How to report a distribution from an Australian Superannuation fund for a duel US/ Australian citizen ?

Generally, if you are a US person living abroad, all your income is taxable in the US unless there is a tax treaty between the two countries that indicates an exception.  But this needs an expert @pk

Thanks Opus 17,

This is what I don't get  ... if "Superannuation" fits like a "square peg in a round hole" for US tax law ,  then it needs to be fixed.  I don't believe I should have to retain some fancy international tax firm  to be able to get an answer.

When I worked as a VITA tax volunteer,  we had IRS provided flow charts to determine how to handle regular tax situations.

I can't see why such a flow chart couldn't exist for Australian Superannuation .... unless  US tax law doesn't know how to handle "superannuation"  . That means hiring an international tax lawyer is more hiring someone who is confident they can defend their interpretation of US tax law with the IRS and protect the tax payer from any issues.

I believe all I need to provide is :

A. Who funded the account.

B.  What gains the account had . 

C. Possibly how the funds were invested. 

Thanks,  Bob.

@aussiebobaustin 

I don't know what you are quoting.  The US is under no obligation to make their tax laws conform to other countries.  Under US tax law, all income is assumed to be taxable unless you can prove otherwise.  In the case of overseas income, there is sometimes a tax treaty between two countries that modifies this general rule.  (For example, I believe that for expats living in Germany, the US agrees not to tax German social security income and Germany agrees not to tax US social security income.  But I may be remembering that incorrectly.)

And I don't think VITA is going to have much to say about overseas rules that affect a tiny percentage of US taxpayers.

If Wikipedia is to be believed, the employer mandatory contribution to a super is not considered taxable income at the time.  That would make it the equivalent of an IRA or 401k--money is not taxed when it is contributed, so everything is taxed when it is withdrawn.  I can't tell from the article whether additional employee voluntary contributions are made before or after taxes.  If before tax, then the super really is like an IRA or pre-tax 401k.  If employee voluntary contributions are after-tax, then that would give you a partial basis in the payout, and you would only pay tax on the gains, but under US law, the burden is on you to prove the amount.

However, there is another expert on this forum who knows the most about international tax issues, and I hope he or she stops by and adds their comments. 

Thanks Opus 17 for the input....

Here are some things I do know.

1. The Australian government requires employers to contribute to superannuation for each employee  . Some view this as a kind of "Social Security". In this case the company was IBM Australia. If an employer contributes over the required percentage then that would  result in a taxable event on withdrawal. 

2. In my case I never made any contributions either per-tax or after tax to the superannuation account ...  I wasn't really aware of it until I retired from the IBM US company.

I agree with you that this is outside the scope of VITA, however I mentioned it since I was hoping the US tax law would have an easy,  ie "flow chart",  methodology to determine how to handle Australian superannuation  when filing US taxes as a US citizen.

So, I'm not suggesting the US tax law should be  addressing other country tax situations, but I am asking for US tax law to  be specific for US citizens who receive Australian superannuation payments   ie how to   report on a US tax return when distributions are made.  This can occur if US citizens are assigned to an Australian company for some  time then return to the US  ... leaving a superannuation account in Australia.

Obviously  am not a CPA or International Tax expert but I am tempted to read what the Treaty  between the US and Australia  has to say  if anything about this. 

If the US tax law is agnostic on the issue ,  the only option I have is to hire a CPA /  lawyer who will direct me in reporting the distribution on my US tax return  and  defend their position if necessary.

I did call TurboTax since I am happy to pay  for the advice and it was difficult but the tax support folks suggest I request  someone who is familiar with the subject.

2. In my case I never made any contributions either per-tax or after tax to the superannuation account ...  I wasn't really aware of it until I retired from the IBM US company.

Because IBM made contributions that were pre-tax (you did not pay tax on the contributions), my position is that the payout is 100% taxable in the US, unless there is a tax treaty that says different.   Someone else may know something different.

