• Automatic exchange of information – guidance material

    This information is intended to help you understand your obligations under Australia’s participation in Automatic Exchange of Information (AEOI) regimes concerning the automatic exchange of financial account information with foreign jurisdictions.

    These regimes are known as the Foreign Account Tax Compliance Act (FATCA) in the case of exchange by Australia with the United States of America (U.S.) and the Common Reporting Standard – CRS or the Standard, as the context requires– in the case of exchange by Australia with other countries that have implemented the Standard.

    This guidance explains AEOI obligations from 1 July 2017, the date on which the CRS starts operation in Australia. Unless otherwise noted, the explanations in this guidance cover both FATCA and CRS from 1 July 2017. We have previously published separate guidance for FATCA purposes which may be relied upon for the period up to 30 June 2017.

    There are some variations in terminology between FATCA and CRS. When the context requires, the following CRS terms should be read interchangeably with FATCA terms in this guidance:

    CRS

    FATCA

    Reporting Financial Institution (RFI)

    Reporting Australian Financial Institution

    Non-Reporting Financial Institution

    Non-Reporting Australian Financial Institution

    Non-Financial Entity (NFE)

    Non-Financial Foreign Entity (NFFE)

    Reportable Person

    Specified U.S. Person

    Reportable Account

    U.S. Reportable Account

    Dollar values stated in the guidance should be read for CRS purposes as referring to either Australian dollars or U.S. dollars according to the election by the relevant RFI, as permitted by Australian law for the CRS. For FATCA, the dollar values refer to U.S. dollars only.

    References to calendar year in this guidance should be taken to include, for CRS purposes, the initial reporting period of 1 July 2017 to 31 December 2017.

    This guidance provides general assistance and does not cover all possibilities. If you follow our information in this guidance and it turns out to be incorrect, or it is misleading and you make a mistake as a result, we must still apply the law correctly but we will not charge you a penalty.

    This guidance material will be updated from time to time.

    1 Introduction

    1.1 Background

    In 2010 the U.S. enacted the FATCA provisions which are aimed at reducing tax evasion by U.S. citizens and entities. FATCA is a unilateral anti-tax evasion regime enacted by the U.S. Congress as part of the U.S. Hiring Incentives to Restore Employment Act 2010. FATCA is aimed at detecting U.S. taxpayers who use accounts with offshore financial institutions to conceal income and assets from the Internal Revenue Service (IRS). The substantive FATCA requirements for financial institutions generally started on 1 July 2014.

    Recognising that many countries’ domestic laws would otherwise prevent foreign financial institutions from fully complying with FATCA, the U.S. developed an intergovernmental agreement (commonly known as an IGA) approach. This approach manages legal impediments, simplifies practical implementation, and reduces compliance costs for relevant financial institutions. On 28 April 2014 the Treasurer, on behalf of the Australian Government, and the U.S. Ambassador to Australia, on behalf of the U.S. Government, signed 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 (FATCA Agreement).

    The implementation of Australia’s obligations under the FATCA Agreement was initiated with the passage of the Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014 which took effect on 1 July 2014.

    Tax evasion is a global problem and international cooperation and sharing of high quality, predictable information between revenue authorities will help them ensure compliance with local tax laws. Starting in 2012 international interest focused on the opportunities provided by automatic exchange of information.

    On 6 September 2013 the G20 Leaders committed to automatic exchange of information as the new global standard and fully supported the OECD work with G20 countries, which aimed to present a single global standard in 2014. In February 2014, the G20 Finance Ministers and Central Bank Governors endorsed the CRS as the mechanism for automatic exchange of tax information between multiple countries.

    The CRS was endorsed by G20 Leaders at their meeting on 15 and 16 November 2014. So far, more than 90 jurisdictions have committed to its implementation. The CRS, with a view to maximising efficiency and reducing cost for financial institutions, draws extensively on the IGA approach to implementing FATCA. While the IGA approach to FATCA reporting does deviate in certain aspects from the CRS, the differences are driven by the multilateral nature of the CRS system and other U.S. specific aspects, in particular taxation based on citizenship and the presence of a significant and comprehensive FATCA withholding tax.

    There are different legal bases for the automatic exchange of information. These include Australia’s bilateral tax treaties and tax information exchange agreements (TIEA) and the Convention on Mutual Administrative Assistance in Tax Matters (the Convention). The latter is a multilateral agreement to facilitate international cooperation among tax authorities, improve their ability to tackle tax evasion and avoidance, and ensure full implementation of their national tax laws while respecting the fundamental rights of taxpayers. The Convention provides for all forms of administrative cooperation and contains strict rules on confidentiality and proper use of information. Australia signed the amended Convention in 2011.

    Automatic exchange under the Convention requires an administrative agreement between the ATO and other countries’ tax authorities. On 3 June 2015, Australia signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA), which is based on Article 6 of the Convention. This agreement facilitates the implementation of the CRS on a multilateral basis and has so far been signed by more than 70 jurisdictions. The MCAA provides a framework for the bilateral exchange of information with other signatories.

    1.2 Legislative implementation

    CRS obligations are imposed on Australian financial institutions (AFIs) through the operation of Subdivision 396-C of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).

    The CRS implementing legislation requires that the CRSExternal Link must be applied consistently with the CRS CommentaryExternal Link. The OECD also published Frequently Asked Questions (FAQs) and an Implementation Handbook to assist in understanding CRS obligations, although this material must be considered as secondary to the legislation, the CRS and its Commentary.

    This guidance is intended to assist in the application of the CRS, its Commentary and the implementing legislation and does not substitute or reduce the need to apply CRS requirements consistently with the same. The CRS legislation allows RFIs to make any of the elections available within the CRS. Examples of due diligence elections are described in section 4.2 of this Guidance.

