Need Help Understanding U.S. Taxation of Australian Superannuation?

Understanding Australian Super: U.S. Tax Guide for Beginners

Understanding Australian Superannuation

Unfortunately, the internet is littered with misinformation about how the United States taxes Australian superannuation accounts. Self-proclaimed international tax experts claim to understand how superannuation works when all they do is use AI to slap together bits and pieces of inaccurate articles — and send unsuspecting Taxpayers on a wild goose chase trying to figure out the basics of Australian Superannuation for U.S. tax purposes – and what to do when the Taxpayer is out of compliance for reporting Australian superannuation on a U.S. tax return, FBAR, Form 8938, etc. Our international tax law specialists have prepared several resources for understanding U.S. tax on Australian superannuation but wanted to provide a resource summarizing some of the more common misunderstandings, This way, Taxpayers can get the basics on what they should do if they have an Australian superannuation.

Is Your Australian Super Treated as U.S. Social Security?

No, Australian superannuation is not the same as U.S. Social Security and the U.S. does not (yet) recognize the Australian Superannuation system as equivalent to the U.S. social security systems; in fact, Australia has its own social assistance system. Instead, the IRS treats Australian Super as a pension. However, since there is a totalization agreement between the United States and Australia, there is the argument that at least the superannuation guarantee (SG) portion should be considered social security equivalent but the IRS has never ruled to date that Australian superannuation should be treated as Social Security for U.S. tax purposes.

How are Employer Contributions Taxed?

Unlike several other foreign countries, contributions made into the Australian superannuation by an Australian employer are not deductible on the U.S. tax return. For example, while the tax treaty between the United States and the United Kingdom allows for employer contributions to be deducted similar to a 401K, unfortunately, the superannuation was created after the US/Australian tax treaty was enacted and no reference to Superannuation is made with within the treaty — or reference to deducting employer contributions from gross taxes on the U.S. tax return.

Are Voluntary Contributions Taxable?

Depending on whether the voluntary contributions are concessional or non-concessional — and post-tax dollars vs. pre-tax dollars will impact the U.S. taxation rules for voluntary contributions. Essentially, voluntary contributions that are made with pre-U.S. tax dollars do not avoid U.S. taxes (e.g., U.S. income taxes on the earnings that were then used to make voluntary contributions to the Superannuation). Stated another way, a person cannot contribute their pre-U.S. income tax dollars into Australian superannuation similar to the employee’s portion of pre-tax contributions in a 401K, and receive tax-deferred treatment on those contributions.

Australian Superannuation Withdrawal/Distribution Taxes

The general rule is that withdrawals and distributions are taxable. There may be some room for nuance depending on whether there is any step-up value to the superannuation depending on when the person became a U.S. person and whether the portion being withdrawn is from before the person became a U.S. person — but the general rule is that withdrawals are taxable (this also leads to potential forensic accounting issues). Another factor that may impact the taxation of distributions or withdrawals is whether the Taxpayer qualifies to make a treaty election to be treated as a non-resident alien for tax purposes.

Super Foreign Tax Credits for Growth

In Australia, superannuation is taxed within the actual superannuation itself while it grows (which makes it distinct from a 401K or U.S. social security). Since technically it is not the Taxpayer who is paying the foreign taxes but rather taxes are being withheld within the superannuation itself, these credits cannot be applied as foreign tax credits.

Is Superannuation Reported as a Foreign Trust  (Forms 3520/3520-A)

While superannuation is technically considered a trust and therefore may be reportable on Form 3520 or Form 3520-A various exceptions, exclusions, and limitations may apply. For example, the U.S. government developed Revenue Procedure 2020-17 that limits having to report certain foreign retired and non-retirement deferred savings trusts as foreign trusts for Forms 3520/3520-A. This is further supported by the recently proposed foreign trust regulations which were issued in 2024. Noting, that even though the foreign trust may not be reportable on Forms 3520 and 3520-A, it is still reportable for the FBAR and Form 8938.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.