@aussiebobaustin ,  while I generally agree with the comments by my colleague @Opus 17  on this thread,  before I jump in I want to be sure that I am reading/ understanding the situation correctly.  Thus  below I list my assumptions:

(a)   You a US person ( citizen/GreenCard ) worked in Australia for many years.

(b) For all those years, you filed both US and Australia returns  recognizing  your world income.

(c) During your stay / work in Australia,  you did not  contribute  to  the local pension fund i.e. the basis of the  fund at distribution is zero  ( for US tax purposes ).

(d)  During your work life ( both domestic and Foreign/Australia you did participate  in US or Australian equivalent of  Social Security  and Medicare  ( FICA/ SECA ).

(e) Currently  your tax home is US

Please confirm and/or correct my assumptions to avoid  me being in the left field.

Also are you talking about  tax year 2023 or 2024 ?

I will circle back once I hear from you --yes ?

pk 

Thanks for  helping pk .

Answers to your questions below.

(d)  During your work life ( both domestic and Foreign/Australia you did participate  in US or Australian equivalent of  Social Security  and Medicare  ( FICA/ SECA ).

      Yes,  I contributed to Social Security the whole time I was employed by IBM US .  (  approx. 20 years ).

      I have retired and get a monthly Social Security check and am signed up with Medicare.

(e) Currently  your tax home is US

     Yes ,  I file only US taxes every year using TurboTax.

Since the Superannuation account in Australia kept  changing names / trustees, I decided to make a withdrawal  this year  partly to test if it was real ... so the issue I have is if I need to report that superannuation  withdrawal and if so how to  report it for my 2024 US tax return.

@aussiebobaustin  my general opinion on this situation is best described as agreeing with this  following article --->U.S. Tax Treatment of Australian Superannuation

There are other positions on this  such as treating the  superannuation as social security or a private mandated trust etc. -- I do not   fully agree with such 

 Note however that  tax treatment does not immunize you from FBAR and FATCA regs. -- so those may still be applicable.

Is there more I can do for you ?

pk

@aussiebobaustin , just a little addition to my earlier note / position above. 

 1.  Recognizing the purpose of Tax treaties ( for individuals at least )  is to   eliminate / ameliorate the double taxation burden  while allowing for  idiosyncrasies of  domestic tax laws and administration thereof.

  2.  The double taxation amelioration is generally achieved through  exclusion  of incomes or  tax credit etc.   This often results in limiting which country gets to tax the income ( generally by source or type) or by limiting the tax rate.

  3.    In the case of  Australian  Superannuation fund  ( generally a privatized   & govt. mandated pension scheme ),  can be treated as equivalent of US SSA  ( because it is govt. mandated  even though  privately managed ) or  as a  private trust.

4.  No matter which  interpretation the tax payer chooses  ( i.e.  treat the  fund as a trust  OR as  a  public / govt.  funded distribution )  there is an assumption that this  distribution needs to be taxed by  one state or the other.   This is because all incomes  are  taxed  either by the source country or the residence country or both -- but taxed it is.

5.  Give the above it implies that the taxpayer must facilitate the re cognition of the income for taxation purposes.   

6.  Therefore  if you treat this distribution as SSA  equivalent and not taxable by the USA , you must file an Australian return and therefore be taxed  under Australian tax laws.   If you choose not  to file a return with Australia ( and therefore not giving source country to tax the  distribution )  then in effect you are  taking the position that  you do not recognize the  tax treaty and  therefore this is distribution from a foreign trust or an annuity.  This then becomes ordinary income for purposes of US taxation.

7.  Al.so note that  your state of domicile may  not recognize the tax treaty between US and Australia -- thus this is  taxable income for the state.

Does this make sense ?

Is there  more I can do for you ? 

pk

Thanks PK,  

I believe your ideas and opinions help.

1. I was getting ready to contact Castro and Company  ie John Anthony Castro since his video was compelling .

     Assuming he is the author of the journal article above ( https://scholars.law.unlv.edu/nljforum/vol2/iss1/6/ ) , I am not sure I can take anything from it since he seems to be in trouble with the IRS assuming it is the same John A Castro ?

