By Mark Bland, Partner

If you haven’t figured out how you will be dealing with FATCA – time is almost up.  FATCA is an account reporting regime which will affect nearly every Australian managed fund and custodian.  Even if you do not have account holders who are U.S. persons, you will need to consider how you’re going to deal with FATCA.

Background

FATCA is an account reporting regime which requires reporting on the details of financial accounts of U.S. persons (individuals, partnerships, corporations and trusts) to the Australian Tax Office (ATO) and, ultimately, the U.S. Internal Revenue Service (IRS).

If you are a managed fund or custodian, and are not otherwise exempted, FATCA requires you to:

1. Register with the IRS;
2. Undertake due diligence on account holders (new and existing) to determine whether they are held by U.S. persons; and
3. Submit annual reports to the ATO in relation to the accounts held by U.S. persons which contain information regarding certain types of income and transactions.

IRS registration began on 1 January 2014.  FATCA also applies to depository institutions and insurance companies.

Which Managed Funds and Custodians will be affected by the regime?

FATCA will apply to the majority of managed funds and custodians.

For managed funds, FATCA will apply to you if you do any of the following for, or on behalf of, a customer:

1. Individual or collective portfolio management
2. Trading in money market instruments, foreign exchange, interest rate and index instruments, transferable securities (e.g. shares and bonds), or commodity futures trading
3. Investing, administering or managing funds or money on behalf of other persons

An exemption may apply if you merely provide financial advice.

For custodians, FATCA will apply to you if you generate 20% of gross income (averaged over a 3 year period) from custodian services.

Is there a way to avoid FATCA?

There are a number of exclusions and exemptions which may apply so that you can avoid FATCA.  An exclusion which is particularly relevant to managed funds and custodians is the exclusion for financial institutions with a local client base.  For this exclusion to apply, a number of requirements must be met which include:

1. 98% of your accounts must be held by Australian or New Zealand residents (by value)
2. You need to hold an AFSL or be authorised by an AFSL holder
3. You must not target customers outside of Australia
4. You must be currently required to report on, or withhold tax, for Australian residents
5. You must not have a fixed place of business outside of Australia
6. You must adopt policies and procedures, beginning on 1 July 2014, which:
   1. Prevent you from having account holders who are Nonparticipating Financial Institutions (Nonparticipating Financial Institutions is discussed further below);
   2. Monitor whether you open or maintain an account for a U.S. person who is not an Australian resident (and other specified persons); and
   3. If your monitoring procedures identify such accounts, you must close the account or elect to comply with and implement FATCA.
7. For pre-existing accounts, you must conduct due diligence to ensure you do not have or close accounts held by U.S. persons who are not residents of Australia
8. You must not discriminate against opening accounts for individuals who are U.S. persons who are residents of Australia

So I think I might be caught – what now?

If you think you may be caught by FATCA, you should seek advice to confirm this and on whether an exclusion may apply to your circumstances.  You may also need advice on developing a strategy for complying with FATCA.

If FATCA applies to you, you should have already registered with the IRS.  You should have also implemented procedures which will enable you to make your first report on 30 June 2015.

On 30 June 2015 you will need to report on high value U.S. reportable accounts which exceed US$1 million.  In subsequent years, you will need to report on lower value U.S. reportable accounts with a balance between US$50,000 and US$1 million.

What happens if I ignore FATCA?

If you do not comply with FATCA when it applies to you, you will be potentially liable to 30% U.S. withholding tax on payments to you from U.S. sources.

It is also possible for FATCA to affect your relations with other Australian financial institutions if you are deemed to be a Nonparticipating Financial Institution.

You may be deemed to be a Nonparticipating Financial Institution if the ATO receives a notice of your significant non-compliance from the IRS and you do not resolve the non-compliance within a period of 18-months.  Examples of significant non-compliance include:

1. Repeated failure to lodge a report or repeated late lodgement;
2. Failure to register;
3. Ongoing or repeated failure to supply accurate information or establish appropriate governance or due diligence processes; or
4. Intentional or negligent provision of incorrect information or omission of required information.

FATCA compliant financial institutions must report on payments made to Nonparticipating Financial Institutions to the ATO, in addition to reporting on U.S. reportable accounts.  In addition, if a financial institution is relying on the exclusion for financial institutions with a local client base as explained above, their procedures may prevent opening accounts for Nonparticipating Financial Institutions.

If you ignore FATCA and you are an AFSL holder, you will also need to consider whether this is in breach of your general obligation to provide financial services efficiently, honestly and fairly.

Disclaimer

The above explanation simplifies the application of FATCA.  You should not act on the above explanation without seeking legal advice.