    FATCA obligations are imposed on AFIs through the operation of Subdivision 396-A of Schedule 1 to the TAA 1953.

    The FATCA implementing legislation permits RFIs to make any of the elections allowed, or contemplated, by the FATCA Agreement. The FATCA Agreement permits Australia to allow RFIs to elect to apply alternative definitions as well as alternative procedures to those specified in the Agreement. Consequently, an AFI may elect to use the definitions in U.S. FATCA Regulations where a term is defined in the FATCA Agreement and may use alternative procedures provided in the Regulations. More information on the Regulations are available on the US Internal Revenue Service websiteExternal Link.

    1.3 CRS – the ‘wider approach’

    The due diligence procedures in the CRS are designed to identify accounts which are held by residents of jurisdictions with which the implementing jurisdiction exchanges information under the Standard. However, there is an expectation that the number of these jurisdictions will increase over time. As a result, Australia’s implementation of the CRS was designed to adopt a wider approach to recording the jurisdictions in which a person is a tax resident. In general, the fewer times a financial institution needs to complete the processes required under the CRS, the less costly it is overall for the financial institution to comply. The wider approach will enhance the efficiency and effectiveness of the CRS.

    For accounts opened after the commencement of the CRS, the financial institution will generally be required to ask the person opening the account to certify their residence for tax purposes. If the person has tax residency in another jurisdiction, irrespective of whether that jurisdiction has adopted the CRS, then the details of the account need to be reported to the ATO. We will, in turn, exchange that information with other jurisdictions, but only if they have adopted the CRS and signed an MCAA.

    Similarly, for accounts existing at the date of commencement of the CRS, the general requirement is for financial institutions to use the information they have on file to establish whether information about the account holder needs to be reported, unless cured by the account holder. Again, if the person is resident in another jurisdiction, then the details of the account need to be reported to the ATO irrespective of whether that jurisdiction has adopted the CRS. We will then exchange that information with other jurisdictions. However, we will only exchange information with jurisdictions that have adopted the CRS and signed an MCAA.

    Effect of the ‘wider approach’ on FATCA practices

    The CRS does not alter FATCA obligations, but an RFI's CRS practices may require adjustment to activities previously designed solely for FATCA.

    CRS reports to the ATO are separate data files to those provided for FATCA.

    Review (due diligence) thresholds - FATCA and CRS

    From 1 July 2017, RFIs are required to apply the due diligence procedures relevant to the CRS. As a result of this and the absence of de minimis account balance thresholds for individuals under the CRS, the advantage of the general account balance thresholds at which FATCA pre-existing and new individual accounts became reviewable (without an election by a financial institution not to apply these thresholds) in a practical sense ends on 30 June 2017. RFIs will need to identify and report accounts held by such individuals who are US tax residents - regardless of the account balance - using the specific identification rules in the CRS that apply to pre-existing and new individual accounts. This is because the US is considered a Reportable Jurisdiction under the CRS legislation.

    Unless a financial institution at the time elected otherwise, this means that relevant pre-existing and new FATCA individual accounts which were not reviewed because they fell below the relevant FATCA account balance threshold, will now have to be reviewed for CRS purposes - including for potential U.S. tax residency of the account holders.

    Even so, RFIs may continue to choose whether or not to apply FATCA thresholds when complying with their FATCA due diligence and reporting obligations (noting that those thresholds for reporting have always been optional).

    In line with the above position for individuals, the practical benefit of certain thresholds at which FATCA entity accounts were excluded from review (without an election) will also substantially reduce from 1 July 2017. Under FATCA, pre-existing entity accounts with an account balance or value that did not exceed $250,000 were not reviewable until the account balance or value exceeded $1,000,000 on the last day of a subsequent calendar year. Those accounts will now be reviewable under the CRS rules if the account balance or value exceeds $250,000 on 30 June 2017, or on 31 December 2017, or on the last day of a subsequent calendar year.

    Under the CRS an entity account that becomes reviewable due to its balance or value exceeding $250,000 on the last day of a calendar year must be reviewed during the following 12 months. Under FATCA, an entity account that becomes reviewable due to its balance or value exceeding $1,000,000 on the last day of a calendar year, the FATCA Agreement provides only six months from that day to complete the review.

    The different timeframes and thresholds may complicate the scheduling of due diligence procedures for an RFI. Although the FATCA Agreement refers to six months to carry out the review of a relevant entity account, an account identified as a U.S. Reportable Account is not required to be reported until 31 July of the year after the calendar year in which the review is done. If the account is reported when required, the RFI will have met its reporting obligation under the FATCA Agreement for that account.

    Example

    An RFI maintains an in-scope entity account opened during 2011. In the years since, the account has always had a balance or value that fell below the thresholds that would have triggered review under either the CRS or FATCA. However, on 31 December 2017 the balance or value is more than $1 million, so the account has become subject to review for both the CRS and FATCA.

    The RFI has 12 months to carry out due diligence for CRS purposes (by 31 December 2018) and 6 months for FATCA purposes (by 30 June 2018). It will be acceptable for the RFI to carry out combined due diligence by 31 December 2018 for both regimes provided that if found to be reportable, the account is appropriately reported.

    Reporting thresholds - FATCA only

    In its FATCA reports to the ATO (which are separate to the CRS reports), an RFI may omit U.S. accounts for individuals with a year-end balance or value under FATCA's reporting thresholds. The RFI's CRS reports must include Reportable Accounts held by U.S. resident individuals (determined under the CRS due diligence rules), regardless of the balance or value (since there are no reporting thresholds for individuals in the CRS).

