US Expat with Australian Superannuation fund

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Topic Author
NorthSouth
Posts: 20
Joined: Sat Jun 21, 2008 5:14 am
Location: Queensland, Australia

US Expat with Australian Superannuation fund

Post by NorthSouth »

All,

I am a US citizen who works and lives in Australia. My retirement funds are kept in a SMSF which is treated as a "Grantor Trust" by the USA. In retirement, pension withdrawals are tax free in Australia. I cannot find a straight forward answer to how the USA treats these pension withdrawals. Can anyone steer me in the right direction?

Thank you.

NS
Peter G
Posts: 74
Joined: Sat Apr 30, 2016 8:14 pm

Re: US Expat with Australian Superannuation fund

Post by Peter G »

I don't know, but there'll be a tax treaty which assigns liabilities and concessions. Try here:
https://www.irs.gov/businesses/internat ... -documents
Something here too:
https://www.irs.gov/businesses/the-taxa ... tributions
assyadh
Posts: 252
Joined: Tue Sep 18, 2018 12:44 pm

Re: US Expat with Australian Superannuation fund

Post by assyadh »

Get ready for the bonanza[

http://fixthetaxtreaty.org
typical.investor
Posts: 2257
Joined: Mon Jun 11, 2018 3:17 am

Re: US Expat with Australian Superannuation fund

Post by typical.investor »

assyadh wrote: Tue Sep 15, 2020 7:37 am Get ready for the bonanza[

http://fixthetaxtreaty.org
Well, all the Australians who don't want to be taxed like Americans need to do is not be classified as US taxpayers. Those legally classified as US persons (A citizen or resident of the United States) have certain obligations. Australia has no chance of changing tax law for US persons.

Crying won't help you. Praying won't do you no good. When the levee breaks, momma you gotta move. -Kansas Joe McCoy and Memphis Minnie (on the Great Mississippi Flood of 1927).
assyadh
Posts: 252
Joined: Tue Sep 18, 2018 12:44 pm

Re: US Expat with Australian Superannuation fund

Post by assyadh »

typical.investor wrote: Tue Sep 15, 2020 8:22 am
assyadh wrote: Tue Sep 15, 2020 7:37 am Get ready for the bonanza[

http://fixthetaxtreaty.org
Well, all the Australians who don't want to be taxed like Americans need to do is not be classified as US taxpayers. Those legally classified as US persons (A citizen or resident of the United States) have certain obligations. Australia has no chance of changing tax law for US persons.

Crying won't help you. Praying won't do you no good. When the levee breaks, momma you gotta move. -Kansas Joe McCoy and Memphis Minnie (on the Great Mississippi Flood of 1927).
I'm not sure what point you are trying to make.

The above link I shared is one of the few that explains effectively how a superannuation is covered (not) by the US Australian tax treaty. It is explained by a PhD professor of finance from an Australian university. The fact that this professor is trying to raise awareness on the gaps of the tax treaty is secondary to the question OP asked.

More specifically this article: http://fixthetaxtreaty.org/problem/superannuation/
typical.investor
Posts: 2257
Joined: Mon Jun 11, 2018 3:17 am

Re: US Expat with Australian Superannuation fund

Post by typical.investor »

NorthSouth wrote: Tue Sep 15, 2020 4:51 am All,

I am a US citizen who works and lives in Australia. My retirement funds are kept in a SMSF which is treated as a "Grantor Trust" by the USA.
Have you seen https://www.greenbacktaxservices.com/bl ... -taxation/
Taxes for Superannuations That Are Considered Foreign Grantor Trusts
If your superannuation is considered a foreign grantor trust, the follow US tax situation will apply:

What Is Taxed?
For superannuations that are considered foreign grantor trusts, both contributions and growth income will be taxed in the US.

How Is the Superannuation Reported?
You’ll use Form 3520 and 3520A, respectively, to report on ownership and income for all years you have the trust. On Form 3520A, realized and unrealized income (growth) plus contributions are reported and then taxed on your US return.

