On 29 May 2014 the Parliamentary Secretary to the Treasurer introduced the Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014 into the House of Representatives.
The Bill will amend Schedule 1 to the Taxation Administration Act 1953 (TAA) to require Australian financial institutions to collect information about their customers that are likely to be taxpayers in the United States of America and to provide that information to the Australian Commissioner of Taxation who will, in turn, provide that information to the US Internal Revenue Service.
These amendments give effect to the Australian Government’s commitments as set out in the Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA, which was signed in Canberra on 28 April 2014.
The amendments made by this Bill will have effect from 1 July 2014.
The Foreign Account Tax Compliance Act (FATCA) is a unilateral anti-tax evasion regime enacted by the US Congress as part of the US Hiring Incentives to Restore Employment Act 2010. FATCA is aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the IRS. The relevant provisions are contained in the US Internal Revenue Code (IRC) 1986 and are supplemented by extensive US Treasury Regulations that were issued on 17 January 2013 (and have been subject to subsequent amendment).
The substantive FATCA requirements for financial institutions generally start on 1 July 2014. From that date, FATCA will require all foreign (that is, non-US) financial institutions, including custodial institutions, depository institutions, investment entities and specified insurance companies, to conclude individual agreements with the IRS under which they will periodically report certain information about their account holders who are US citizens or US resident individuals (or individuals who fail to rebut a presumption of being a US citizen or US resident individual) or specified entities established in the US or controlled by US persons.
In order to comply with their reporting obligations, these financial institutions will need to follow specific due diligence procedures in identifying all relevant accounts.
The level of due diligence required depends on whether the account is held by an individual or an entity and whether or not the account was opened prior to 1 July 2014.
For example, the due diligence requirements generally do not apply to accounts held by individuals unless the aggregated account balances exceed $US50,000.
Financial institutions that do not comply with FATCA will be subject to a 30% US withholding tax on their US source income.
A broad range of Australian financial institutions, including banks, some building societies, some credit unions, specified life insurance companies, private equity funds, managed funds, exchange traded funds and some brokers (generally those brokers maintaining Custodial Accounts) will be subject to FATCA. As most major Australian financial institutions operate or otherwise invest in the US, the US withholding tax creates a strong commercial incentive for these entities to comply with FATCA.
Australian retirement funds, including superannuation entities (which includes self-managed superannuation funds), public sector superannuation schemes, constitutionally protected funds or pooled superannuation trusts, will generally not be Reporting Australian Financial Institutions as they are treated as Non-Reporting Australian Financial Institutions and as exempt beneficial owners for the purposes of the US IRC under the FATCA Agreement. Government entities will also generally not be Reporting Australian Financial Institutions under the FATCA Agreement.
The amendments insert a new Division 396 — FATCA into Part 5-25 — Record-keeping and other obligations of taxpayers in Schedule 1 to the TAA.
To ensure consistency with the FATCA Agreement, these amendments adopt meanings and concepts used in that agreement. This means the substantive amendments apply to “Reporting Australian Financial Institutions” that maintain at least one “U.S. Reportable Account” in a calendar year.
In addition, transitional obligations apply to “Reporting Australian Financial Institutions” that make payments to “Nonparticipating Financial Institutions” in 2015 and 2016.
Reporting Australian Financial Institutions that report information to the Commissioner will need to keep records for five years that explain the procedures used for determining the information reported.