FATCA Update

May 2014

The recent signing of the intergovernmental agreement between Australia and the United States will reduce the compliance burden on Australian financial institutions complying with FATCA, whilst improving tax-information sharing between the two countries.
 

What is FATCA?

The United States’ Foreign Account Taxation Compliance Act (FATCA) is the attempt by the United States to detect US tax residents (and foreign entities in which US taxpayers hold a substantial interest) using accounts with offshore financial institutions to conceal income and assets from the United States IRS. The intended effect of FATCA is to reduce tax evaded through these offshore accounts. In order to achieve this goal, FATCA - which commences on 1 July 2014 - imposes extensive reporting, due diligence and withholding obligations on financial institutions both within and outside of the United States.
 

The Australian Intergovernmental Agreement

On 28 April 2014, Australia and the United States signed an intergovernmental agreement (IGA) that will significantly reduce the burden for Australian financial institutions to comply with their obligations under FATCA. This is because, under the IGA:

  • Australian financial institutions are required to report information about account holders who are likely to be US taxpayers to the ATO, rather than to the IRS
  • more time is allowed for Australian financial institutions to comply with the reporting requirements
  • there is no requirement for complying Australian financial institutions to impose a 30% FATCA withholding tax on any pass through payments to account holders that choose not to enter FATCA or to other non-FATCA compliant financial institutions, and
  • superannuation entities (including pooled superannuation trusts) and government entities will generally not be captured under FATCA.

Together, these changes make FATCA for Australian financial institutions a solely reporting based set of obligations mandated by Australian legislation (through amendments to the Taxation Administration Act 1953). Failure to comply with the obligations locally will result in administrative penalties of up to 25 penalty units. However, it is important to note that failure to comply with the obligations may result in the Australian financial institution being deemed a “Nonparticipating Financial Institution” by the IRS leading to the imposition of 30% withholding tax on any US-source withholdable payments made to it.

Significantly, the removal of the requirement for withholding to be made on account holders that choose not to enter FATCA and non-FATCA compliant financial institutions means that Australian financial institutions will no longer be expected to operate as de facto tax collectors for the IRS. 

The IGA is another step towards an increasingly high degree of international cooperation between governments and regulators. The IGA will help facilitate the bilateral sharing of tax information between the ATO and the IRS, with the likelihood that there will be a degree of cooperation between all countries entering into IGAs with the United States under FATCA. This cooperation will likely lead to an enhanced tax system integrity that may result in increased audit activities by regulators globally.
 

Next steps for compliance

The key obligations for Australian financial institutions in complying with FATCA relate to registration, account holder due diligence and reporting. 
 

Registration

Australian financial entities should consider whether they need to register with the IRS for FATCA, particularly if they have any accounts held by US tax residents and if they receive any direct or indirect US source income.

Existing Australian foreign financial intermediaries (FFIs) will need to register with the IRS through their Online Portal by 1 January 2015. As a result of the Australian IGA, Australian FFIs that register with the IRS will become “Registered Deemed Compliant FFIs” and be provided with a Global Intermediary Identification Number (GIIN).

To assist with initial compliance with FATCA, fund managers or trustees may register with the IRS as sponsoring entities for one or more “sponsored entities” (namely, funds). The sponsoring entity is responsible for the due diligence and the reporting obligations for their sponsored entities. Accordingly, sponsored entities will not need to obtain their own GIIN until 1 January 2016. Until this date, sponsored entities will be able to use the GIIN of their sponsoring entity, but will need to register with the IRS and obtain their own GIIN after 1 January 2016.

Account holder due diligence

Under FATCA, Australian FFIs are also required to undertake due diligence of new and pre-existing accounts. Accounts held with Australian FFIs as at 1 July 2014 will be considered “pre-existing” accounts for the purposes of due diligence obligations. To facilitate compliance, several deadlines have been provided for completing the due diligence based on the account type. Australian FFIs will also be required to implement new account opening procedures to identify US account holders from 1 July 2014.

By 31 December 2014, due diligence must be completed for pre-existing accounts prima facie FFIs held by Australian FFIs (i.e. accounts of institutional clients). By 30 June 2015, due diligence must be completed for pre-existing “high value” individual accounts (accounts valued at over US$1 million). By 30 June 2016, due diligence must be completed for pre-existing “low-value” individual accounts (accounts valued at between US$50,000 and US$1 million), and for accounts of entities not identified as being FFIs.

