U.S. Tax Treatment of Australian Superannuation Funds

Whenever a U.S. taxpayer is confronted with an international tax issue, they should understand that there are two separate and distinct bodies of law that could potentially apply to the issue.

  1. Domestic U.S. Tax Law: Title 26 of the United States Code, which is known as the Internal Revenue Code.
  2. International Treaty Law: The Convention Between the Government on the United States of America and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which is more commonly known as the U.S.-Australia Income Tax Treaty.

Domestic U.S. tax law applies by default unless a taxpayer affirmatively elects to apply the treaty and explains the application on IRS Form 8833. A taxpayer that takes a treaty position without disclosing it on IRS Form 8833 will be liable for civil tax penalties for which there is no statute of limitations. You may also be exposed to criminal tax penalties if your failure to file IRS Form 8833 was intentional.

How Are Australian Superannuation Funds Treated in the U.S.?

Under domestic U.S. tax law, Australian Superannuation Funds can be treated as either a foreign grantor trust or an annuity depending on whether the assets within the fund are preserved or non-preserved. There may also be hybrid treatment where a portion of the Superannuation Fund is treated as an annuity and the other portion is treated as a foreign grantor trust. Generally, gains within a foreign grantor trust are taxable in the U.S., which can result in a tremendous tax burden, especially if an Australian national does a rollover from one Superannuation fund to another while a U.S. tax resident.

Under the U.S.-Australia Income Tax Treaty, however, there is an opportunity to lawfully avoid U.S. taxation on Australian Superannuation Funds. By taking this legal position, Australia would have exclusive taxing rights over Australian Superannuation Funds, which effectively allows Australian nationals residing in the U.S. to lawfully exclude any gains within or even future distributions from their Australian Superannuation Fund from their U.S. federal income tax returns.

This not only makes the U.S. a more attractive retirement jurisdiction for Australian nationals, it also allows Australian nationals to work in the United States without concern that their tax-preferred Superannuation Funds will be unfairly taxed by the United States. As explained above, however, you are required to fully explain the legal basis of any treaty-based position on IRS Form 8833. Without the legal explanation of the position in Section 6 of IRS Form 8833, you risk an IRS audit, civil tax penalties, and even criminal tax prosecution unless there is a legal basis for not filing the form.

Will My Funds Be Taxed?

In order to obtain the legal basis to take this position regarding US tax Australian superannuation, it is necessary to obtain a tax opinion from our firm. A tax opinion is a legal opinion issued by a U.S. tax firm that shields taxpayers from certain tax penalties and interest thereon. The tax opinion also guarantees that, in the event of an audit, our firm will represent you without additional charge and fully defend the position to shield you from any and all liability. The tax opinion perpetually exempts the Australian Superannuation Fund from U.S. taxation regardless of the amount of gains within, distributions from, and income attributable to the fund.

Moreover, if you’ve paid U.S. tax on your Australian Superannuation Fund in prior tax years, we can file amended tax returns to recover those taxes. Contact our firm today to obtain the tax opinion and shield your Australian Superannuation Fund from U.S. taxation.

For legal counsel on matters due to U.S. tax superannuation, please contact Castro & Co. today.

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