Aussie Super and the US Taxman: The Cross-Border Headache Nobody Warns You About

If you’re an Australian living in the United States, or a US citizen or green card holder working in Australia, here is the bit nobody puts on the welcome brochure: Australian super is not neatly recognised by the US tax system in the same cosy way Australia treats it.

In Australia, super gets the red-carpet treatment. In America, it can look like a foreign trust, a foreign financial account, a pension-ish thing, or all three before lunch. Charming, in the way an unexpected envelope from the IRS is charming.

So let’s untangle it, or at least comb its hair. Even the experts argue about this area, which tells you everything you need to know.

Super, in 60 seconds

Australian superannuation is compulsory retirement saving. In general, employers must pay Superannuation Guarantee contributions for eligible employees into a complying super fund or retirement savings account, calculated by reference to ordinary time earnings. From 1 July 2025, the general SG rate is 12%.

Inside Australia, super is a very good deal. Contributions and super fund earnings are usually taxed at concessional rates (15%), and your money is broadly preserved until retirement or another condition of release. Where Australia sees a treasured nest egg, the US sees a suspicious foreign parcel that nobody can quite identify.

Why the US doesn’t know what to do with your super

Here’s the root of the whole problem: superannuation has no clean American equivalent. It’s a hybrid creature, part compulsory national retirement scheme, part private investment account, and there is only limited US guidance on how American rules apply to Australian super funds. That gap is what breeds all the uncertainty (and all the conflicting advice you’ll find online).

The US-Australia tax treaty helps with plenty of cross-border headaches, but it does not give Australian super a clean US tax-deferred pension wrapper. Article 18 deals with pensions and annuities when they are paid. It does not clearly tell the IRS to ignore employer contributions, annual fund earnings or SMSF activity before retirement. Which is inconvenient. Also known as the whole problem.

There is one bright spot. Australia and the US have a social security agreement, better known as a totalisation agreement. It can help stop dual social security coverage and it expressly deals with Australia’s Superannuation Guarantee for that purpose. Useful? Yes. A solution to the income tax treatment of super? No. Sadly, the tax goblin remains in the cupboard.

The two boxes the US may try to shove your super into

Because there is no neat IRS manual called Australian Super for People Who Enjoy Sleep, US advisers usually analyse super under one of two broad approaches. The answer matters because it changes both the income tax and the paperwork.

Box one: non-exempt employee benefits trust

This is often the more benign analysis for a standard industry or retail super fund where the member does not control the fund’s investments. Under section 402(b), employer contributions to a non-exempt employee trust can be included in the employee’s US income when the employee’s interest is substantially vested, with later distributions dealt with under the US annuity rules.

The highly compensated employee rules can matter, but they are not a neat sticker that says “tax the growth every year”. For 2025 and 2026, the HCE dollar threshold is US$160,000. The actual definition also catches 5% owners, looks to the preceding year, and can involve a top-paid group election. Because apparently “simple pension rule” was unavailable.

Where an amount has already been taxed in the US, it should generally form part of the member’s US basis, so the same dollar is not taxed twice later. That is the theory. The record-keeping is where optimism goes to quietly expire.

Box two: foreign grantor trust

This is where SMSFs start sweating. If a US person is treated as the owner of a foreign trust under the grantor trust rules, the US can tax that person on the trust’s income each year. With an SMSF, the member’s role as trustee or director, their control over investments, their contribution history and the fund deed all matter.

Control is the danger word. A standard large fund may look like an employer retirement arrangement. An SMSF can look much more like a foreign trust controlled by the member. That can bring annual income inclusion and Forms 3520 and 3520-A into the conversation, unless a reporting exemption applies. Nobody invites these forms over for dinner. They still come.

The development that changed the paperwork: Revenue Procedure 2020-17

For years, the genuine terror of super for US filers was not just the income tax. It was the reporting. A super fund treated as a foreign grantor trust could drag Forms 3520 and 3520-A into the annual filing pile, and those forms come with penalty settings best described as unfriendly.

Revenue Procedure 2020-17 is genuinely helpful, but it is not a magic eraser. It can remove Forms 3520 and 3520-A for eligible individuals with certain tax-favoured foreign retirement trusts that satisfy detailed conditions. Those conditions include local tax-favoured status, local information reporting, contribution limits, restrictions on withdrawals and, for employer plans, nondiscrimination requirements.

Many ordinary employer-style super funds may be capable of fitting within the relief. Do not assume. SMSFs, large voluntary contribution histories, unusual contributions and non-standard fund arrangements need a proper look. “She’ll be right” is not a filing position.

Most importantly, the revenue procedure deals with foreign trust information reporting. It does not settle how the super is taxed. It also does not remove FBAR or Form 8938 obligations. It takes one angry dog out of the yard. It does not fix the fence.