Due diligence is not necessary for pre-existing or new accounts of values below US$50,000.
 

Reporting

Information collected on US account holders is reported directly to the ATO. For the purposes of FATCA reporting, the first year-end date is 31 December 2014. Under the IGA, Australian FFIs must file their 2014 calendar year FATCA reports with the ATO by 31 July 2015.
 

Nikki Bentley

I understand the financial services industry and thrive on helping our clients in this industry succeed.

Nikki Bentley Partner

Nikki is the Group Leader of Henry Davis York's Corporate Group, which includes the legal teams for Corporate / Mergers & Acquisitions; Investments & Financial Services and Tax.

Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

With more than 15 years funds management experience in private practice, government and as an in-house lawyer, Nikki's practice spans the range of funds management products, with particular expertise in hedge funds, property funds and equities.

Nikki is regularly involved in industry and government discussions on regulatory reforms impacting the Australian funds management industry. Nikki is a passionate advocate for the development of a new corporate collective investment vehicle because of the opportunities it could provide to grow the funds management industry. She is the Honorary Legal Counsel and Chair of the Regulatory Committee for the Australian branch of the Alternative Investment Management Association (AIMA) and is a regular participant on the Financial Services Council (FSC) working groups.

">
see my profile
Jon Ireland

I constantly strive for technical excellence and commercial outcomes that add real value for my clients.

Jon Ireland Partner

Jon has extensive experience in corporate and financial services law, specialising in complex transactions, funds management and investment distribution. Jon also advises on regulatory issues relating to the use of technology in financial services.

Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

">
see my profile
Greg Reinhardt

Expert advice delivering commercial solutions.

Greg Reinhardt Partner

Greg is the Head of our Tax practice and is a recognised specialist in taxation law, advising clients across a range of industries in relation to income tax, GST, stamp duty and other state taxes.

Greg has particular expertise advising clients in the financial services sector, including managed investment funds, derivative markets, insolvency and restructuring.

He advises public and private companies, investment funds, foreign corporations and banks in respect of the tax implications of mergers and acquisitions, disposals, corporate restructures, property and infrastructure projects, financing and leasing arrangements, international taxation, financing transactions, property and infrastructure projects, managed investment schemes and other collective investment vehicles (CIVs) and tax due diligence as well as the establishment of new businesses in Australia.

Greg has published a number of articles on taxation law issues, particularly on the topic of making Australia a financial services hub, and is a regular speaker at conferences.

">
see my profile
Jim Koutsokostas

I am determined. Success is not just finding the correct answer – it is achieving the right outcome.

Jim Koutsokostas Senior Associate

Jim specialises in taxation law and has over 10 years' experience providing taxation advice on a broad range of corporate and trust tax matters with a particular focus on the banking and finance, property and construction sectors.

Jim's practice extends to all areas of taxation law. Having advised a number of publicly-listed and large private clients on a range of matters, he has gained experience in interpreting highly technical tax law and rulings and providing advice on complex transactions.

Jim has been involved in advising on the tax aspects of securitisation structures, development and lease agreements, property sale contracts, structured retail financial products, and collective investment vehicles including managed investment trusts.

In addition, he has advised on the tax aspects of cross-border transactions, onshore and offshore fund establishment, as well as property and infrastructure projects. He has also advised domestic and foreign financiers on the direct and indirect tax aspects of transactions with respect to distressed entities.

">
see my profile
Seema Mishra

I am passionate and focused on delivering outstanding outcomes for my clients.

Seema Mishra Special Counsel

Seema specialises in taxation law and provides income tax, GST and stamp duty advice to clients in a range of industries.

Seema is a Special Counsel in our Taxation practice.

She advises clients in the financial services, including funds management, industry, along with large domestic and multi-national corporations in relation to a range of issues, including the tax implications of mergers and acquisitions, disposals, restructures, international taxation, as well as banking, restructuring and insolvency matters and the establishment of new business in Australia.

Seema also advises clients in the not-for-profit sector on structuring issues, including the establishment of charitable funds.

Seema's experience has included both domestic and international secondments. She has authored a number of articles and publications, and is a contributor to the Australian Tax Handbook (published by Thomson Reuters).

">
see my profile