    Example

    An RFI has identified an individual's Depository Account as a U.S. Reportable Account after applying FATCA's due diligence procedures, as required by the FATCA legislation. In the same calendar year, the RFI identifies the account as a Reportable Account held by a U.S. resident in the course of applying the CRS's due diligence procedures required by the CRS legislation. The account has a balance of US$30,000 on 31 December of the calendar year. The RFI would not report the account to the ATO in the following year under FATCA (unless it elected to do so, as permitted by the FATCA Agreement), because FATCA has a reporting threshold for Depository Accounts of US$50,000. However, the RFI would need to report the account to the ATO under the CRS legislation.

    1.4 Implementation timelines

    CRS event

    CRS timing

    FATCA equivalent

    Cut-off between Pre-existing and New Accounts

    30 June 2017

    30 June 2014

    Test date for Pre-existing Individual Lower Value Account review threshold

    No review threshold

    30 June 2014 ($50,000, or $250,000 for cash value insurance or annuity contract only)

    Test date for Pre-existing Individual Account High Value review threshold

    30 June 2017, 31 December 2017 and 31 December of subsequent calendar years

    30 June 2014, 31 December 2015 and 31 December of subsequent calendar years

    Test date for Pre-existing Entity Account review threshold

    30 June 2017, 31 December 2017 and 31 December of subsequent calendar years

    ($250,000)

    30 June 2014 ($250,000), 31 December 2015 and 31 December of subsequent calendar years ($1,000,000)

    Start of New Account due diligence procedures

    1 July 2017

    1 July 2014

    Completion of first review of Pre-existing Individual Accounts that were High Value accounts on 30 June 2017

    31 July 2018*

    30 June 2015

    Completion of first review of Pre-existing Individual Lower Value Accounts

    31 July 2019*

    30 June 2016

    Completion of first review of Pre-existing Entity Accounts

    31 July 2018*

    30 June 2016

    First reporting of Reportable Accounts to the ATO

    31 July 2018

    31 July 2015

    First exchange of Reportable Accounts with exchange partners

    30 September 2018

    30 September 2015

    * Under the CRS legislation, Pre-existing Individual Accounts that are High Value Accounts on 30 June 2017 and Pre-existing Entity Accounts with a balance exceeding $250,000 on 30 June 2017 are reviewable by 31 July 2018 and if identified as Reportable Accounts, must be reported for the reporting period 1 July to 31 December 2017, even if not identified as such until after 31 December 2017. Pre-existing Individual Accounts that are Lower Value Accounts only become Reportable Accounts in the year identified as such, with reporting required in the following year.

    1.5 Relevance of CRS Commentary to FATCA

    The legislation implementing the CRS requires that the CRS must be applied consistently with the CRS Commentary. Much of the text of the CRS originated from the Model 1 IGA developed for FATCA and there are therefore substantial similarities between the CRS and Australia’s FATCA Agreement. The CRS Commentary was prepared by the OECD to supplement the CRS and draws upon an international consensus on the meaning of the text in the CRS.

    To the extent that provisions are the same in the FATCA Agreement as in the CRS, financial institutions may refer to the CRS Commentary in interpreting the meaning of those provisions in the FATCA Agreement.

    1.6 Structure of this guidance

    This guidance is structured around the logical steps that an entity (typically a Financial Institution) would go through in determining whether and, if so, how it is required to implement the AEOI regimes (that is, their due diligence rules). These steps are outlined in Part II of the OECD’s CRS Implementation HandbookExternal Link, available on its website.

    Broadly, the steps are as follows:

    • entities that are Reporting Financial Institutions
    • review their Financial Accounts
    • to identify Reportable Accounts
    • by applying due diligence rules
    • then report the relevant information.

    2 Financial institutions

    A core requirement of the legislation implementing FATCA and the CRS is that Australian Financial Institutions collect and report the specified information to the ATO. The ATO can then exchange the information with its relevant automatic exchange partners and fulfil Australia’s international obligations.

    An Australian entity must be a Financial Institution under the legislation to have reporting obligations. An entity is a Financial Institution if it is:

    • a Custodial Institution
    • a Depository Institution
    • an Investment Entity
    • a Specified Insurance Company.

    Each of the above types of Financial Institutions has within their respective definitions reference to the term ‘entity’. For AEOI purposes an entity is a legal person or a legal arrangement. An entity covers any legal arrangement, whether or not a separate legal entity is created. It therefore covers companies, associations, joint ventures, partnerships, limited partnerships, and trusts (including unit trusts and discretionary trusts).

    An entity can be more than one type of Financial Institution. Where this is the case, the entity should comply with the AEOI obligations that specifically apply to each type of Financial Institution it is (for example. if it is both a Custodial Institution and an Investment Entity, it must review and report both the Custodial Accounts it maintains and the equity or debt interests it issues to investors as an Investment Entity).

    Where an entity does not meet the definition of Financial Institution in any of the categories then it will be classified as an Active NFE (non-financial entity) or Passive NFE as appropriate (or for FATCA purposes, an Active or Passive NFFE - an acronym derived from U.S. Regulations meaning a non-financial foreign entity).

    The CRS has fewer Non-Reporting Financial Institution exemptions than FATCA (for example, it does not have most of Annex II of the FATCA Agreement's Small or Limited Scope Financial Institution exemptions) and it is therefore possible that Australian financial institutions that are not captured by FATCA as RFIs will be captured by the CRS.

    Members of groups of entities

    The FATCA and CRS regimes apply to each member of a group of entities and the activities of each branch of such a member, that fall within the regimes’ relevant definitions. How each member or branch is characterised under such definitions will determine whether or not the entity or branch has FATCA or CRS obligations. For example, there may be entities or branches (within a group comprised of one or more Financial Institutions) that qualify as Active NFE/NFFEs or Non-Reporting Financial Institutions, with the consequence that such entities do not have due diligence and reporting obligations. Entities within a group that are Reporting Financial Institutions will have obligations.