A quick word on those 3520 penalties

Why all the fuss about Forms 3520 and 3520-A? Because the penalties under section 6677 are punishing. For certain foreign trust reporting failures the penalty can be the greater of US$10,000 or 35% of the gross reportable amount, and for some annual-return failures a 5% figure applies instead, with the “gross reportable amount” depending on the type of failure. The precise calculation is technical, but the headline is simple enough: getting these wrong is expensive, which is exactly why the Rev. Proc. 2020-17 relief matters so much for those who qualify.

The reporting you probably still have

Even where Forms 3520 and 3520-A fall away, super still needs to be considered for US foreign asset reporting. FBAR applies where a US person has a financial interest in, or authority over, foreign financial accounts and the aggregate value exceeds US$10,000 at any time during the calendar year. Form 8938 may also be required where the FATCA thresholds are met, and a foreign pension interest can be a reportable asset on it. The two are separate obligations: filing one does not satisfy the other.

The cautious cross-border approach is simple: disclose where required, keep the calculations and workpapers, and do not try to win a staring contest with an IRS penalty notice. The notice has more time than you do.

Foreign tax credits, not the income exclusion

Super income taxed by the US is generally not helped by the Foreign Earned Income Exclusion. That exclusion is for income from personal services, not pensions, annuities, investment earnings, or amounts included because of employer contributions to a non-exempt employee trust.

Foreign tax credits may help, but only where the Australian tax is creditable to the US taxpayer under the position adopted. Do not assume tax paid inside the super fund automatically belongs on the member’s Form 1116. Tax paid by the trustee of a large fund is paid by the fund, not by you, so it is not necessarily your credit to claim. Sometimes it may help. Sometimes it sits there looking useful and doing precisely nothing. That difference matters.

The bottom line

Australian super is excellent inside Australia and awkward the moment the IRS wanders into the room. Ordinary funds, SMSFs, employer contributions, fund earnings, Forms 3520 and 3520-A, FBAR, Form 8938 and foreign tax credits all need to be lined up carefully.

The system is not impossible. It is just unforgiving, which is tax-law speak for “bring a grown-up”. Tread your own path. Just do not walk this particular path without a US tax expert as your guide.

Super plus the IRS is not a DIY project

This is the pointy end of cross-border tax. The rules are murky, the penalties are severe, and generic advice can be genuinely expensive. Whether your super is best analysed as a non-exempt employee trust, a foreign grantor trust, or something else on your specific facts, the answer affects your US income tax, Forms 3520 and 3520-A, FBAR, Form 8938 and foreign tax credit position.

Our specialist team lives in this cross-border space, helping Australians in the US and US persons in Australia get their super reporting right and sleep at night.

Book an appointment with our cross-border tax specialists today and get your superannuation position sorted before the IRS raises an eyebrow. Future you will thank you.

General information only. This article concerns a complex and unsettled area of US and cross-border tax law, doesn’t consider your personal circumstances, and isn’t tax or financial advice. US tax positions on superannuation vary between practitioners and depend heavily on your specific facts. Speak to our specialist cross-border tax team today, or another suitably qualified tax adviser, before acting.

References

1. Australian Taxation Office, “How much super to pay” (the Superannuation Guarantee rate of 12% of ordinary time earnings from 1 July 2025): ato.gov.au
2. Internal Revenue Service, “COLA increases for dollar limitations on benefits and contributions” (section 414(q) highly compensated employee threshold of US$160,000 for 2025 and 2026): irs.gov
3. US Internal Revenue Code, section 414(q) (statutory definition of a highly compensated employee): law.cornell.edu
4. US Internal Revenue Code, section 402(b) and Treasury Regulation section 1.402(b)-1 (taxation of employer contributions to a non-exempt employee trust): law.cornell.edu
5. Internal Revenue Service, Revenue Procedure 2020-17, Internal Revenue Bulletin 2020-12 (conditional exemption from Forms 3520 and 3520-A for certain tax-favoured foreign retirement trusts; does not remove FBAR or Form 8938 obligations): irs.gov
6. Internal Revenue Service, “Foreign trust reporting requirements and tax consequences” (grantor trust consequences and Forms 3520 and 3520-A): irs.gov
7. US Internal Revenue Code, section 6677 (penalties for failure to file foreign trust information returns): law.cornell.edu
8. Internal Revenue Service, “Understand how to report foreign bank and financial accounts” (FBAR US$10,000 threshold and its separate nature from Form 8938): irs.gov
9. Internal Revenue Service, Instructions for Form 8938 (foreign pension interests as specified foreign financial assets, and the separate FBAR and Form 8938 obligations): irs.gov
10. Internal Revenue Service, Publication 514, “Foreign Tax Credit for Individuals” (requirement that the foreign tax be imposed on and paid by the taxpayer claiming the credit): irs.gov
11. Internal Revenue Service, “Foreign earned income exclusion: what is foreign earned income” (exclusion does not apply to pensions, annuities, or amounts from employer contributions to a non-exempt employee trust): irs.gov
12. Convention between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation (Article 18, pensions and annuities), and the US-Australia Social Security (Totalization) Agreement: irs.gov