OZ SMSF and US legislation

[TaxMan60601]

Hi again.

I see the enthusiasm in your eyes after my last topic, lol. But it is easy to be explained - there are a lot of more important things to discuss these days in the country ...

Anyway, here's the next case.

I believe most of you have heard about Australian Self Managed Superannuation Funds - these are trusts which manage the retirement contributions of people in Australia. They usually invest the funds and often invest in US assets.

So the point is how to treat them from the US legislation perspective and what kind ot tax return they should file in case they need to file one. Is it grantor, simple or complex foreign trust.

I realise this is rather legal than tax question, so feel free to move/delete this if needed.

Any suggestions and shared good ideas will be highly appreciated though.

Thank you

[Elrod]

Foreign Trust

Through 1996, a trust was foreign if the trustee, corpus, and administration were foreign. Since 1996, a trust is foreign unless a U.S. court supervises the trust and a U.S. fiduciary controls all substantial decisions. U.S. taxpayers are subject to filing Form 3520, Creation of or Transfer to Certain Foreign Trusts, Form 3520-A, Annual Return of Foreign Trust With U.S. Beneficiaries, and Form 926, Return by a Transferor of Property to a Foreign Estate or Trust, when contributing property to a foreign trust. These trusts are usually U.S. tax neutral and are treated as grantor trusts with income taxed to the grantor.

Foreign trusts that have income attributable to U.S. sources and are not grantor trusts are required to file Form 1040NR, U.S. Nonresident Alien Income Tax Return. Foreign trusts that have income attributable to U.S. sources and are grantor trusts would have that income directly attributable to the grantor (if U.S. grantor income, it must be included on Form 1040; if nonresident alien grantor income, it must be included on Form 1040NR).

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Abusive-Trust-Tax-Evasion-Schemes---Special-Types-of-Trusts

[Christo]

Hi TaxMan,

Did you receive a proper answer to your question?

Here is my opinion, though I believe the best option will be a Private Letter Ruling from the IRS.

Pursuant to the OZ legislation, employers are the only one who must make mandatory Superannuation contributions to the fund. There is no compulsory employee participation and the employer's contribution is usually fixed to 9 % of the employee's income, subject to a maxim amount. So the actual "grantor" of the corpus of the Superannuation fund is generally the employer. However the SMSF rules stipulate that the beneficiaries will have control over the investment and management of the funds (i.e. they will be the trustees). Moreover, the beneficiaries must be related to each other. It is not possible to form SMSF with unrelated parties, so the most common scenario is a husband and wife plus probably dependents. Yet, the SMSF is above all a pension fund, so it is not that easy (but not impossible) to revert the corpus or to gain access to the income prior to retirement. However based on my experience the vast majority of the SMSFs are formed by self-employed individuals or individuals who own the voting rights of an OZ Pty (limited liability company). So binding it up altogether, it appears that grantor, the beneficiaries and the trustees of the SMSF are either one and the same person or subordinate or related to each other. Having in mind the provisions of IRC 671 - 679 and Treas. Reg. 1.1441-1©(26), it appears that the SMSF is a foreign grantor trust. How do you feel about it?

Hristo