How US employers in Australia can avoid double superannuation coverage

Effective 01 July 2024, employers have been required to contribute 11.5% of an employee’s ordinary time earnings into a superannuation fund under the superannuation guarantee. Individuals can also make voluntary contributions to their superannuation fund. 

When US residents work in Australia temporarily, their non-Australian employers are generally required to pay superannuation guarantee contributions for their employees in Australia. US employers can also pay compulsory social security contributions for their employees. These payments can also cover Australian super contributions.

Generally, US retirement funds allow for the withdrawal of benefits before retirement age for purposes other than retirement. An Australian superannuation benefit paid to a person aged 60 years or over is generally tax-free unless the lump sum includes an untaxed element. However, withdrawals from a superannuation fund prior to 60 years of age may be taxed at the individual’s marginal tax rate less a 15% tax offset. 

Due to the ability to withdraw funds prior to retirement age, US retirement funds do not meet the “sole purpose test” in section 62 of the Superannuation Industry (Supervision) Act 1993 (Cth), and do not qualify as foreign superannuation funds for Australian income tax purposes. Accordingly, US residents who cease working in Australia may not be able to transfer their benefits from their Australian superannuation fund to their US retirement funds when they leave Australia. US residents who have worked in Australia may find that, without up-front planning by their employers, they may only be able to withdraw from their Australian superannuation funds tax-free upon reaching 60 years of age.

To avoid this double superannuation coverage, Australia entered into a bilateral social security agreement with the United States effective 01 October 2002. The agreement allows employers to apply for a certificate of coverage to avoid dual social security taxation while ensuring that periods of work in both countries can be combined to qualify for benefits, such as US social security or Australian pensions. 

The certificate exempts the US employer from paying Australian superannuation contributions during the period they are already contributing to the US social security system. The certificate is usually issued for a period of up to five years, depending on the nature of the assignment and the specific terms of the agreement between Australia and the US.

For US residents considering working in Australia, it is important to apply for the certificate of coverage before commencing work in Australia to ensure eligibility for this exemption. US employers should retain certificates of coverage issued by the Australian Taxation Office for record-keeping purposes.

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Tony Nunes has over 25 years’ experience in providing tax advice to clients, especially on issues affecting cross-border transactions, acquisitions and restructures, and on all aspects of structuring the ownership and financing of corporations and their operations.

Isabella Chin is a qualified CA, CTA and tax lawyer. She commenced her tax career with one of the “Big 4” accounting firms. She works with a diverse range of clients. Her areas of tax expertise include small business tax concessions, restructures, capital gains tax, and tax residency.