    2.1 Australian financial institutions

    The AEOI legislation places reporting obligations on Australian financial institutions. An AFI is any financial institution resident in Australia, excluding the operations of any branch of the financial institution located outside of Australia. Any branch of a non-resident financial institution is also an AFI where the branch is located in Australia.

    In many cases a financial institution's residency or location in Australia is clear. In situations where residency in an ordinary sense is not obvious, the ATO will apply residency for income tax purposes as a way to determine the entity’s status.

    If a Financial Institution is a resident of Australia and a resident of another country under the tax law of that country, and is treated as a resident solely of the other country under a tax treaty between Australia and that other country, it will still be a resident of Australia for AEOI reporting purposes. The jurisdiction for reporting a particular account is based on where the account is maintained in any ordinary sense.

    For a trust other than a unit trust, the trust is a resident of Australia in any given income year if either:

    • a trustee of the trust was a tax resident in Australia at any time during the income year; or
    • the central management and control of the trust was in Australia at any time during the income year.

    For unit trusts, the trust is a tax resident unit trust for an income year if at any time during the income year:

    • either any property of the trust is situated in Australia, or the trustee carries on business in Australia; and
    • either the central management and control of the trust is in Australia or Australian residents hold more than 50% of the beneficial interests in the income or property of the trust.

    If an Australian resident trust that is a financial institution reports all the required information on reportable accounts it maintains to another participating jurisdiction where it is resident for tax purposes, it will not be subject to the jurisdiction of Australia for CRS purposes.

    Where a financial institution (other than a trust) does not have a residence for tax purposes (for example, because it is located in a jurisdiction that does not have an income tax or treats the entity as fiscally transparent), it is an AFI if its place of management (including effective management) is in Australia or it is subject to financial supervision in Australia. A financial institution is subject to supervision in Australia if it, or its activities, are licensed or regulated under the laws of Australia.

    Where a financial institution (other than a trust) is resident in Australia and is also resident in one or more other CRS Participating Jurisdictions, the financial institution is subject to the CRS due diligence and reporting obligations that apply to Australia for the Financial Accounts it maintains in Australia. For FATCA, a financial institution residing in Australia is subject to due diligence and reporting for accounts that it maintains worldwide, excepting accounts maintained by an overseas branch.

    The jurisdiction where an account is maintained is a question of fact which considers such matters as where the RFI maintains records of the account and whether the account is subject to regulation by the jurisdiction.

    A branch of a non-resident financial institution is located in Australia if the branch satisfies the definition of 'permanent establishment' for Australian tax law purposes.

    2.2 Registration

    There are currently no registration requirements for RFIs under the CRS.

    FATCA registration

    AFIs that are Reporting AFIs under the FATCA Agreement should register with the IRS, irrespective of whether they receive payments directly from U. S. sources. The following types of entities are not required to register:

    • Non-Reporting AFIs as described in Annex II of the FATCA Agreement (note that a Sponsored Entity does not register, but may be registered by a Sponsoring Entity)
    • certified deemed-compliant foreign financial institutions (FFIs) in the Regulations
    • Active and Passive NFFEs (excluding direct reporting NFFEs in the Regulations).

    An AFI not otherwise qualifying as a Non-Reporting AFI as described in Annex II of the FATCA Agreement, that seeks to qualify as a registered deemed-compliant FFI solely under the Regulations must register with the IRS to obtain that status,.

    Once registered, a financial institution is issued a Global Intermediary Identification Number (GIIN) and included on a published list available on the IRS website. The GIIN may be used by a financial institution to identify itself to withholding agents and to tax administrations for FATCA purposes.

    Where a financial institution with a local client base has a reporting obligation because it has U. S. Reportable Accounts, it should register with the IRS (see subparagraph A(7) of section III of Annex II of the FATCA Agreement).

    Entities that are Reporting AFIs and also acting as a sponsoring entity for other entities will need to register separately for each of these roles. In other words, the Reporting AFI will have a separate GIIN for each role. Sponsoring entities have obligations to register their sponsored entities by the end of 2016 (a sponsored entity does not register itself).

    The IRS has a registration portal and details of the registration process are set out at IRS FATCA Registration Resources & Support InformationExternal Link

    2.3 Custodial institution

    A Custodial Institution is an entity that holds, as a substantial portion of its business, Financial Assets for the account of others. For AEOI purposes, a substantial portion means that at least 20% of the entity’s gross income is attributable to holding Financial Assets and providing related financial services in the shorter of either:

    • its last three accounting periods
    • the period it has existed.

    Income attributable to holding Financial Assets and providing related financial services means the following:

    • custody, account maintenance and transfer fees
    • commissions and fees earned from executing and pricing securities transactions with respect to Financial Assets held in custody
    • income earned from extending credit to customers with respect to Financial Assets held in custody (or acquired through such extension of credit)
    • income earned from contracts for difference or on the bid-ask spread of Financial Assets held in custody
    • fees for providing financial advice with respect to Financial Assets held in (or potentially to be held in) custody by the entity
    • fees for clearance and settlement services.

    2.4 Depository institution

    A Depository Institution is an institution that accepts deposits in the ordinary course of a banking or similar business. An entity is considered to be carrying on a 'banking or similar business' if it is, or is required to be, authorised by the Australian Prudential Regulation Authority as an authorised deposit-taking institution. ATO guidance has previously stated that this was the only circumstance under the FATCA Agreement in which an entity is considered as carrying on such a business.

    However, for CRS purposes the meaning of a 'banking or similar business' is required to be applied consistent with the CRS Commentary, which provides a more expansive definition. Therefore, an entity may be a Depository Institution for CRS purposes even if it is not, or is not required to be, authorised by the Australian Prudential Regulation Authority as an authorised deposit-taking institution. In particular, it is a Depository Institution if in the ordinary course of its business with customers it accepts deposits or other similar investments of funds and in addition to that activity also regularly engages in one or more of the following activities:

    • makes personal, mortgage, industrial or other loans or provides other extensions of credit purchases, sells, discounts or negotiates accounts receivable, instalment obligations, notes, drafts, cheques, bills of exchange, acceptances or other evidences of indebtedness
    • issues letters of credit and negotiates drafts drawn under them
    • provides trust or fiduciary services
    • finances foreign exchange transactions, or
    • enters into, purchases or disposes of finance leases or leased assets.

