For US citizens living in Australia, the US taxation of Australian SMSFs is a huge question.
US Taxation of Australian Super Funds
Unfortunately, there is no easy answer. The US taxation of Australian SMSFs is complicated.
In this episode Marsha Dungog of Withersworldwide in San Francisco will walk you through the issues your Australian SMSFs faces in your US tax return.
Here is what we learned but please listen in as Marsha explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
US Taxation of Australian Super Funds
Let’s put the foreign entity classification aside the US Treasury and IRS use. For US federal tax a foreign organisation is either 1 – a business entity, 2 – a trust or 3 – a pass-through entity. And that is especially an issue for the big Australian super funds.
But an Australian SMSF is usually a trust, either a foreign pension 402B trust, especially if the SMSF just receives employer SG contributions, or a foreign grantor trust, if the SMSF also received personal and/or non-concessional contributions.
The US taxation of Australian SMSFs very much depends on who makes the contributions.
Employer superannuation guarantee (SG) payments have a fair chance of qualifying as foreign pension income, which is exempt under the Australian US Double Tax Agreement (DTA). Not clear though, since the IRS hasn’t confirmed this yet, so make sure you file a protective filing in Form 8833 and declare this income advising that you believe it to be exempt under the DTA.
But when a U.S. person makes voluntary (‘personal’) concessional and non-concessional contributions to the fund, and a U.S. person (the same one in the case of an Australian SMSF) is entitled to receive retirement distributions from that fund, then you probably look at a foreign grantor fund.
Foreign Grantor Fund
A foreign grantor trust is a pass-through entity. So all income, capital gains, deductions, and credits accrued in the SMSF are immediately attributed to the U.S. person who makes the contributions to the fund.
The good news is that the U.S. person is also able to claim FTCs for Australian taxes paid by the SMSF on its Australian tax returns.
Because contributions and earnings accrued in the SMSF would have already been subject to U.S. tax, any distributions (ie. pension payments) received from the fund would constitute post-tax money and be tax-free.
Both Types of Contributions
What do you do if the SMSF receives both types of contributions, ie SG and personal and non-concessional contributions?
Marsha Dungog suggests that you basically cut the SMSF into two sections. One for the SG contributions and related investment gains, foreign pension income exempt under the DTA.
And one for the other contributions. And only this other portion is subject to US tax with a look-through approach as if the SMSF didn’t exist and all assets were held in individual names.
Do you need to report your Australian super on your FBAR (FinCEN Form 114)? Maybe.
The FBAR regulations don’t say you have to but they also don’t give you an exemption (neither in the preamble nor in the text to 31 CFR s1010.350).
Hopefully, the IRS will fix this soon. They should amend 31 CFR section 1010.350(c)(4). Clarify that Supers and similar arrangements subject to an SSTA are excluded from reporting on FinCEN Form 114.
In the meantime, to be on the safe side, list your super on your FBAR.
However, the U.S. Foreign Account Tax Compliance Act (FATCA) does exclude your super. The preamble to s6038D and the IRS website both exclude social security, social insurance, or similar programs of a foreign government (aka Australian super) from the definition of foreign financial asset reporting interests in.
So for FATCA you don’t need to report your Australian super, but for FBAR you do. Go figure that one out.
The US taxation of Australian SMSFs is hazy but will hopefully get a lot clearer soon.
There are two large court cases pending at the US tax courts at the moment. One is the Alan Dixon, an Australian billionaire who became a US resident in 2004. It all depends on which way this goes. The case will either decide that SMSF income is not-taxable at all as exempt foreign pension income. Or you will have taxable income from a foreign grantor trust for the personal and non-concessional contribution part. Or all of the income will be taxable.
So let’s wait how the Dixon case goes.
These are just some notes we made during our talk with Marsha, so please listen in since Marsha explains all this in a lot more detail.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 02 December 2021