Is my Australian super taxable in the United States?

Who this is actually about

Nobody needs this page unless the United States has a claim on them. That means a US citizen or green card holder with Australian super, whether they live in Australia or have moved back, or someone who built up super in Australia and has since become a US person.

An Australian in Australia with no American connection can stop reading. Their super is an Australian question with an Australian answer.

How Australia taxes super, and why that matters here

Australia taxes super mostly on the way in and while it grows, not on the way out. The Australian Taxation Office says super may be taxed at three points: on contributions, on the fund's investment earnings, and on withdrawal.

The earnings are taxed at 15% while the account is building up. Once the money moves into a retirement phase account, "investment earnings on funds in the account are not taxed", up to a lifetime limit called the transfer balance cap. Employer contributions and salary sacrifice go into the taxable part of your balance, and in a taxed fund the fund pays tax on them at 15%.

On the way out, the ATO's table for someone 60 or older in an ordinary taxed fund reads "No tax" for both a lump sum and an income stream. Super from an untaxed source, most commonly a public sector scheme, is treated differently.

That is Australia's design. The US has its own, and nothing in Australian law decides what the IRS does with the same money.

What the treaty says about pensions

The United States and Australia signed their income tax treaty in Sydney on 6 August 1982. A protocol signed in 2001 amended it, but did not change the pensions article.

Article 18(1) is the part that looks, at first, like the answer:

Subject to the provisions of Article 19 (Governmental Remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

Two things about it matter.

It is about pensions, defined in Article 18(4) as "periodic payments made by reason of retirement or death, in consideration for services rendered". A regular payment fits that wording. The article says nothing about an account while it is still growing.

And unlike the New Zealand treaty, whose 2008 protocol added a definition of pension fund that names KiwiSaver, nothing in this treaty or its 2001 protocol names super as a pension fund. The word "superannuation" appears once in the treaty, in the residence article, which deals with when a fund itself counts as resident in Australia. It says nothing about how a member is taxed.

What takes that protection away: the saving clause

Read alone, Article 18(1) would mean a resident of Australia pays Australian tax on their pension and nothing else. But it is not read alone.

Article 1(3) contains what American treaties call the saving clause:

Notwithstanding any provision of this Convention, except paragraph (4) of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)) and individuals electing under its domestic law to be taxed as residents of that state, and by reason of citizenship may tax its citizens, as if this Convention had not entered into force.

Article 1(4)(a) then lists what survives that. For the pensions article, it names "paragraph (2) or (6) of Article 18" and nothing else.

Paragraph 2 covers social security and other public pensions. Paragraph 6 covers alimony and child support. Paragraph 1, the one about pensions for past employment, is not on the list. So a United States citizen living in Australia cannot point at Article 18(1) and tell the IRS that only Australia may tax their pension.

The same list does keep Article 22, the treaty's relief from double taxation, for citizens and residents alike. How that relief applies to super, where most of Australia's tax is paid by the fund rather than by you, is not something any published source works through.

The part the saving clause does not reach

Article 18(2) survives, and it says:

Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

That is about payments made by a government. Super is paid by a fund, and neither the treaty nor anything published by the IRS treats super as a public pension under this paragraph. Whether super affects a US Social Security benefit is a separate question with a much clearer answer, covered in the guide to Australian super and US Social Security.

What has never been answered

The treaty decides which country may tax. It does not tell the United States how to classify a super account under its own law, and that classification decides the questions that come up every year rather than only at the end:

• Are your employer's super guarantee contributions income to you in the year they are made?
• Are the fund's earnings taxable to you as they accrue, years before you can reach them?
• Is the account a foreign trust, and if so, whose, with the reporting that goes with that?
• Are the fund's underlying investments passive foreign investment companies, with the harsh regime that attaches to those?

No published ruling was found for any of these. No IRS guidance names Australian super. The IRS page on foreign pensions deals with distributions, where "the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract)", and notes that your cost "might include amounts contributed by your employer that were not includible in your gross income". It does not deal with earnings building up inside a foreign plan.

That silence is the answer to give you, because the alternative is to invent one. A great deal of confident writing exists on this question, and none of it is the IRS.

One piece of IRS relief, and what it does not do

In 2020 the IRS removed one filing burden for some foreign retirement arrangements. Revenue Procedure 2020-17 exempts eligible individuals from Forms 3520 and 3520-A, the foreign trust returns, for a "tax-favored foreign retirement trust".

The conditions are specific. Among them, the trust must be tax-favoured under local law, have information about it reported to its own tax authority each year, accept only contributions of income earned from work, and tie withdrawals to retirement age, disability or death, or penalise earlier ones. Contributions must be limited by a percentage of earned income, an annual limit of $50,000 or less, or a lifetime limit of $1,000,000 or less.

Three limits on this relief matter.

It does not name Australia or any Australian fund. Whether a given super fund meets every condition is something the revenue procedure leaves to you.

It is only about those two forms. The IRS says it "does not affect any reporting obligations under section 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114", which is the FBAR.

And it does not settle the tax. To be eligible, a person must have reported contributions, earnings or distributions as income "to the extent required under U.S. tax law". It does not say what that extent is.

What is not in doubt is the reporting

Whatever the tax treatment turns out to be, the disclosure obligations attach to the balance rather than to the analysis.

A US person must file an FBAR if their foreign financial accounts together "exceeded $10,000 at any time during the calendar year reported". A super balance of any size will take most people over that on its own.

Form 8938 has much higher thresholds for people living abroad: "more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year" for someone unmarried, and "more than $400,000" and "more than $600,000" for a joint return. The IRS says specified foreign financial assets include "interests in certain foreign retirement, pension, and non-retirement savings funds or accounts".

Reporting an account is not the same as paying tax on it, and doing the first does not settle the second. More on the US filing obligations for someone living abroad, written for New Zealand but built on the same forms.

What this guide does not tell you

It does not tell you whether your super is taxable to you this year, because nothing published says so.

It does not cover what happens when you take a lump sum, which falls outside the treaty's definition of a pension and runs into the same unresolved classification.

It does not deal with self-managed super funds, defined benefit schemes, or what happens to super when you die. The New Zealand version of this question is in the guide to KiwiSaver and US tax, and the published material runs out in the same place.

The ATO page on tax on super benefits was last updated on 2 August 2023, so check the current page before relying on the figures.

This is a question where the published material genuinely runs out, and where a person with both Australian super and a US filing obligation is better served by someone who takes professional responsibility for the position than by anything written for a general audience, this page included.