    The CRS Commentary definition of Depository Institution is substantially the same as that provided under relevant US FATCA Regulations. Under Australia’s implementation of FATCA, AFIs may choose to use a definition in the FATCA Regulations in lieu of a corresponding definition in the FATCA Agreement. AFIs seeking to reduce administrative differences between FATCA and the CRS might therefore consider using the definition of Depository Institution in the Regulations in complying with AEOI obligations.

    2.5 Investment entity

    The definition of Investment Entity for the CRS closely follows paragraphs A and B of the definition in section 1.1471-5(e)(4)(i) of the FATCA Regulations. Under Australia’s implementation of FATCA, AFIs may choose to use a definition in the FATCA Regulations in lieu of a corresponding definition in the FATCA Agreement. Therefore, AFIs seeking to reduce administrative differences between FATCA and the CRS may use the definition of Investment Entity in the Regulations in complying with AEOI obligations.

    CRS and FATCA Regulations

    Broadly, under both the CRS and FATCA Regulations an entity is an Investment Entity if it:

    • primarily conducts as a business specified activities for or on behalf of customers ('type A'); or
    • primarily derives its gross income from investing or trading in Financial Assets and is managed by a Financial Institution ('type B').

    An entity is a type A Investment Entity if it primarily conducts as a business for or on behalf of a customer, one or more of the following activities:

    • trading in        
      • money market instruments (such as cheques, bills, certificates of deposit, derivatives)
      • foreign exchange
      • exchange, interest rate and index instruments
      • transferable securities
      • commodity futures
       
    • individual and collective portfolio management
    • otherwise investing, administering or managing funds or money on behalf of other persons.

    An entity is regarded as primarily conducting these activities as a business if its gross income from these activities is at least 50% of its total gross income during the shorter period of either:

    • the three-years ending on 31 December in the year before its status as an Investment Entity is to be determined
    • the time the entity has existed.

    An entity is a type B Investment Entity if it is:

    • investing on its own account, as a collective investment vehicle on behalf of participants or as a trust on behalf of beneficiaries, and
    • managed by a Depository Institution, a Custodial Institution, a Specified Insurance Company or a type A Investment Entity mentioned above, and it meets the Financial Assets test described below.

    An entity is managed by a Financial Institution if that Financial Institution performs, either directly or through another service provider, any of the investing or trading activities described above on behalf of the entity. The activities may be performed as part of managing the entity as a whole, or by appointment to manage all or a portion of the Financial Assets of the entity.

    An entity is not regarded as being managed by a Financial Institution if that Financial Institution does not have discretionary authority to manage the entity’s assets.

    The entity:

    • may be managed by a mix of other entities and individuals – if one of the entities involved in managing the entity is a Financial Institution within the meaning of the AEOI regimes then the entity meets the requirements for being managed by a Financial Institution
    • meets the Financial Assets test if its gross income is primarily attributable to investing, reinvesting or trading in Financial Assets – at least 50% of its income is attributable to investing, reinvesting or trading in Financial Assets in the shorter period of either       
      • the three-years ending on 31 December in the year before that when its status as an investment entity is to be determined
      • the time the entity has existed.
       

    An entity could fit the description of being both a type A and type B Investment Entity. The distinction between type A and type B may be significant for CRS purposes in the case of an Investment Entity that is not a Participating Jurisdiction Financial Institution. If it is solely a type B Investment Entity, it must be treated as a Passive NFE.

    FATCA Agreement

    The definition of Investment Entity under the FATCA Agreement differs from the definition in the CRS and the FATCA Regulations in two significant respects. Firstly, it does not include the 'primarily' condition for activities or income, so an entity can be an Investment Entity under the FATCA Agreement if only part (less than 50%) of its business activity or income is described in the definition.

    Secondly, the 'managed by' part of the definition requires that the managed entity must be managed by an Investment Entity, in contrast to the definition in the CRS and the FATCA Regulations for which a Depository Institution, a Custodial Institution and a Specified Insurance Company are included as relevant managing entities.

    An entity wishing to avoid such different outcomes should consider electing to apply the definition of Investment Entity in the FATCA Regulations.

    2.6 Specified insurance company

    A Specified Insurance Company is an entity that is an insurance company or the holding company of an insurance company that issues, or is obligated to make payments on a Cash Value Insurance Contract or an Annuity Contract.

    Insurance companies that only provide general insurance or term life insurance will not be specified insurance companies, nor will reinsurance companies that only provide indemnity reinsurance contracts.

    An insurance broker that sells Cash Value Insurance or Annuity Contracts on behalf of insurance companies is part of the payment chain and will not be a specified insurance company.

    2.7 Financial institutions – trusts

    A trust is treated as an entity for AEOI purposes, even though it is not considered an entity under common law. For a trust to be a Financial Institution it must fall under at least one of the following categories:

    • a Custodial Institution
    • a Depository Institution
    • an Investment Entity
    • a Specified Insurance Company.

    The category most likely to apply to trusts is 'Investment Entity'.

    Determining whether a trust is an Investment Entity may require you to consider the status of any entity ‘managing’ the trust. The trustee is an entity or individual that must carry out various obligations under the trust, including managing the trust in accordance with the terms of the trust and laws relating to trustees’ duties. A trustee that is an entity could carry on activities such that the trustee is an Investment Entity itself; for example, a corporate trustee in the business of trading, administering or managing financial assets on behalf of other persons.

