This is a collaborative post: Superannuation accounts can be complicated, especially for Americans in Australia who have no idea how it works. You’d want to read this one! I know that there are a lot of questions going through your mind, and you’ll see that as you progress, you will find your answers. Let’s start with the basics.
What is Superannuation?
Superannuation is the benefit you get after all your years of hard work, a retirement benefit. This would mean that a superannuation account is where all that benefit is kept.
SUPERANNUATION ACCOUNTS FOR U.S CITIZENS IN AUSTRALIA
What happens to an American’s super account if he migrates?
In this present time, Migration is inevitable It is important to note that super accounts are exempt from FATCA reporting but only from a bank and central bank perspective. Furthermore, it is exempt from FATCA reporting to satisfy the IRS’s desire from all of this information. Frankly, when critically looked at, people in Australia usually end up with a tax liability of little or nothing.
What are super funds?
Super Funds has a planning technique that can however bring you to a somewhat almost failing tax treaty. The super funds are treated differently from 401k. 401k which is a lot easier to remember was generated from the Internal Revenue Code Section 401. One of the rules is that your plan must be established in the United States for retirement. There is however no IRS compliance super fund for a U.S citizen in Australia when we look at super funds, we’ve got to think about what it’s doing and how it’s there to help us. For example, in our retirement funds, we don’t have the funds in our name super funds put them with a fiduciary whose responsibility is to take care and to look after it. This is like a trust relationship built over time. All you have to do is Google Australian super and you’ll come up with something that tells you who the trustee is. So, it isn’t a question about whether super funds are a trust neither is it about a retirement plan but instead about the responsibility of the fund to give interest. This is the reason why it gets categorized as a foreign trust. Foreign because it’s set up
and established in Australia can be held in Australia.
WHAT IS FATCA AND HOW DOES IT HAVE A RELATION WITH SUPERANNUATION ACCOUNTS?
(FATCA) The Foreign Account Tax Compliance Act is a federal law from the United States passed in 2010. It requires all non-U.S. foreign financial institutions (FFIs) to search their records for customers that have a connection to the U.S with legal indication, including indications in records of birth or previous residency in the U.S. FATCA also requires such persons report their assets and identities to the U.S Department of Treasury and their non-U.S. financial assets annually to the Internal Revenue Service (IRS). FATCA applies to both U.S. residents and also to U.S. citizens.
FREQUENTLY ASKED QUESTIONS
What if I had a super account but I didn’t use it to pay for my life insurance?
How the code Section is written is whether it may be used… Yes MAY! as payment. But remember though when we’re looking at tax planning, we’re looking at lowering our overall tax liability. So, where something may work well from an Australian perspective like having money in your super fund does not mean paying up for life insurance is a bad thing. Although, there might be a repercussion on the US side because ultimately, you’re looking for the overall best scenario.
Why don’t we do foreign grantor trust reporting for everyone?
The super fund does not necessarily have to do the forms thirty-five twenty and thirty-five twenty-eight to show the transactions or the owner of the super fund and it’s one of the reasons and ways in which the IRS is cognizant of people overseas who might happen to have retirement funds.
Is Superannuation Fund mandated in Australia?
For a long time in Australia, Super funds have been mandated and if I as an employer, choose not to pay superannuation for my employees, I will be in a lot of trouble with the Australian tax office. Whether it is right or wrong, it is forced on all Australians to save up for retirement. It is important to note that a company must have the mandatory nine and a half percent superannuation guarantee charge.
How many types of super funds are in Australia?
There are three types of super funds in Australia:
- The SMSF- is the self-managed super funds that come with a lot of tax problems.
- The retail fund- The most common of the funds usually called an Australian super.
- The Industry fund-where there’s like industrial workplace agreement in place that says if you work here in this industry you have to do this sort of stuff.
Can you control the flow of funds in and out of your superfund?