2. I like the idea of calling Superannuation as a Social Security equivalent that  via the Treaty is only taxed in the country of origin but there seems a catch with the "Saving Clause" where the IRS could ignore the Treaty with Australia. Having said that I, am in no position as a non-lawyer to defend any interpretations I may have .

3. There seems some work on Treaty changes / fixes to address Australian Superannuation  I found here......  https://fixthetaxtreaty.org/     but its going to take too long me and it may never happen.

4. Your idea of filing an Australian Tax return is new.... I haven't filed one for say 25+ years and it would give the Australian tax  folks  a chance to tax the Superannuation , but to my knowledge the distributions are not subject to Australian tax.

I think I will have to "punt" since I don't have the expertise to handle this and the penalties for a miss step seem way high.  If I can find a tax firm  who are confident about how this is handled for the IRS to be satisfied , I think I will just pay the money as a way to protect myself.

Thanks for all the help from you and Opus 17,  I appreciate it ... Bob.

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@aussiebobaustin wrote:

Thanks PK,  

 

 

4. Your idea of filing an Australian Tax return is new.... I haven't filed one for say 25+ years and it would give the Australian tax  folks  a chance to tax the Superannuation , but to my knowledge the distributions are not subject to Australian tax.

 

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But that's kind of the issue.  With the treaty, you either treat it as taxable investment income that you as a US person pay tax on, or you treat it like Australian social security.  

What are the rules on Australian super payments?  Under US law, social security is not taxable if it is your only income, but may be taxable if you have other income over a certain threshold.  If you file in Australia, you might not have to pay at all, but you have to give them that chance.  And then, you have to see if the tax you owe to Australia, if any, is more or less than the tax you would owe to the US if you treated it as a taxable trust.

@aussiebobaustin , having gone through the thread again and generally agreeing with the points made by my colleague @Opus 17 ,   I am not sure  that I understand the  reasoning behind your  doubts as to the path to follow:

(a)  As far as I know Australia , like most countries and unlike  US , taxes   either by source or by residence or both.  Thus  if you are no longer a resident of Australia, then you are taxed ONLY on Australia sourced  income  ( the treaty specifically  control the right to tax govt. remuneration and  public sourced   payments / distributions ).  This is pretty common for  most countries.   Thus your US sourced pension ./ Social Security  are generally taxed only in the USA.

(b)  Therefore  you can always  ignore the treaty benefits and recognize the Australian  income as from a foreign  trust and pay  taxes as ordinary income ( note that per your earlier  statements and if  your employer  did not include  its  contribution to the fund , on your behalf, as taxable income to you  )  with a basis of zero i.e. it is all taxable .

(c)  I do not believe you will find a different answer  that will stand the test of IRS audit ( in that rare case  ) -- the laws are pretty clear.   Also  depending on the actual facts, the tax attracted by this distribution may  pale in comparison to employing a tax professional familiar with the subject and/or defending an audit.

That is my two cents.

Is there more I can do for you ?

pk

Thanks PK,

I am reluctant to hire a Law Firm or Tax Accountant .... so I will go with the argument after 

printing and reviewing the US-Australian tax treaty.

1. The Australian sourced Superannuation was not funded by me  but by  by my employer  as a requirement by the Australian government, therefor it is a kind of Australian "Social Security".

2. The Treaty states  these accounts are taxed  in the country where they were sourced.

3. Given 1 and 2, the Australian  Superannuation withdrawal  will not be reported on my US taxes.

Thank you for your assistance .... I don't have any further questions .

Remember that if you are relying on the treaty provision, that the social security is taxed in the country of origin, then you must file an Australian tax return if required to under Australian law.  (I don't know if that would be required or not.)

@aussiebobaustin , understand your position .

(a)  We are here to help but the decision / filing and standing behind the  declaration ( filing ) is definitely ONLY yours, no matter whom prepares your return.