    A trustee may appoint or engage a professional manager to manage the trust. Refer to section 2.8 of this guidance for further explanation of when an entity is ‘managed by’ another entity.

    A trust that is not a Financial Institution is a Non-Financial Entity (NFE) for CRS purposes and a Non-Financial Foreign Entity (NFFE) for FATCA purposes.

    Example 1 – trust that is not a Financial Institution

    Ms C is one of three individual trustees of her discretionary family trust. The beneficiaries include Ms C’s four children. On behalf of the trust, in her capacity as trustee, Ms C opens an account (a Financial Account) with a Reporting financial institution (RFI). It is noted in the account opening documentation that Ms C and the other trustees hold the account in their capacity as trustees for Ms C’s family trust. The trustees of the trust invest and administer the trust funds on behalf of the beneficiaries.

    The trust is not managed by any Entity conducting that activity commercially, as the trustees are individuals individuals trustees are not includedin the definition of 'Entity'. The trust is therefore not an Investment Entity.

    Where the trust holds a Financial Account in an RFI, for AEOI purposes the Account Holder is the trust and not Ms C, the other trustees, or any of the beneficiaries. This is despite the trustees entering into the contractual agreement with the RFI offering the account, and the trustees may be named as account holders in the records of the RFI.

    The RFI will need to apply the due diligence procedures to the trust’s account to determine the trust’s status. If it is determined to be a Passive NFE, the RFI will need to determine whether individuals exercising control or treated as exercising control over the trust are Controlling Persons who are Reportable Persons. Potential Reportable Persons include Ms C (as trustee), the other trustees and Ms C's four children (as beneficiaries).

    Example 2 – professionally managed trust that is not a financial institution

    The Smith Family Trust has Mr Jones, an accountant with Jones & Jones, as its sole individual trustee. Even though the trust is professionally managed by Mr Jones, as Mr Jones is an individual, the trust will not be classified as a Financial Institution.

    Example 3 – professionally managed trust that is a financial institution

    The trustee of Smith Family Trust is Jones & Jones, a partnership primarily in the business of managing and administering financial investments for clients. A partnership falls within the definition of an entity for both the CRS and FATCA and the partnership of Jones & Jones is an Investment Entity. Therefore, the trust will be an Investment Entity for CRS purposes provided that the trust's gross income is primarily attributable to investing, reinvesting or trading in financial assets. The trust will also be an Investment Entity for FATCA purposes (noting that the trust may use the definitions in the FATCA Regulations and apply the same gross income test as for the CRS).

    An RFI maintaining a Financial Account for the trust will, on establishing the facts with the trustee, treat the trust as a Financial Institution.

    FATCA Note: Jones & Jones would consider whether it is a deemed-compliant FFI under the 'investment advisers and investment managers' exemption provided by paragraph D of section IV of Annex II of the FACTA Agreement (refer to section 2.12 of this guidance). Whether the Smith Family Trust also has an exception under Annex II will separately depend on the circumstances related to the trust.

    CRS Note: The exemption for investment advisers and investment managers is not replicated in the CRS. See sections 2.9 and 2.12 of this guidance.

    End of example

    Reporting exception for certain types of trusts

    Even if a trust is a Financial Institution, it will not necessarily be required to report.

    A trust that is a 'trustee-documented trust' is a Non-Reporting Financial Institution and will not itself be required to report to the ATO directly. A trust is a trustee-documented trust to the extent that the trustee is a Reporting Financial Institution and the trustee reports all information that is required to be reported for all Reportable Accounts of the trust.

    Both the CRS and FATCA include the concept of a trustee-documented trust.

    2.8 Financial institutions – ‘managed by’ another financial institution

    An entity may gain the status of Investment Entity if it is managed by a Financial Institution; see section 2.5 of this guidance. There is a distinction between managing an entity and merely administering or providing services to an entity. Managing an entity involves one entity having a significant degree of discretionary decision-making and responsibility for the other entity's business.

    A trustee of a trust may appoint or engage another entity to professionally manage the activities or operations of the trust. If that other entity's management of the trust's activities or operations is in conducting a business as described in the relevant definition of 'Investment Entity', the trust is an Investment Entity.

    Typically a professional trustee or a discretionary fund manager is treated as managing a trust in the context of determining if the trust is an Investment Entity.

    The status of a trust under the definition of Investment Entity and the status of an entity managing the trust under paragraph D of section IV of Annex II are separate considerations.

    Example 1

    1 – trustee and responsible entity as manager

    R1 Co is the trustee and responsible entity (RE) of a managed investment scheme (H Trust) which manages and invests in a range of financial assets for H Trust. R1 Co is carrying on these activities as a business. As H Trust is managed by R1 Co, the latter entity’s activities relating to the trust causes H Trust to be an Investment Entity. R1 Co itself is also an Investment Entity.

    Example 2 – non-trustee Investment Entity managing the trust

    Following from example 1, H Trust’s portfolio of investments includes holding all of the units in another trust, B Trust, which has investments in a range of financial assets. R1 Co is not the trustee of B trust, but is appointed by the trustee to provide investment advice, manage B Trust’s portfolio of investments and administer distributions of income and reports. The trustee of B Trust does not carry on any business.

    R1 Co does not hold legal title to the assets of B Trust. R1 Co is carrying on these activities as a business. R1 Co’s activities relating to B Trust cause B Trust to be an Investment Entity. Those activities would also cause R1 Co to be an Investment Entity if it had not already gained that status from the activities in example 1.

