Discussion:Australia Pension of US Citizen Residing in Australia

Thanks to Sandy and to all of the dedicated professionals using the site. This was my first time and I was very impressed by the knowledge and cooperation of all those involved.

From what I am thinking, this is typical to a ROTH IRA in the US? If the tp was taxed on the pension contributions already in AU, then it is tax free on distribution....since the US did not tax the income due to the treaty on the contribution of that money, then why would it be taxable on distribution?

Hmmm....this pension plan was funded by after tax dollars or pretax dollars?

I think the IRS may take the position that since a pension distribution similar to a 401K withdrawal (it is called a "Superannuation" here) would be taxable and the fact that Australia would not tax it would prevent double taxing the "income" and further justify their argument. The US did not tax the income originally because it was not included in the wages of the Australian income. If the amount of the superannuation was included in the wages, I believe the US would tax it on the basis that as a US citizen the taxpayer is subject to tax on world wide income with the provisions of the earned income exclusion and foreign tax credits available to avoid double taxation. I do not think the treaty protects wage income. The contribution was funded with pre tax dollars so I have additional reservation about the distribution being taxable in the states. My gut feeling is that it does not seem right that the US could tax this but, I just cannot find something to support my opinion strongly enough yet.

Thanks again for your help.

So..if it is sourced in AU and the citizen is also a citizen and resident of AU, then this is not taxable in the US since it never was even derived in the US and the US citizen is not even living in the US.

MANNNNNNNNNN...this seems very inequitable for the US to tax a pension that is earned and is being redeemed in a country of which that country is not even requesting taxes on the income.

Please keep me updated if you will. This is very interesting and I would love to find something to hang your hat on with this one :)

I have re read the US Australia Tax Treaty Article 18 and now believe on its face part 1 may be the simple answer and in favor of the tapayer:

"Subject to Article 19 (Governmental Renumeration) pensions and other similar renumeration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that state."

Riley2 (thanks again): I did review the savings clause but, it seems in conflict with the above and does not seem to be in line with the objectives of the treaty in regard to pensions received by residents.

Any input would be greatly appreciated.

Thanks.

There are a variety of private letter rulings on this issue that outline the key parts of the treaty and the law.

I faced a slightly more complicated situation in that the payout from TIAA-CREF was a lump sum which TIAA-CREF insisted was fully taxable in the US and wanted to withhold at 30%. However more recent treaty technical explanations make it clear, at least to me, that even the lump sum payout is only taxable in the state of residence. See PLR 200416008 (which deals with the lump sum payment from US pension plan to Australian resident). And as of 4 months ago, I got TIAA-CREF to change their position, and they now don't feel that any withholding is required on pension payments to Australian beneficiaries - even if the distribution is a lump sum.

See also PLR 200209026 (Ruling 2) which doesn't address your particular situation but again makes a clear statement of the law re: taxation of pensions paid to non-resident beneficiaries.

There's plenty of other PLRs dealing with this - I just happened to look at these because they dealt with lump sum distributions.

Also, if you look at the most recent technical explanations of the US model treaty (11/15/2006), you'll see that they address additional situations like the US Roth-IRA.

So in your case, I can't see where the IRS would have any basis for viewing this as taxable in the US. And I believe you're correct that the authority is clearly stated in Article 18 of the treaty.

I'm a new user to this board and am not sure if I have my account set up properly to identify me but I'm a CPA in Colorado and have an e-mail on my account if you want to get in touch. If my account isn't set up properly, I'd welcome any tips on this from the veterans.

However:

1. The taxpayer should have basis for his/her own & employer contributions plus possibloy growth if s/he was highly compensated; and

2. The pension will almost certainly turn out to be foreign source general limitation basket income & there may well be excess credits in that basket already.

So in summary if the basis was properly figured & FTC accounted for this may turn out to be moot. If real tax arises then expatriation may be the eventual choice!

Therefore, Article 18, like most treaty provisions that could potentially override the Internal Revenue Code, works for almost everyone except a US citizen.

For more a in-depth analysis of this issue, see Chief Counsel Advice 200604023.

I'd say you're exactly right on this. I've confused the issue because I'm dealing with an Australian individual who is a non-resident alien for US tax purposes. Your explanation of the savings clause is concise and to the point.

Hopefully, notwithstanding the savings clause, that this particular pension payment is somehow not taxable income under US tax law for another reason or that there is some relief available through the credit system - but I'd have to say it doesn't look promising.

Good luck "down under" TA37.

Or,

Again, this is a US citizen who has lived and worked in Australia for 30 years for a university in Australia. I will try the angle of determining if such a pension is considered from a governmental agency and outside the savings clause provision.

Any further suggestions and your input to date appreciated.

Thanks again.

Thanks.

Any further suggestions or insight would be greatly appreciated before I finalize my memo.

Thanks once again.

Thanks again for your thoughts and time.

The Australian Superannuation is a government mandated minimum 9% on gross earnings however it is not a withholding to the employee. So, I am not fully commited to either point of view yet. I will try and find some specific rulings but, unfortunately, I am running out of time (and long out of budget) and will have to present the client with a general opinion unless we receive more information and time from him. I will continue my research as this is obviously a big issue I will see over and over again.

Thanks again.

SSA

Thanks again Riley2 for your assistance all the way through and for giving good advise and the correct answer and interpretation of the issues.

I will hope to be able to return the favor to someone if I can.