Dual Taxation After a Death Between Australia and the US

The Core Problem: Two Tax Systems, One Estate

When an American citizen dies in Australia, their estate potentially falls under both the Australian tax system and the US Internal Revenue Code. Australia does not impose a separate estate or inheritance tax, but it does tax certain death benefit distributions (particularly from superannuation) depending on who receives them. The US, meanwhile, taxes the worldwide income and assets of its citizens regardless of where they lived or died — and it has its own rules for how foreign retirement accounts, foreign bank balances, and foreign real property get treated at death.

The collision point is almost always Australian superannuation.

The Superannuation Tax Trap

Australian superannuation (the mandatory retirement savings system) is where most of the cross-border tax complexity lives. Here is why it creates problems:

In Australia, superannuation death benefits paid to a "superannuation dependent" — a surviving spouse, minor child, or someone in an interdependency relationship — are generally tax-free. A non-dependent beneficiary (an adult child who was not financially dependent) may face Australian tax on the taxable portion of the benefit.

In the United States, the IRS does not treat Australian superannuation the same way it treats a US 401(k) or IRA. Depending on the fund structure and how contributions were made, the IRS may classify the super fund as a foreign non-exempt employee trust or a foreign grantor trust. This classification changes everything about how distributions are taxed.

When a US person inherits an interest in an Australian super fund, the death benefit distribution is generally classified as Income in Respect of a Decedent (IRD) under Internal Revenue Code Section 691. The beneficiary must report these distributions as taxable income on their US individual tax return — even when the distribution was entirely tax-free under Australian law.

Additionally, the total value of the deceased's superannuation account at the date of death must be included in their gross estate for US Federal Estate Tax purposes.

Reporting Obligations That Carry Penalties

US beneficiaries and executors must satisfy several foreign-asset reporting requirements:

• FBAR (FinCEN Form 114) — If the total value of all foreign financial accounts (including Australian bank accounts and super funds) exceeds $10,000 at any point during the year, the estate and beneficiaries may have to file an FBAR. Non-filing penalties can be substantial.
• FATCA (Form 8938) — If foreign financial assets meet the applicable reporting threshold, the estate or beneficiary may have to file Form 8938 with the relevant tax return.
• Foreign trust reporting (Forms 3520 and 3520-A) — If the IRS classifies the super fund as a foreign trust, these forms may also be required. Penalties for late or missing filings can be substantial.

The practical problem: most US families do not realize that their deceased relative's Australian super fund triggers these reporting requirements. The penalties accumulate quietly, and the IRS does not send reminders for foreign-asset forms.

The US-Australia Tax Treaty

The US-Australia income tax treaty provides some relief through foreign tax credits (FTCs). If Australia taxes any component of the super death benefit distribution, the US beneficiary can claim a credit against their US tax liability for Australian taxes paid on the same income, avoiding full double taxation.

However, the treaty creates an awkward gap: when Australia taxes the distribution at zero (because it went to a superannuation dependent), there is no Australian tax paid, so there is no foreign tax credit to claim. The US beneficiary pays full US tax on income that was tax-free in Australia. This is legal, intentional, and catches families off guard.

What Executors Should Do

The cross-border tax implications of a death in Australia require professional advice from a dual-qualified tax practitioner — someone licensed in both US and Australian tax law. General estate attorneys and standard CPAs in either country typically lack the expertise to navigate the treaty, the super fund classification, and the foreign-trust reporting requirements simultaneously.

Key action items for the first three months:

1. Request a statement of the deceased's superannuation account balance from the fund immediately after notifying them of the death
2. Determine whether the IRS will classify the super fund as a grantor trust or a non-grantor trust
3. Determine whether FBAR, FATCA, or foreign-trust forms are required for the year of death and whether any prior years need review
4. Consult a dual-tax specialist before accepting the super death benefit payout — the timing and structure of the distribution affects the US tax outcome

The American Dies in Australia guide walks executors through the superannuation death benefit process, the FBAR and FATCA filing triggers, and the questions to ask a dual-qualified tax adviser before accepting any cross-border distribution.