    Example 3 – external investment manager

    In the previous example, if R2 Co is substituted for R1 Co and R2 Co is solely in the business of providing these services for B Trust and other clients, R2 Co’s activities relating to B Trust cause B Trust to be an Investment Entity, and therefore a Reporting AFI. R2 Co is an Investment Entity in its own right; however it may qualify as a Non-Reporting AFI and deemed-compliant FFI under paragraph D of section IV of Annex II to the FATCA Agreement (but not the CRS). The availability of an exemption for R2 Co for its own affairs has no bearing on the status of B Trust.

    Example 4 – Non-Financial Institution investment manager

    Continuing the previous example, R3 Co is substituted for R2 Co. R3 Co is engaged in a range of business activities and its gross income from trading, investing, managing or administering financial assets on behalf of other persons has always been less than half of its total gross income. The outcome for both B Trust and R3 Co under the FATCA Agreement is the same as in the previous example.

    However, under the CRS R3 Co will not be an Investment Entity because it is not primarily conducting the required business activities. B Trust will also not be an Investment Entity under the CRS if neither R3 Co nor B Trust’s trustee is a Financial Institution. B Trust and R3 could obtain the same result for FATCA as for the CRS if they choose to apply the definition of Investment Entity under the U. S. Treasury Regulations.

    End of example

    2.9 Non-Reporting Financial Institutions

    Both the CRS and FATCA regimes exclude certain Financial Institutions from being RFIs. A number of categories of entities are generally Non-reporting Financial Institutions for both the CRS and FATCA (or would be if they were a Financial Institution). The categories in common are:

    • governmental entities
    • international organisations
    • the Reserve Bank and its wholly owned subsidiaries
    • Australian retirement funds (including self-managed superannuation funds)
    • a qualified credit card issuer
    • trustee-documented trusts.

    In both regimes the exclusion provided through the first three categories does not extend to payments derived from an obligation held in connection with a commercial financial activity of a type engaged in by a Specified Insurance Company, Custodial Institution, or Depository Institution.

    There are other exclusions specific to FATCA only. Two are the categories Investment Entity Wholly Owned by Exempt Beneficial Owners; and Investment Advisers and Investment Managers. Under the CRS these entities are not excluded from being RFIs, but whether such an entity has any reporting obligation still depends on whether it maintains any Reportable Accounts. For example, an Investment Entity that solely manages portfolios for, or acts on behalf of, clients where all investments are in the client's name with other Financial Institutions will not have relevant Financial Accounts. As a result such an entity would have no reporting obligations for both the CRS and FATCA.

    In the case of the sponsored entity categories in FATCA, a similar outcome can be obtained for CRS where the financial institution employs the FATCA sponsoring entity as a third party service provider. Examples of entities which may be engaged as a sponsoring entity under FATCA or a third party service provider under the CRS are trustees or fund managers.

    Other exclusions found in the FATCA Agreement but not available under the CRS are:

    • local banks
    • financial institutions with a local client base
    • financial institutions with only low-value accounts
    • sponsored investment entity and controlled foreign corporation
    • sponsored closely-held investment vehicle.

    Further categories also treated as non-reporting financial institutions are those treated as deemed-compliant financial institutions or exempt beneficial owners in the current U.S. FATCA Regulations.

    From 1 July 2017, there are entities falling within FATCA excluded categories that will be required to fulfil due diligence and reporting obligations for the first time as a result of the commencement of the CRS.

    The CRS contemplates the addition of further entities as Non-reporting Financial Institutions by an implementing jurisdiction. Australia’s CRS legislation authorises the Minister to prescribe by legislative instrument further entities which present a low risk of being used to evade tax and have substantially similar characteristics to governmental entities, international organisations, central banks or certain retirement funds defined by the CRS as Non-Reporting Financial Institutions, provided this does not frustrate the purposes of the CRS. No excluded entities have been prescribed by the Minister to date.

    2.10 Financial institutions – holding companies and treasury centres

    Under the CRS, a holding company or treasury centre will have the status of a Financial Institution if it meets the standard definition of Financial Institution. Whether a holding company or treasury centre has the status of Financial Institution depends on the facts and circumstances. In particular, it depends on whether it engages in the specified activities or operations of a Financial Institution, even if those activities or operations are solely on behalf of Related Entities or its shareholders. For example, an Entity that enters into foreign exchange hedges on behalf of the Entity’s Related Entity financial group to eliminate foreign exchange risk will meet the definition of Financial Institution, provided that the other requirements of Investment Entity definition are met. A holding company will also meet the definition of Financial Institution (specifically, an Investment Entity if it acts as an investment fund, private equity fund, venture capital fund, or similar investment vehicles where investors participate (either through debt or equity) in investment schemes through the holding company.

    Differences may arise under FATCA depending on definitional choices made by AFIs. As noted earlier, AFIs may choose to use a definition in the FATCA Regulations instead of a corresponding definition in the FATCA Agreement. Depending on the circumstances, a holding company or treasury centre may be a Financial Institution for FATCA purposes under the FATCA Regulations, but not be a Financial Institution for CRS purposes. The reverse can also occur. The definition of Financial Institution in the FATCA Regulations provides exclusions for holding companies, treasury centres and captive finance companies in a non-financial group, provided certain conditions are met. This includes the condition that the activities of the entity are performing those specified functions (as a holding company, treasury centre or captive finance company). A further exception relates to inter-affiliate FFIs.

    If it chooses, an AFI may, change its choice of FATCA related definitions from 1 July 2017.

    2.11 Financial institutions – providers of asset-based finance services

    An entity will not be considered a Depository Institution if the entity does not accept deposits in the ordinary course of a banking or similar business (refer to section 2.4 of this guidance).

    Therefore an entity will not be a Depository Institution if its business is solely to provide asset-based finance services, such as:

    • equipment finance or other asset leasing services
    • real property leasing services
    • accepting deposits solely as collateral or security for a sale or lease of property
    • providing loans secured by property, such as mortgage providers, car finance companies or similar financing arrangements.

