Australian Tax Position for US Individual Retirement Accounts (IRAs)

US IRAs receive favourable tax treatment under the US tax system. But for Americans who immigrate to Australia, the taxation of US IRA’s under Australian tax law can be thwart with complexity. This article is the second article in a series on foreign retirement investments and foreign superannuation – last month we featured Canadian RRSPs.

What is the Australian tax treatment?

The Australian Taxation Office’s (ATO) interpretation of the relevant Australian tax law (ID 2008/36) treats US IRAs as a form of foreign trust and not a foreign superannuation fund. This view is supported by the 2015 AAT case of Re Baker and FCT (2015). However, the exact tax position of each IRA should be assessed in conjunction with the terms of the particular IRA account agreement.

The ATO recognises that the distribution of a lump sum from an IRA may consist of multiple components:

• pre-tax contributions made by the taxpayer.
• contributions made by the US government.
• investment income derived by the fund itself, including dividends, realised capital gains and other income such as interest.

The investment income and capital gains components of any payment received from a US IRA are assessable income under Australian tax law. The return of the original capital that was invested in a US IRA is not assessable income because this is a return of the tax-free corpus of the trust.

Income receipts from US IRAs that would have been assessable income if the individual had earned the income personally as a tax resident of Australia are treated as assessable income in Australia. Therefore, distributions to an individual from their IRA which had their source from investment income e.g. interest, dividends or capital gains form part of an individual’s assessable income in the year of distribution.

What is the effect of the Australian tax laws?

The application of the above Australian tax law results in accumulated investment income and capital gains that arose within the US IRA during years in which an individual was not a tax resident of Australia, being included in that individual’s assessable income on distribution in a latter tax year, when the individual is an Australian tax resident. That is, earnings within the IRA during a period of non-residence are taxable in Australia on distribution if the individual is an Australian tax resident when the distribution occurs. This result is unreasonable because income derived when the person was not an Australian resident is later taxed in Australia on withdrawal from the IRA.

Therefore individuals with US IRAs who plan to move to Australia should seek Australian tax advice prior to becoming tax residents of Australia, particularly if they are returning Australian citizens. Some exceptions exist for individuals who will only be temporary residents of Australia – see below.

Temporary Residents of Australia

People who are in Australia on temporary visas should obtain Australian tax advice before obtaining permanent residency visa status in Australia. This is particularly the case for persons with US IRAs. Certain Australian tax advantages in relation to the taxation of foreign trusts are lost once a person changes their visa status from ‘temporary resident’ to ‘permanent resident’. Therefore, persons with US IRAs should seek Australian tax advice prior to applying for permanent residency with the Australian Department of Immigration and Border Protection.

Conclusion

The Australian taxation of US IRAs is a complex area of Australian tax law. If you have a US IRA and plan to make a withdrawal, or have already made withdrawals, please contact Naomi Smith on 02 6279 5400 or nsmith@nexiacanberra.com.au .

Similarly, if you are in Australia on a temporary visa and plan to apply for a permanent residency visa, please request tax advice from us prior to changing your visa status.

We can also assist you if you have US tax issues via the Nexia Network of accounting firms in the USA.