You can’t control the flow of funds in or out of your super fund especially if the employee’s contribution to the super fund are incidental then you do not have to do foreign grantor trust reporting. in Section 402 B which is an exemption from the foreign grantor trust, the meaning of the word incidental is clarified. You only meet the exemption from foreign grantor trust filing if your contributions
aren’t what the employers put in. This is why the majority of people in Australia have their nine and a half percent super that goes in. You typically don’t put your own money in, if you’re just a regular everyday person. There you have it, that is exactly why you don’t reach the 50 percent incidental threshold which means you don’t need to do the foreign brands or trusts filings, even if you are an American in Australia. Of course, you do fall into non-exemption if you are running a self-managed super fund.
List of things that the IRS put a limitation on?
The number one thing is the fact that IRS, is trying to understand the situation for many Americans overseas and the IRS is doing this by trying to remove some of this foreign trust filing, for “appropriate retirement funds”. Another thing is the annual $50,000 limit. This means that you are not allowed to put in more than $50,000 into your super funds yearly.
How many types of contributions do we have?
So basically, we have two types of contributions.
The concessional is the nine and a half percent employer
that we talked about above.
The non-concessional contributions in which is effectively after-tax money and that can be several hundred thousand dollars that you can put in depending on whether you decide to put in one year in or whether you decide to put in three years of contributions in one go.
What happens if there’s a termination letter or redundancy in payment?
So, what makes the Australian taxing system unique and different from others is the fact that taxing may vary for different payments. In this case you pay less tax.
Do we pay tax when money goes into the Superfund?
Is there anything tangible that we don’t pay tax on? Basically, we pay a 15% tax both on earnings and when the money goes into the super. But current rules say that we don’t pay super comes out in retirement. Also, because of the slightly defective tax treaty, we can align tax treatment and the timing of the tax.
What additional thing do I need to know about superfund?
Yes, there are a lot of other types of superfunds that we didn’t spend very much time talking about, the industry funds for instance. If we go back to those foreign brands or trust Internal Revenue Code sections, there is one in there that talks about retirement fund which has been established on your behalf that is having contributions to it. In this case, there is a protectant able to get someone out of grantor trust filings for those in industry funds even if they breach the 50% incidental test but the number of people who are genuinely in industry funds is really small compared to the majority that has regular retail funds or has self-managed super funds the SMSFs. When you’re in the SMSF or retail fund territory, because of the way that the Internal Revenue Code is written, as soon as you have a problem with that 50% test, you’re pretty much toast.
You are on the hook of all this extra foreign reporting if you’re
in a retail fund, which is probably the far majority of people, and you are personally contributing more than 50% of the funds going into the account. But if they’re putting less than 50% in because their employers putting more then they probably don’t have to do anything at all. For the industry funds it is kind of similar but even if you are putting more than half the funds into the super account this still could be an area where they might not have to do it.
What is the importance of paying tax returns?
Well that boils down to if you’re an American in Australia and you got money rolling into the super fund which almost is probably almost every single American. In this situation, you’d need to be doing your tax returns, because you get that kind of zero tax income on both sides. More importantly so when retirement comes along you’re not going to end up pulling some money out your super or end up having to give a bit of it away to the IRS or alternately try and go back and put ten years of US tax returns together to try and get yourself out of it. It is going to be messy if you are just told that has a U.S tax liability on your superfund, especially if you simply didn’t know that you had to do tax returns when you lived in Australia.
For someone who is looking to start filing US tax returns and catch up if they want to go and have a look at whether they’re going to be on the hook, for this extra reporting, they would need to get, hold of one of their super statements and look at how much are they putting in and how much their employer putting in. If they happen to be putting in more than they could be on the hook for it.
In this situation, they go over the employer contributions, the salary sacrifice contributions, and the personal contributions they all get. This is crucial because you’re basically saying don’t give me my salary but instead subject it to tax, whereas personal contributions also have an Australian income tax paid on it.
If I pulled my member statement and looked online it will split out for me the taxable and non-taxable stuff. So, after the spill, there is a pre-tax and what’s gone in after-tax so that’s what they got to look at, even after this, you don’t just proceed to file a foreign trust instead you are asked some questions.
When it comes to how it deals with super funds it is what it is, but it’s beautiful at times that we can actually use that defective nature to tax the super fund income that we have to annually not create U.S tax liability, and make it so that it comes out tax-free and mirrors the Australian treatment.