Ca. Tax Lawyer 2016, VOLUME 25, NUMBER 3

The United State Income Tax Treatment of Australian Superannuation Funds Owned by U.S. Persons (Part 1 of 2)1

By Roy A. Berg2 & Marsha-laine Dungog3


The United States ("U.S.") tax consequences to U.S. person participants in non-U.S. social security programs ("foreign social security programs") generally mirror the consequences to participants in the U.S. Social Security programs: contributions and accretions are not taxed however distributions are subject to tax. When inconsistencies arise, income tax conventions and social security totalization agreements generally resolve these inconsistencies. However under current U.S. law, when the foreign social security program is fundamentally different than it is in the U.S. (as in the case of Australia), the older income tax conventions and social security totalization agreements to do not resolve the adverse U.S. tax consequences to affected individuals. Our paper analyzes these differences in the context of Australia’s Social Security program, and suggests ways to resolve them.

Over the past several years the United States has considered, and rejected, numerous different proposals to modify its Social Security programs.5 The social security programs as they currently exist bear the following hallmarks that are important to the analysis that follows: First, payment into the system is mandatory for all those who are employed or self-employed. Second, a participant’s benefits are unfunded and unsecured: they are simply a promise (though not a binding promise) by the State to pay some amount (which is subject to change) at some time (which is also subject to change) in the future.6 Third, since a participant’s ultimate benefit under the program is unfunded and unsecured, the participant can expect to receive her benefit (whatever that may be) whenever U.S. law entitles her to receive it. In sum, it is mandatory, publically administered, unfunded and unsecured ("Unfunded and Unsecured").

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