    If such an entity does not meet the definition of a Financial Institution, it may be an Active NFE. An entity is an Active NFE if less than 50% of its gross income in a relevant period is passive income, and less than 50% of the assets held during that period were for the production of passive income.

    2.12 Financial institutions – investment advisers and investment managers

    The treatment of investment advisers and investment managers under the CRS and FATCA differs slightly, but the effect is similar.

    Under the CRS, if an entity is an Investment Entity solely because it is an investment adviser or investment manager, equity or debt interests in that entity are not Financial Accounts. Under FATCA, such an investment adviser or investment manager is a Non-Reporting AFI.

    For both the CRS and FATCA it is a condition of the exclusion mentioned above that the customer’s financial assets or funds are deposited in the name of the customer with another Financial Institution.

    There are two minor differences in qualifying for the exclusion. The CRS requires that the other Financial Institution (in which funds are deposited in the customer's name) cannot be another investment adviser or investment manager. FATCA permits such an arrangement but requires that the other Financial Institution (in which the funds are deposited in the name of the customer) cannot be a Nonparticipating Financial Institution.

    Due diligence and reporting obligations fall to other entities within the investment relationship such as an investment fund that issues Financial Accounts (for example, debt or equity interests) to investors, or entities acting as Custodial Institutions.

    In Australia, financial planners or advisers are examples of entities which may be excluded. Managers of investment funds in Australia (for example, discretionary fund managers of an Investment Entity) may also fall within this category. This is consistent with expectations that within collective or managed investment schemes only interests in the collective investment scheme or managed fund are treated as the relevant Financial Accounts and only the scheme or fund itself is treated as the Reporting FI (Investment Entity).

    For separately managed portfolios (SMP) or individually managed accounts (IMA), where an investment manager is appointed directly by the legal owner of assets to provide investment management services, then these accounts are not Financial Accounts of the investment manager. Instead, they will be Custodial Accounts of a Custodial Institution (who will need to treat the investors as their Account Holders). Where a discretionary investment manager also holds assets on behalf of clients (acting as custodian), reporting on those accounts is required by the manager because the investment manager falls within the definition of a Custodial Institution.

    Debt or equity interests in investment advisers, managers and similar entities (for example, professional management companies) could be perceived as a Financial Account, since those entities can be construed as Financial Institutions which are solely Investment Entities. However, an adviser or manager that is a Non-Reporting AFI will not be required to report the equity or debt interests it issues. Such interests in the investment manager or adviser are not Financial Accounts.

    Investment advisers and managers may be engaged by Reporting FIs to provide assistance in documenting Account Holders. For example, financial advisers may have a direct relationship with investors and readier access to their information. However, it is envisaged that non-reporting advisers and managers will only have reporting obligations as a result of contractual arrangements with Reporting FIs: for instance, where they undertake to act as third party service providers for the customer due diligence (as the Reporting FI is responsible for this under the CRS or FATCA).

    2.13 Financial institutions – trustee company in a stapled company/property trust arrangement

    The status of an entity in a group depends on the circumstances of that entity. The stapling of the securities of two entities does not alter the need to consider the AEOI status of each separate entity.

    If a head company of a stapled group directly managing the head trust is conducting this activity as its sole business, the company is an Investment Entity. The customer is the entity for whom the services are performed – the trust. The activities of the company can still mean carrying on a business even if services are performed for only one trust. The same principles apply to a subsidiary company acting as trustee of an intermediate or sub-trust in the group.

    A trust in these circumstances may consider its eligibility to be a trustee-documented trust, a status available for both the CRS and FATCA.

    Where the head company acts solely as a holding company with subsidiaries performing various functions relating to the stapled group (for example, responsible entity, finance company, trustee company or service company), the head company will not be a Financial Institution. The head company's investments in subsidiary companies benefit the head company shareholders and those shareholders are not customers as defined in the definition of 'Investment Entity'.

    2.14 Financial institutions – deceased estates and testamentary trusts

    Although deceased estates are a type of trust, generally these are temporary in nature and used to distribute the assets and manage the affairs of the person who has died. So long as the administration of the estate is directed at the winding up and distribution of assets (which may include temporary investing while the winding up and distribution is resolved) and is not an indefinite activity of investing, reinvesting or trading financial assets, it will not be a Financial Institution.

    However, a testamentary trust can remain in effect for a number of years. During its existence a testamentary trust works as any other trust would, and can be used for various purposes. As such a testamentary trust can be a Financial Institution, subject to the guidance at section 2.7.

    2.15 Financial institutions – Qualified Credit Card Issuers

    Where an RFI is a Qualified Credit Card Issuer, it is a Non-Reporting Financial Institution and is not required to perform due diligence and reporting for AEOI purposes.

    In order to be a Qualified Credit Card Issuer, an entity must satisfy the following conditions:

    • it is a Financial Institution solely because it is an issuer of credit cards that accepts deposits only when a customer makes a payment in excess of a balance due for the card and the overpayment is not immediately returned to the customer
    • beginning on or before 1 July, 2014 (FATCA), 1 July 2017 (CRS), or the date the entity commences as a Financial Institution if later, it implements policies and procedures to either prevent a customer deposit in excess of $50,000, or to ensure that any customer deposit in excess of $50,000 (under the rules for account aggregation and currency translation) is refunded to the customer within 60 days. A customer deposit does not include credit balances for disputed charges but includes credit balances resulting from merchandise returns.

    An entity issuing credit cards will not satisfy the conditions to be a Qualified Credit Card Issuer if there is another reason why it is a Financial Institution; for example, if it also offers Depository Accounts other than credit card accounts. However, if such an RFI accepts deposits on a credit card or other revolving credit facility in excess of the balance due, it may be able to disregard these accounts if they are Excluded Accounts; see section 3.2.

      Last modified: 13 Oct 2016QC 48683