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Old 11-12-2011, 10:56 PM   #1
swarch
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Are Australian superannuation account investment earnings taxable in US

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Hi, I saw this question came up once before but the answer was indecisive - look at the treaty, etc. The treaty seems to say nothing about it. Aus super accounts are just like 401k/IRA, they earn interest/dividends through investment and all of this is non-taxable until retirement/withdrawal of money from the fund. The question is, does the IRS recognize this or do they want to tax that as regular income? If they tax it, then it will be double-taxed on retirement won't it? I've been searching everywhere, expecting to find a simple, clear answer to this question, and I can't find it anywhere, which seems rather odd to me - surely this must come up a lot... Would really appreciate any help, links, etc.
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Old 11-13-2011, 09:09 AM   #2
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“Aus super accounts are just like 401k/IRA, they earn interest/dividends through investment and all of this is non-taxable until retirement/withdrawal of money from the fund. The question is, does the IRS recognize this or do they want to tax that as regular income?”---->quote,” If the pension is regular public( social I mean) pension that is equivalent to US social security benefits, then the pension would be exempt from taxation but, if from an equivalent non- public social security pension, like the US 401K or IRA type pension plan, it would be taxable in the US even if it is not taxable in Australia where it was originally derived.Please visit the IRS Website for some more info. on it.” Note on article.#18; http://www.irs.gov/pub/irs-trty/aus.pdf
“ If they tax it, then it will be double-taxed on retirement won't it?”--->If the IRS taxes it, then needless to say, it is double taxation; you pay tax on the benefit in AUS and in US.
Investment earnings your retirement account,i.e., 401k( either tradi. or Roth) or IRA( either tradi. or Roth) produces will not be taxed until you take withdrawals from the account. For example, say, you have a ROTH 401k account, and you have made nondeductible contributions to the account. Because you received no deduction for these contributions they create basis. This means that when you withdraw money from the account you won't have to pay tax on the portion of your distributions representing these dollars. I guess the situation is almost identical even in the US; in US, 401K plan’s assets must be held in trust to assure that assets are used solely to benefit the participants and their beneficiaries. The trust must have at least one trustee to handle contributions, plan investments, and distributions to and from the 401(k) plan. Since the financial integrity of the plan depends on the trustee( i mean the trustee's investment capability or etc)this is one of the most important decisions you will make in establishing a 401(k) plan.However, if you set up your plan through insurance contracts, the contracts do not need to be held in trust.
“I've been searching everywhere, expecting to find a simple, clear answer to this question, and I can't find it anywhere, which seems rather odd to me - surely this must come up a lot... Would really appreciate any help, links, etc.”---> Pleae visit the IRS website given above and check Article #18.
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Old 11-13-2011, 09:19 AM   #3
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Thank you. I did read article 18 of the treaty, but it is talking about the payment of the pension itself. My question is about interest and dividends earned by the superannuation account before retirement is reached. This is non-taxable in Australia as it is income that cannot be withdrawn from the account (expect under heavy tax penalty). I don't see anywhere that the treaty addresses this. Some advisors say it is non-taxable because you cannot withdraw it, others say there is no protection for these accounts, except maybe Canadian accounts. Obviously it is brutally unfair, it is costing people who move b/w countries their retirement funds, but still it is not clear if this income is taxable or not. The account is this one: http://www.css.gov.au/ I don't think it's equivalent to social security, it is more like IRA or 401k.
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Old 11-13-2011, 12:02 PM   #4
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“My question is about interest and dividends earned by the superannuation account before retirement is reached. This is non-taxable in Australia as it is income that cannot be withdrawn from the account (expect under heavy tax penalty).”----> I guess interest and dividends earned by the superannuation account before your retirement is NON-taxable in US, either UNLESS you withdraw your super annuation early ;normally superanuation must be left in the fund until you reach the required age to withdraw it. However if you are suffering hardship, you can apply to access your superannuation early. Generally you can withdraw your non-preserved contributions (i.e., money you have paid into your fund and not claimed a deduction for) at any time. However, preserved moneys can usually only be withdrawn when you retire.So,you cannot withdraw preserved contributions, until you retire (between the age of 60 or 55 depending on your date of birth); suffer from a total and permanent disability; suffer from a total and permanent disability; die; or you can show that there is financial hardship or other compassionate grounds.
Perhaps you need to contact the IRS for more information in detail(I am NOT sure if IRS agents can help you with this issue though).
“Some advisors say it is non-taxable because you cannot withdraw it,”--->As said above, it depends.
“ others say there is no protection for these accounts, except maybe Canadian accounts. Obviously it is brutally unfair, it is costing people who move b/w countries their retirement funds, but still it is not clear if this income is taxable or not.”--> If you are a U.S. citizen or resident, the IRS requires you to report all worldwide income. This includes income from dividends and interest from abroad(including CANADA). While not all your income may be included in a W-2 or 1099, the IRS advises that you are still responsible for reporting income earned from every source. To mitigate confusion and complexity resulting from living or working between the United States and AUSTRALIA, both countries abide by the AUSTRALIA-United States Convention with Respect to Taxes on Income and on Capital, otherwise known as the AUS-U.S. Tax Treaty.
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Old 11-13-2011, 12:13 PM   #5
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Thank you again, you're an amazing and much appreciated resource. I'll have to do some more research. I do have one follow up, on the question of reporting all income. Do you mean on your tax return? Do you mean *all* income or all *taxable* income? I don't recall ever reporting income and dividends earned by my 401k. And if I did, is there some complex thing you have to do to adjust it away again so it is not taxed? Obviously I have no idea what I'm talking about. I'll try the IRS, but like you said they probably won't know, well perhaps, might get lucky.
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Old 11-13-2011, 12:49 PM   #6
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“Do you mean on your tax return? Do you mean *all* income or all *taxable* income? I don't recall ever reporting income and dividends earned by my 401k. And if I did, is there some complex thing you have to do to adjust it away again so it is not taxed?”--->OK, I am not very clear what your question is;however, I guess your 401K is traditional 401K, then some, NOT ALL, 401k plans offer mutual funds that pay dividends. Aslongas you invest in mutual funds inside of the 401k plan, you may be paid dividends. Because 401k plan earnings are not taxed while the money is in the account,as said previously, you do not pay tax on any of the dividends you earn in your 401k plan. When you withdraw the money, all money, including dividends, are taxed at ordinary income tax rates. The benefit of tax-free dividends in your 401k plan is that you are able to reinvest the dividends in your 401k to accelerate the earnings of your dividend paying mutual funds. The money that would normally be paid in taxes on your dividends is instead reinvested. This full reinvestment of dividends helps you to grow a retirement savings that is larger than it otherwise would be.If you withdraw money earlier, as we said, prior to your age 59 1/2, you may pay a penalty on your 401k earnings. The penalty will be 10 percent of the amount you are withdrawing and you are also subject to both federal and state income tax on the early withdrawals. This may erase the benefit of the dividends you've earned if the withdrawal is a sizable one.
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