Additionally, as a foreign grantor trust, your superannuation needs to be reported on the FBAR.

Do I Need to Report the Superannuation on Form 8621?

PFIC investments held within a foreign grantor trust must be reported separately on Form 8621 on an annual basis.
Which seems consistent with https://www.irsmedic.com/blog/2017/09/i ... tment.html
NorthSouth wrote: Tue Sep 15, 2020 4:51 am I cannot find a straight forward answer to how the USA treats these pension withdrawals.
Have you been filing 3520 and 8621? If you have, you'd have paid taxes yearly on gains already and it would seems just a continuation of that except that if distributions are taxable to Australia, then you'd have a foreign tax credit to claim. If you haven't been paying taxes yearly, I'd suggest an accountant.
typical.investor
Posts: 2257
Joined: Mon Jun 11, 2018 3:17 am

Re: US Expat with Australian Superannuation fund

Post by typical.investor »

assyadh wrote: Wed Sep 16, 2020 8:07 am
typical.investor wrote: Tue Sep 15, 2020 8:22 am
assyadh wrote: Tue Sep 15, 2020 7:37 am Get ready for the bonanza[

http://fixthetaxtreaty.org
Well, all the Australians who don't want to be taxed like Americans need to do is not be classified as US taxpayers. Those legally classified as US persons (A citizen or resident of the United States) have certain obligations. Australia has no chance of changing tax law for US persons.

Crying won't help you. Praying won't do you no good. When the levee breaks, momma you gotta move. -Kansas Joe McCoy and Memphis Minnie (on the Great Mississippi Flood of 1927).
I'm not sure what point you are trying to make.

The above link I shared is one of the few that explains effectively how a superannuation is covered (not) by the US Australian tax treaty. It is explained by a PhD professor of finance from an Australian university. The fact that this professor is trying to raise awareness on the gaps of the tax treaty is secondary to the question OP asked.

More specifically this article: http://fixthetaxtreaty.org/problem/superannuation/
That's a rubbish article. It states:
Any US tax paid on superannuation contributions, earnings, or rollovers will not be offset by a tax credit for Australian tax paid because these are tax-free transactions in Australia. Similarly, any US tax due on distribution to a retiree over the age of 60 will not have an offsetting credit for Australian tax paid.
Part of that is correct and part isn't. I'm thinking no, if you pay Australian taxes, you will have a credit.

Look into the "Effective tax rates paid by Mei" in this example from the Australian Tax Office to see why https://www.ato.gov.au/individuals/supe ... oyoursuper

http://fixthetaxtreaty.org is more a site to engender anger than dispense good advice I think. There are other factually incorrect and wildly misleading statements other that the one above.
TedSwippet
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Location: UK

Re: US Expat with Australian Superannuation fund

Post by TedSwippet »

typical.investor wrote: Wed Sep 16, 2020 8:46 am That's a rubbish article. It states:
Any US tax paid on superannuation contributions, earnings, or rollovers will not be offset by a tax credit for Australian tax paid because these are tax-free transactions in Australia. Similarly, any US tax due on distribution to a retiree over the age of 60 will not have an offsetting credit for Australian tax paid.
Part of that is correct and part isn't. I'm thinking no, if you pay Australian taxes, you will have a credit.
I don't own an Australian super account, so no direct experience, but ... there are definitely ways in which US tax annually on pensions can create unresolvable double-tax.

For example, imagine that Australian pensions work just like IRAs, except that the US views them as unwrapped trading accounts for US tax purposes. Now, contributions and earnings in the Australian pension are taxable annually by the US to a US citizen living in Australia. This builds up a 'basis' for US tax, so that little or no US tax is payable on withdrawals. However, for Australian tax, there is no tax to pay on contributions or on gains inside the plan, only on withdrawals, and at this point the 'US basis' has no meaning for Australian tax. Countries almost never permit foreign tax credits for taxes paid in earlier or later years. So during accumulation, the US is taxing the inputs, and on decumulation Australia is taxing the outputs. That's double tax.

