19 September, 2014

Super and US Taxation

Part of the recently delayed Foreign Account Tax Compliance Act (FATCA) requires that US tax residents, citizens and permanent residents (greencardholders) provide details of their foreign assets, subject to some minimum values, and indicate where the income appears in their US tax return.

One common misconception is that the foreign pension funds, such as Australian superannuation, held by expatriates in the US, are somehow tax-exempt and lie outside the scope of US taxation via the Double Tax Treaty. That is usually not the case, and definitely isn't in the case of the current Australia/US Tax Treaty.

In practice, it is often been the case that Australian expats in the US have not reported their Australian superannuation holdings, or superannuation income. That approach is understandable from a number of perspectives, but it is going to be much more difficult to sustain, both for individuals, their tax advisors and employers, given the new FATCA/FBAR reporting requirements and the significant penalties they include.

Almost no foreign pension plans will be complying or qualified pension plans for US tax purposes, as the legislation requires that the fund or plan needs to have been created or organized in the United States. The precise US tax treatment of foreign funds is highly complex and may be dependent on the type of pension fund involved - 1) employer sponsored and funded defined contribution plans 2) defined benefit plans funded by employer contributions 3) personal pension plans, funded by individuals; and 4) unfunded plans which are maintained by an employer.

There is also scope for the tax treatment (and reporting required) to depend on whether the pension/superannuation scheme is construed as a trust, what type of trust, and whether the individual is a "highly compensated employee" for US purposes ($115,000 p.a. in 2013). There is also the potential in a number of situation for the individual to be taxed on the annual earnings accruing in their superannuation scheme. To add insult to injury, because tax paid within superannuation in Australia is paid by the fund, not by the individual, you may not be able to claim a foreign tax credit for the tax.

This is a serious and complex area which could have significant, negative implications for Australians working in the US, or those with dual citizenship or permanent residency (green card). Expats with international employers should seek clarification on their position, if it hasn't already been provided, and others should seek specific tax advice regarding their reporting obligations and potential exposure.
 

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