Have a Tax Question? Ask a Tax Expert
I am a a dual Australian/American citizen but I have lived in Australia for over 20 years so I am a bona fide resident. I worked for an Australian company for 16 years during which time I built up my super. Here is my question: in Australia, if I were to move my super from one non-taxable super fund to another the Australian Tax Office (ATO) does not consider it taxable. I have heard interpretations of the US/AUS treaty that suggest that the fact of this rollover means the US can take a huge chunk of my super which the ATO considers to go directly against the entire intent of super, i.e., to enable Australians to retire on private funds rather than on the pension. What is your view on this?
Hi and welcome to our site!From US tax prospective - you are an US citizen - and as such you are taxed on all your worldwide income.Your taxable income is recognized when received - and you may defer your tax liability when you make contribution into Australian super funds. From the IRS prospective - that is your regular investment account and all income is reported every year it is credited. While funds in your surer are deferred from tax liability - Australia - these funds are NOT deferred in the US. You are generally taxed on income that is available to you, regardless of whether it is actually in your possession. As long as the money are credited in your super account and are allocated to you without substantial risk of forfeiture - you are considered as constructively received that income.
I'm afraid I don't quite understand your answer. Are you saying that the US can actually take money from an Australian that even the Australian government doesn't take? This seems quite egregious.
Also, does the US look at the full value of the super or just the employer contribution, or what, when assessing tax?
That is correct - US tax law is not based on Australian laws.You may only defer tax liability for contributions made into qualified retirement plan. Australian super is NOT a qualified retirement plan under the US law - thus contributions are NOT deferred.
So they look at the full value of the super and not just employer contributions?
You are generally taxed on income that is available to you, regardless of whether it is actually in your possession. Every year amounts credited to your super must be reported as your income on the US tax return. That amount is added to your basis in that account.
As you lived and worked in Australia for over 20 years - every of these years you must report your income on your US tax return. That income includes amounts credited to your account in your super.
Wow, this is stunning. I only just this year became aware of the Amnesty program and I have submitted my 1040s and have enrolled in FBAR but I had no idea that I was supposed to include super because, as you can imagine, like any Australian I don't think of it as taxable or available. Are you able to advise on whether or not I can amend my returns to include this information? Are you also saying that they US will back tax me for the amounts credited to my super each year?
Honestly, it also worries me that none of my local contacts knew of this so it makes me wonder how well the US government is communicating this information.
Are you still with me?
Unfortunately - that is correct. Just because some income is not taxable in Australia (or any other foreign country) - that doesn't mean it is not taxable in the US. As a general rule - whatever your employer and you contributed into a foreign retirement account may not be excluded from your US taxable income. All these amount are taxable in the year received - and will be included into your Cost.Then - for earnings in that account - the situation is different - it is treated as annuity - and it is not taxed unless distributed.Please consider that illustration example. For instance your contributions were $1000 every of these 20 years - total $20,000 - that means - every year - you should report $1000 as your taxable income - and your cost is $20,000.Assuming - there are additional earning in that account $10,000 - so total account value is $30,000.When you take distribution - out of $30,000 - only $10,000 is taxable, but $20,000 woudl be your cost (or basis) - and will not be taxable because that amount was taxable in previous years.
I'll have a good read of that. I am not someone who wants to dodge the IRS so do you think I should amend the returns I recently filed as part of the Amnesty program?
According to the tax law - yes - you need to amend your past tax return - and report all your taxable income.
Ok, one final question for now. When I amend, do you think I'll be looking at serious penalities or taxes. I am talking about returns that show that I had no income in the U.S. for the years that I filed under Amnesty, which is true.
As that related to your conversion from one super account to another supper account - that might qualify for 'Section 1035 Exchange' - a tax-free exchange of an existing annuity contract for a new one.So far - you woudl not be taxed on that rollover.
I might suggest for your reference this publication - https://www1.genworth.com/content/etc/medialib/genworth_v2/pdf/pension_protection.Par.12661.File.dat/so you woudl be familiar with such option.
If you did not report your total income - there is no option - you need to amend your tax returns - and correct your reporting.Will or will not that result in any additional tax liability - would be hard to say without actual calculations.Because Australian tax rated are generally higher - and you woudl be able to claim a foreign earned income exclusion - it is possible that you woudl not have any US income tax liability - but again - you still need to prepare US tax return and report all your worldwide income.
Will that address the question I just asked about penalties or taxes when I amend to show super? (I'll read it but I'm guessing that if it's like other tax documents I won't understand it.)
Oops, I meant to say thanks for that previous answer. I will check that link as per my comment above.
You have been great. It's absolutely fantastic to be able to chat to someone like this.