The situation is worse when the US invents one of the 'deemed' distributions that it is so fond of, for example in the 'exit tax' for pensions, and in the TCJA for retained corporate earnings. There can be a US tax due, but no money received to pay it, and the US will not 'pre-credit' a foreign tax that has yet to be accrued. Then later, perhaps decades later, the non-US tax becomes due with no ability to offset for the US tax already paid. And of course, no way to obtain a 'retroactive' US tax credit for the non-US tax now becoming due.

It's not clear at all to me that this is what the article is trying to describe -- maybe it's an entirely different problem that's occurring here. Or maybe the last sentence is trying to indicate that there won't be a US tax credit for Australian tax paid because the Australian tax liability on the withdrawal was actually zero (more detail in this article; Australia apparently does not tax withdrawals after age 60, but of course the US will). Whatever, it is simplistic to discount and rubbish the entire article based only on the notion that if you pay one country's tax then you invariably get a credit for the other's. This simply isn't always true.
typical.investor wrote: Wed Sep 16, 2020 8:46 am Look into the "Effective tax rates paid by Mei" in this example from the Australian Tax Office to see why https://www.ato.gov.au/individuals/supe ... oyoursuper

http://fixthetaxtreaty.org is more a site to engender anger than dispense good advice I think. There are other factually incorrect and wildly misleading statements other that the one above.
I have a passing acquaintance with the paper's author, and she has always appeared open, honest and fair-minded. In my opinion, not the sort of person to be sensationalist merely for the sake of it.

If you think there are factual errors in the site, my suggestion is that you contact the author directly. She is responsive and pays attention to detail -- you can see that from the comment stream -- and I am sure she will either fix them or else edit the site to make clearer why it is correct.
Topic Author
NorthSouth
Posts: 20
Joined: Sat Jun 21, 2008 5:14 am
Location: Queensland, Australia

Re: US Expat with Australian Superannuation fund

Post by NorthSouth »

Thank you to everyone that responded. Yes, I am up to date with all my filing and I have a CPA that specialises in US/Aussie tax. I spent decades in the accumulation phase and only I recently needed to think about withdrawals. Thanks for explaining the "basis" for withdrawals.
That aside, would income from the fund be taxed as passive income? Is income from dividends/ capital gains treated better than interest? (i.e. is such a fund better off holding shares in companies than receiving bank interest....I know, no PIFC's ;-)).

Thanks again,

NS
typical.investor
Posts: 2257
Joined: Mon Jun 11, 2018 3:17 am

Re: US Expat with Australian Superannuation fund

Post by typical.investor »

NorthSouth wrote: Mon Sep 21, 2020 3:37 am That aside, would income from the fund be taxed as passive income? Is income from dividends/ capital gains treated better than interest? (i.e. is such a fund better off holding shares in companies than receiving bank interest....I know, no PIFC's ;-)).
Yes, generally long term capital gains and qualified dividends will have favorable treatment. Interest, short term gains and unqualified dividend will be taxed at your regular income tax bracket. Don't get confused though, income excluded via FEIE is still used when you calculate your bracket. Or do you take everything as a tax credit instead?

Anyway, if you have to realize gains in a foreign trust every year, you probably won't have long term capital gains. So qualified dividends might be best.
Topic Author
NorthSouth
Posts: 20
Joined: Sat Jun 21, 2008 5:14 am
Location: Queensland, Australia

Re: US Expat with Australian Superannuation fund

Post by NorthSouth »

Yes, I claim FEIE. Thanks for the tip on the income for FEIE included to determine the tax bracket. Once retirment comes, I will only have (passive) income from the Super Fund. To date most of my investments in the fund is cash and bonds and hence this income is primarilly interest. I do follow a Bogleheads Philosophy but due to PIFC issues, our index funds are held in my wife's name. It seems that I would be better looking for qualified dividends instead.
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