(b) Whether an income is  taxed by the USA is per the US laws and as modified by any tax treaties in effect at the time of filing.  However, you as a filer / tax payer  MUST declare each and every income for the tax year  unless  specifically  excluded by tax code.  Thus  you will need to declare this income from Australian source and then  either pay tax on it  or exclude  from taxable income by using treaty assertions ( form 8833 ).

Good Luck.

If you need further help / explanation, please feel free to either extend this thread  or start a new one.

pk

Thanks PK,

I am requesting  Australian tax forms from the Superannuation company  that relate to the withdrawal I made.

These forms will indicate if any or none of the withdrawal  is subject to Australian tax.

Past communications with the Superannuation company indicate there  may be forms but not available now.

The Australian tax  year ends around the middle of the calendar year so I may not have forms  by the time 

I file in the US for 2024 ie April 15 2025.  I think this is OK.

What I don't really understand is the choice I have ,  you mention I can file a form or take advantage of the Treaty ... it seems to me that it may be more straight forward  to file the Australian taxes to pay taxes in Australia  if I have  taxes owed there ( I don't think I do but need to prove it ).   

Then I  believe I am done based o the Treaty ... correct ?

Thanks Bob.

Let me try and make this clear.  But I can only talk about the US.

In the US, the IRS assumes all income is taxable, unless you can prove otherwise.  Because of the tax treaty, you have two options on your US tax return.

1. Declare the super income and pay US tax on it along with all your other income.

2. Declare the super income and then claim exemption because of the tax treaty.  (You will still pay US tax on your other income, of course.)   In other words, you have to show the income, then claim exemption.  You can't ignore it.  (Like math class in school, you have to show your work.)

But, if you rely on the treaty to make the income exempt in the US, then you must follow Australian law to pay any tax that might be owed under Australian law.  Relying on the treaty means you are telling the IRS "this is not taxable in the US because I am following Australian law regarding this income."  So you need to follow through and do that.  The Australian tax might be more or less, I have no idea.  But your choice is to pay all tax in the US, or claim the treaty to skip the US tax, but if you claim the treaty, you have to do whatever Australia says you must do.

@aussiebobaustin ,  sorry for the confusion .  If you choose to not have to pay US taxes on this Australia sourced income i.e. keep the income from US taxable income while still meeting your burden of declaring work income for federal purposes:

(a)  You enter this  income  as  pension  ( whether paid  at regular intervals or  total ) .  You can use a dummy 1099-R  ( your  particular version of TT may allow you to declare  pension with not 1099-R ),  use  pension  distributor name ( what it is ),  , EIN  as  00-0000000 or an arbitrary number like 12-1234567 -- an obviously fake # ,  provide all the  distribution agents name address etc. as actual, Distribution amount in US$, Taxable amount as the same as  Distribution amount, No taxes withheld and select code  that applies   etc.  Note that you can down load a copy of  1099-R from  www.irs.gov and use this as reference while  providing answers to TT.

(b)  Then  from the forms tree choose  form 8833.  Fill this out as to the  distribution amount and  include the treaty article under which you are claiming non-taxability by US.  This should result in  a negative amount showing on  Schedule-1 and thus reducing your US taxable amount.  See here for the form and instruction for 8833-->

About Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) | Internal Revenue Service

Thereafter  i.e. after filing and acceptance of your return  for processing by the IRS, you are done for the year.  Note that your State of residence may or may not tax this amount.

(c) Because of this  exclusion , there is a general assumption that you file proper paperwork for Australia to  have the chance to tax this income. Whether they do or do not is up to them.  I also do not believe  that IRS  would actually vet  that you have filed a return in Australia but there is always the chance that  the IRS  would audit the return for compliance and within the next  three years.

Hopefully the situation and the paths are clear now  -- the choice is yours.

I do not believe  I can provide any more  info on this  open board.   If you have any specific questions etc. that that may not be of interest to the general posters/users, please consider  PM me  ( obviously  no Personally Identifiable Information).

regards, 

pk

Thanks PK,  I appreciate your help .  I will work on this for my 2024 taxes with Turbo Tax.