Super tax challenges for Australians with US income tax obligations

Super tax challenges for Australians

Jackie Shelton, Terry Hoban & Warwick Lowe explore a US case which is highlighting the need for individuals to seek tax advice before moving overseas.

Terry Hoban

Director, Expatriate Tax

KPMG Australia


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An ongoing United States (US) court case involving an Australian executive working in the US has highlighted the challenges that taxpayers face in dealing with the US tax treatment of Australian superannuation funds.

In Dixon vs United States of America, currently before the US District Court for the District of New Jersey, the Internal Revenue Service (IRS) has made a claim regarding a refund of taxes paid on superannuation income. The taxpayer filed tax returns which excluded income from his superannuation funds from taxable income. While the IRS initially processed the returns, it is now challenging the validity of the returns and subsequent amendments including the exclusion by the taxpayer of his superannuation from taxable income.

Why is this important?

To date, neither the IRS, nor the US courts have provided a view on exactly how Australian superannuation should be taxed. This case provides the first indication of the IRS’s view, and also an opportunity for a judge to rule on this issue.

Currently under US domestic law, Australian superannuation does not meet the criteria to qualify for tax deferral, the way that US plans, such as s 401(k) retirement plans, do. As such, employer contributions made to Australian superannuation funds are subject to US tax in the hands of the employee if they are working in the US.

Where the employee is a ‘highly compensated employee’ (defined as including employees with more than US $120,000[1] in wage income) the yearly earnings within the Australian superannuation fund are also included as taxable earnings. Practically, this means that the value of the taxpayer’s fund is measured in USD equivalent as of 1 January, and then again as of 31 December, and the difference is picked up as reportable wage income. In applying this methodology, even if fund earnings are flat, foreign exchange movements may result in a taxable income pick up.

Additional complications arise where employee contributions (such as non-concessional contributions) to the fund exceed employer contributions. Where this is the case, the fund would no longer be taxable under the pension rules, and instead be subject to complex and onerous foreign trust reporting. This can often be the case when the taxpayer is a member of a self-managed superannuation fund.

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