• Automatic exchange of information guidance – CRS and FATCA

    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 and FATCA terms

    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 help 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 100 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 80 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 in-scope 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 an agreement for exchange is in effect, under either the MCAA or a bilateral treaty and agreement.

    Similarly, for in-scope 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 if they have adopted the CRS and an agreement for exchange is in effect, under either the MCAA or a bilateral treaty and agreement.

    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 treated as a Reportable Jurisdiction under the wider approach.

    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.

    End of example

    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 or entities 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). Another difference can arise for entity accounts. Pre-existing Entity Accounts are in-scope – for CRS due diligence and reporting – once the account exceeds the $250,000 CRS threshold on 31 December of any subsequent year, while the threshold for FATCA is $1,000,000. See section 4.8 of this guidance for details.

    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. tax 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 still needs to report the account to the ATO under the CRS legislation.

    End of example

    1.4 Implementation timelines

    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 (see note)

    30 June 2015

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

    31 July 2019 (see note)

    30 June 2016

    Completion of first review of Pre-existing Entity Accounts

    31 July 2018 (see note)

    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

    Note: 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. This is an exception to the general rule that an account only becomes a Reportable Account when identified as such. 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.
      Last modified: 06 Jul 2017QC 48683