough years in particular. The funds' units dropped AUS $84,000 in value in 2008 and AUS $28,000 in 2011. Overall, though, I don't quite understand what the tax would be on the years in which the unit values increased. Would we be taxed on just the income (which was minimal) as reported in my Super accounts - OR the income plus appreciation/growth of the units on a year to year basis? If the latter, would the the appreciation/growth be taxed at ordinary income or as capital gains (since we've had "buy and hold" positions)? 

Whatever the case, we just want to be complaint and current re. any tax obligations. I've had too many sleepless nights over the past two months since becoming aware that we should have been filing FBAR's all these years (and the 8938 over the past couple of years). And it spooks me out to think that the IRS could lump us into the same category of folks who were intentionally trying to hide offshore investments in Belize, Cayman Islands, Switzerland, etc.


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## BBCWatcher

You have to cross at least two threshold questions here. One is whether there's a tax treaty that says anything. Then, are these PFIC investments or not? ("Units" means probably yes, but you have to check that.)

Yes, your employer's contributions would ordinarily be taxable income, though they would also be eligible for the Foreign Earned Income Exclusion.

If they're non-treaty-protected PFIC investments then my understanding is you have a couple choices. One is to "let it ride" and pay a fairly onerous U.S. tax rate in the future (based on a 2006 cost basis in sounds like). The other is to see if you can go back and make (late) mark-to-market QEF elections for those years. Which might not be a bad idea given those couple years of losses.

Take it slowly and do your homework.


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## OnceDownUnder

Employers contributions have all been reported as income on 1040 from 2000 - 2006. There have been no employer contributions from 2007 onwards since we moved back to the U.S. Just up and down market movement of the units themselves.


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## BBCWatcher

That's helpful.

Were you making QEF elections from 2000 (or 2001) to 2006?


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## OnceDownUnder

No QEF elections were made. Never heard of that term until right now, nor have I ever heard of a PFIC. Our U.S. tax advisor in Sydney simply included employer Super contributions as income in each year from 2000 - 2006.


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## DownunderInUS

I am reading conflicting interpretation of IGA signed by Australia with US. In this forum, it says it is for the Australian non-financial institution guideline. 

My question is - if the Australian institutions are not reporting as they are deemed compliant, then if a taxpayer reports in his FBAR, how will the accuracy of the reporting be verified?


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## BBCWatcher

Again, what two other parties agree to has zero relationship to your legal requirements to one of those parties. It's not our agreement, folks.

Maybe your reports will be verified, and maybe they won't. Whether or not (and how) they are verified, if you're still legally required to file truthful reports then you're legally required to file truthful reports. The only thing that's changed is that the government receiving your report now has more data from other governments to use for verification and for other purposes. How much more data isn't actually very interesting unless you're lying or plan to lie. If you aren't lying (or planning to lie), it's completely irrelevant.


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## DownunderInUS

Thank you for your response.

My problem now is to look for an expert accountant on this field. So, anybody who knows a good accountant that understands FATCA in US, please help. 

Anyway, I am glad that I have found this forum. It is a big help for expats. Many knowledgeable and helpful people like you are chiming in. It's a great forum.


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## OnceDownUnder

I have another question for BBCWatcher, David McKeegan or anyone else who cares to respond. With respect to my wife's and my superannuation accounts referenced at the start of this thread, my Super Customer Service center in Australia advises that the Trustee is the owner of the managed funds and/or shares within any given investor’s portfolio. The account holder/investor is the beneficiary. As such, the superannuation account holder is not named on a share registry of the investments in the Super account holder's porfolio. The trustee is. That being the case, do we have a PFIC and must we back file our amended returns with Form 8621? Or, is this a foreign non-grantor trust and we need only to back file 3520's and 8938's with the amended returns?

2nd question. Are *unrealized *gains in the super funds taxable in the US? My wife's super fund has had "buy and hold" positions for 14 years. Am I correct in understanding that the paper value of the shares, which will fluctuate based on how the stock market is doing, do not result in taxable/reportable income - and that only interest, dividends or capital gains *actually paid out by the funds*, which if rolled over result in the purchase of more shares, are current taxable income?

By the way, since I started this thread back in mid-June, the IRS has come out with very clear cut instructions on how U.S. taxpayers residing in the U.S. with foreign retirement funds or other foreign accounts can get current with their filing obligations. Go to:
U.S. Taxpayers Residing in the United States

I'm not wild about the idea of the Title 26 miscellaneous offshore penalty, but back filing under these new streamlined procedures and paying the penalty might be a better option than quiet disclosure and running the risk of multiple penalties based on late 3520's and 8963's.


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## DavidMcKeegan

Australian superannuation funds are generally run as trusts. The US tax treatment of your ownership in a superannuation trust depends on a number of factors. Generally speaking, Australian superannuation is treated as either a grantor trust or an employee benefits trust. PFIC rules would not normally be applied to superannuation because PFIC rules apply to foreign corporations. That said, some advisers do treat superannuation as a PFIC.


As a grantor trust, superannuation ownership and income needs to be reported on form 3520 and 3520A, respectively for all years of ownership. On form 3520 A, realized and unrealized income (growth) is reported and then taxed on the US return. As an employee benefits trust, the income is reported directly on form 1040 and ownership needs to be reported on form 8938 if you meet the threshold requirements. The income reported on form 1040 as an employee benefits trust depends on the type of superannuation fund, your personal circumstances and income level, and can include realized and unrealized income (growth) within the fund.

Overall I would strongly recommend speaking with an expat accountant as Super reporting can get complicated quickly!

I hope this helps


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