The United States Income Tax Treatment of Australian Superannuation Funds Owned by U.S. Persons¹ (Part 2 of 2)

By Roy A. Berg² & Marsha-laine Dungog³

IV. NEITHER SG CONTRIBUTIONS OR VEC AMOUNTS TRANSFERRED TO THE SUPER CONSTITUTE GROSS INCOME TO THE USP EMPLOYEE-BENEFICIARY UNDER CODE SECTION 61 PRINCIPLES

A. Section 61 Should Govern Taxation of Supers and Not Section 402(b)

The pressing U.S. tax issue with respect to the Super is whether the SG Contributions and VEC paid to the Super should constitute part of the USP employee-beneficiary’s worldwide taxable income. From a high-level overview of the Super, it would appear that all concessional employer and employee contributions to the Super (and income accretions therefrom) are portable, fully funded and fully preserved ("Funded and Secured") from the moment contribution for the benefit ofthe USP employee-beneficiary. Tax practitioners appear to have fixated on this one aspect of the Super, i.e., the employer-employee relationship, as the dispositive basis for applying Section 402(b) to a Super notwithstanding that Supers are: (a) not established exclusively by private contract between an employer and its employee; and, (b) not a foreign tax-deferred retirement plan.⁴ Most importantly, the Australian courts and tax practitioners have themselves acknowledged the folly of analyzing a member’s interests in a Super within the context of contractual rights arising from an employer-employee relationship.⁵ A reputable Australian jurist, Hon. Justice Graham Hill, has pointed out that a member’s interest in a Super is blurred by the existence of two distinct legal relationships that simultaneously overlap in the Super – the first relationship governed by a deed of trust between the trustee, the trust property and beneficiary; and the second relationship arising from a plan between employer and employees that evidence the terms of their contractual relationship.⁶ We believe that Section 61 provides a more comprehensive framework for determining the taxability of the Super to its USP employee-beneficiary for United States ("U.S.") tax purposes. After all, both employer and employee contributions to the Super, at first blush, reflect a "clear accession to wealth,"⁷ notwithstanding that such contributions are deposited into a fund or trust. To make this determination, the Super contributions and income accretions must be examined in light of the constructive receipt doctrine and economic benefit doctrine.