A core requirement of the legislation implementing FATCA and the CRS is that AFIs collect and report the specified information to the ATO. The ATO then exchanges the information with its relevant automatic exchange partners to fulfil Australia’s international obligations.
An Australian entity must be a financial institution 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 AFIs that are not in scope for FATCA as RFIs are in scope for the CRS.
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 some 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. Other entities within a group that are RFIs will have obligations.
The AEOI legislation places reporting obligations on AFIs. 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 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.
A trust that is a financial institution is an AFI if either:
- one or more trustees of the trust is a tax resident of Australia
- the trust is otherwise a tax resident of Australia.
For a trust other than a unit trust, the trust is a tax resident of Australia in any given income year if either:
- any trustee of the trust was a tax resident in Australia at any time during the income year
- 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 is not required to report those same accounts in Australia.
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 the entity is treated 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. The jurisdiction of the RFI that is named as the contracting party and is obliged under the terms and conditions of the account to make payments or credit interest to the account could also be relevant.
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.
There are currently no registration requirements for RFIs under the CRS.
AFIs that are Reporting Australian Financial Institutions 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 Australian Financial Institutions as described in Annex II of the FATCA Agreement (note that a Sponsored Entity and a Trustee-Documented Trust 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.
An AFI not otherwise qualifying as a Non-Reporting Australian Financial Institution 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 Australian Financial Institutions 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 Australian Financial Institution will have a separate GIIN for each role.
The IRS has a registration portal and details of the registration process are set out at IRS FATCA Registration Resources and Support InformationExternal Link.
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 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.
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.
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 U.S. 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.
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 attributable to 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.
Income remains attributable to activities conducted by an entity even if it is paid to a related entity, such as another company in the same group of companies.
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.
- 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
- time the entity has existed.
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.
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.
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 Financial institutions – 'managed by' another financial institution for further explanation of when an entity is ‘managed by’ another entity.
A trust that is not a financial institution is a NFE for CRS purposes and an 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 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 and individual trustees are not included in 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 on these facts is an Investment Entity. Therefore, the trust will also 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 the facts established by the trustee, treat the trust as a financial institution (presuming the trust is a tax resident of Australia or another CRS participating jurisdiction).
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 Financial institutions – investment advisers and investment managers). 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 Non-reporting Financial institutions and Financial institutions – investment advisers and investment managers.End of example
Reporting exception for certain types of trusts
In practice, the reporting obligations of a trust will usually be fulfilled by the trustee. Where a trustee reports on behalf of a trust, the trust will be a 'trustee-documented trust'.
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. Both the CRS and FATCA include the concept of a trustee-documented trust.
An entity may gain the status of Investment Entity if it is managed by a financial institution – see Investment Entity. 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.
Investing in an unrelated exchange traded fund, unit trust or similar vehicle will not be considered being 'managed by' the exchange traded fund, unit trust or similar vehicle.
A trustee of a trust may appoint or engage an 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.
Example 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 of B Trust 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 Australian Financial Institution. R2 Co is an Investment Entity in its own right. However, it may qualify as a Non-Reporting Australian Financial Institution 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 Co 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
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
- a qualified credit card issuer
- trustee-documented trusts.
The exclusion provided for governmental entities, international organisations and the Reserve Bank and its subsidiaries does not extend to payments derived from obligations held in connection with a commercial financial activity of a type engaged in by a:
- Specified Insurance Company
- Custodial Institution
- Depository Institution.
There are other exclusions specific to FATCA only:
- Investment entity wholly owned by exempt beneficial owners
- Investment advisers and investment managers
- Australian retirement funds (including self-managed superannuation funds).
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 that 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.
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 that 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.
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.
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 Depository Institution).
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. For example, 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.
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 Australian Financial Institution.
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 or invested 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 non-participating 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 RFI (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 Australian Financial Institution 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 RFIs 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 RFIs: for instance, where they undertake to act as third-party service providers for the customer due diligence (as the RFI is responsible for this under the CRS or FATCA).
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'.
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 Financial institutions – trusts.
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 within six months from the date the entity commences as a financial institution if later, it has implemented 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 Depository Accounts – overpayment of credit or loan facilities.
Most not-for-profits do not provide financial services, and so would not expect to be categorised as a financial institution. However, endowed charities and other not-for-profits that receive a significant proportion of their income from investments can be an Investment Entity for CRS purposes. If it is an Investment Entity it will be a financial institution with CRS obligations.
If a not-for-profit is not a financial institution, then it will have no reporting obligations.
In determining whether a not-for-profit entity is a financial institution, the CRS differs from FATCA in its application to entities established exclusively for religious, charitable, scientific, artistic, cultural or educational purposes. FATCA has an exclusion from the definition of financial institution in the U.S. Regulations, while the CRS does not have this exclusion. An entity of this kind could therefore be a financial institution for CRS purposes if a substantial part of its income comes from investments. See section 2.5 for an explanation of Investment Entities.
The meaning of Investment Entity is explained in section 2.5. A not-for-profit may be regarded as an Investment Entity if it is managed by a financial institution and its gross income is primarily attributable to investing, reinvesting, or trading in financial assets. In general:
- an entity is regarded as being managed by a financial institution where it has appointed a financial institution (for example, a professional investment manager) to manage all or part its assets with discretionary authority over managing the assets
- an entity’s income is primarily attributable to investing, reinvesting, or trading in financial assets where this activity accounts for at least 50% of the not-for-profit's gross income.
Financial assets do not include direct interests in real property.
A not-for-profit that is a financial institution under the CRS will need to identify whether it maintains Financial Accounts which must be reported. The meaning of Financial Account is explained in Financial accounts, with specific advice for not-for-profits at Not-for-profits – Financial accounts. Further information on how CRS may impact not-for-profit organisations is found at Not-for-profits and the Common Reporting Standard
If the not-for-profit entity is not a financial institution, the question then becomes whether it is an Active NFE or Passive NFE. An MOU between Australia and the U.S. came to an understanding of the meaning of certain words in the definition of Active NFFE in the FATCA Agreement. A not-for-profit entity that is exempt from Australian income tax under Division 50 of the Income Tax Assessment Act 1997 is an Active NFE. Essentially the same words appear in subparagraph D.9(h) of section VIII of the CRS and should be given the same meaning.