Kiwisaver and Australian Superannuation
One of the most frequent questions we are asked, is “How is my Kiwisaver/Superannuation account taxed and reported”. While there are a number of factors which affect the answer to the above question, we can give a brief overview.
Firstly, before reading any further, it is best to clarify what an overseas pension actually is. The fact that the NZ social security pension is called “New Zealand Superannuation” can sometimes create confusion when determining if you have a plan that needs “over and above” reporting. A typical foreign (non-US) superannuation plan provides for the payment/contribution of retirement benefits in connection with employment, and is usually tax deferred in the country it is established in. This is a private retirement fund, and separate from any government social security scheme.
General U.S. Tax Treatment
The first thing we need to consider, is that a “tax deferred pension” is usually only “tax deferred” in the country in which it was established. This means that your pension may well be seen as an investment tool by the IRS, and thus subject to taxation.
Almost weekly, I speak with US citizens on the telephone who are shocked to hear that their Kiwisaver (which they had always thought was a tax-deferred plan) had serious US tax implications.
The system in the US which provides a provision for tax deferred retirement funds is mainly contained in Sec. 401 of the US tax code, which we use to determine if a plan is qualified or not, few foreign pensions qualify under this code section. The implication of this is that the foreign pension (ie Kiwisaver or Superannuation) can be taxable from the very first contribution, or growth in the account.
Foreign Pensions as Trusts
The most common question we are asked, is “is my Australian/Kiwi superannuation account a trust?”. It is definitely correct to consider this, as many are. Here, we can refer to Sec. 402(b) of the US tax code, which provides guidelines on whether a plan is considered a trust for US tax purposes. Specifically, the code section provides definitions regarding Employees Trusts, and therefore the tax position of these.
Once we have reviewed this code section, and made a determination of whether our superannuation plan is a trust, we can then look at the tax implications. This is where we begin applying the same rules that apply to US retirement accounts, and their tax deferral qualification. We look at whether the foreign pension is “discriminatory” or “non-discriminatory”. This is a test based on the ratio of coverage provided to highly compensated employees (members of the plan).
Looking generally at this, in the case of non-discriminatory pension plans, employees must currently include employer contributions in income but can defer tax on pension earnings until withdrawal upon retirement. In the case of discriminatory plans, the highly-compensated employees may need to currently include both contributions and earnings in income. One benefit of this, is you do increase your “basis” (the pre-taxed amount) and thus reduce any risk of tax implications upon withdrawal (not taking into account the US-NZ or AU tax treaty).
This becomes slightly more complex when we consider if a pension plan is “vested” for tax purposes, and whether the pension plan is actually funded with employer and/or employee contributions.
Tax Filing Implications
While convoluted, the above discussion is part of what we will use to determine if a pension does require any additional US reporting.
As a starting point, we need to ensure that this pension plan is reported on our FBAR (Report of Foreign Bank Accounts, and 8938 (if certain thresholds are met).
We’ve now made our determinations above, and can begin to apply this to the appropriate rules. In the case where we have determined that our foreign pension plan qualify as an employees’ trust, we must then consider Form 3520/3520-A (foreign trust reporting). This may be triggered if employee contributions to the plan are greater than employer contributions.
If this is the case (which it is in most), then the employee is considered the owner of the employee contribution portion of the trust (pension), and is the grantor of the trust (US person who has put assets into a foreign trust). The trust is considered in two parts, the part qualifying as a grantor trust has a filing requirement on Forms 3520 and 3520-A. In addition to this, we may also need to file Form 8621 (Passive Foreign Investment Company), which deals with passive investments made by US citizens
In the case where the employer contributions exceed the employee contributions, the entire plan is generally treated as a “non-grantor” trust that does not trigger a 3520 or 3520-A filing obligation.
As you can see, this is an incredibly complex area, and few without the relevant experience make the correct determinations to begin with. This is where US Global Tax is able to assist, and make this process as simple as can be.