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6 Compliance

Last updated 25 October 2023


RFIs are required to have procedures and systems in place to ensure that Reportable Accounts are identified, the relevant information collected and that information is reported to the ATO. The international agreements to which Australia is a party expect the ATO, as the competent authority, to ensure that RFIs provide complete and accurate information for exchange with those countries.

Australia’s tax laws contain a range of sanctions that may be applied to RFIs not complying with their reporting obligations. Specifically:

  • penalties apply to entities that fail to lodge statements on tax-related matters in time
  • penalties apply to entities that make false or misleading statements about tax-related matters.

An RFI that fails to comply with the due diligence procedures in identifying any Reportable Accounts is unlikely to provide complete and accurate information to the ATO. For example, an RFI that fails to collect a customer’s self-certification upon account opening would have difficulty in identifying and reporting on that account holder’s jurisdiction of residence for tax purposes.

Accordingly, an RFI that does not collect an account holder’s self-certification may be subject to either:

  • an administrative penalty for providing a false or misleading statement to the ATO, or
  • an administrative penalty for failing to lodge a statement with the ATO.

In addition, RFIs that fail to collect a self-certification as required by the CRS may be liable for an additional administrative penalty. Further information about this penalty follows in section 6.1.

An RFI needs to keep adequate records about the procedures used in preparing their AEOI reports to ensure the ATO can properly assess whether they have complied with their reporting obligations. This record-keeping obligation is similar to other record keeping provisions in Australia‘s other domestic taxation laws.

Specifically, an RFI that provides a statement to the ATO should keep records for five years from the due date of lodging the statement that:

  • correctly records the procedures by which it determined what information to include in the statement; and
  • are in English, or are readily accessible and easily convertible into English.

An RFI that does not provide a statement to the ATO in a particular year will need to keep records until 31 July of the sixth year after that year, which correctly records the procedures used to determine that it did not need to provide the statement.

Keeping records of the procedures used in CRS due diligence processes includes keeping a record of the evidence relied upon. This includes the self-certification and, where other evidence is relevant, a record of that evidence. The self-certification is expected to be captured by the RFI in a manner such that it can credibly demonstrate that the self-certification was positively affirmed (for example, voice recording, digital footprint). For other evidence, the evidence retained by an RFI does not have to be the original and may be a certified copy, a photocopy or, at least, a notation of the type of documentation reviewed, the date the documentation was reviewed, and the document's identification number (if any).

An entity that fails to keep or retain records as required by the taxation laws is liable to an administrative penalty.

6.1 Failure to obtain a self-certification – CRS

A penalty of one penalty unit applies for each instance of a failure to obtain a self-certification where the self-certification is required (must be obtained) under the CRS. We would not impose a penalty on an RFI when a self-certification has not been obtained, or would remit such a penalty, to the extent that the failure was not due to an act of the RFI or a failure to act.

Where an RFI is required to obtain a self-certification when opening a new account, a failure to do so would generally attract the penalty. As noted in section 4.7, in exceptional circumstances an RFI is permitted to open an account without a self-certification, subject to having robust procedures in place to obtain the self-certification from the account holder after opening. While the penalty may be remitted for isolated failures to obtain a self-certification, a material number of failures over a period of time may indicate that the procedures in place are not sufficiently robust.

Aside from opening a new account, an RFI may be required to obtain a self-certification or a new self-certification in some other situations. A self-certification or a new self-certification is required under the CRS if:

  • there is a change in circumstances for a New Individual Account or a New Entity Account that causes the RFI to know, or have reason to know, that the original self-certification is incorrect or unreliable
  • a Passive NFE holds a Pre-existing entity account and the aggregate account balance or value is $1 million or more, to determine if a Controlling Person is a Reportable Person.

A change in circumstances would not require an RFI to obtain a new self-certification if the Account Holder provides a reasonable explanation and documentation (as appropriate) of the perceived indicia.

When considering this penalty, an RFI will not incur a penalty for failing to obtain a self-certification when obtaining it is merely one course of action available to the RFI in conducting due diligence procedures for the account.

An RFI would also not incur a penalty where it needs to request a self-certification for an existing account, the request is made, and the Account Holder fails to provide it, as described in the two bullet points above.

Example 1

Where the enhanced review procedures required by the CRS are carried out on a high value account and the only indicium found is a 'hold mail' instruction or 'in-care-of' address in a foreign jurisdiction, the CRS requires the RFI to obtain either a self-certification or Documentary Evidence from the account holder to establish their tax residency. If the RFI fails to obtain a self-certification for this account, this failure would not be subject to a penalty, whether or not the alternative Documentary Evidence was obtained. (Note that the RFI is expected to report the account if neither a self-certification nor Documentary Evidence is obtained. A different penalty may apply to a failure to report).

Example 2

When reviewing a pre-existing entity account to determine whether the entity is a Passive NFE, the RFI must either obtain a self-certification from the Account Holder or use information in its possession or that is publicly available to reasonably determine that the entity is not a Passive NFE. Alternatively, the RFI may determine or presume that the entity is a Passive NFE.

A failure by an RFI to obtain a self-certification in post-account opening circumstances would not be subject to a penalty if the RFI has taken the steps required by the CRS and its Commentary to obtain the self-certification, and the account holder has not complied with the request despite reasonable efforts by the RFI.

End of example

A self-certification that is obtained by an RFI and subsequently found to be invalid or not reasonable will not attract a penalty for failing to obtain a self-certification, if the RFI did not know or have reason to know of the shortcoming.

6.2 Significant non-compliance – FATCA

The FATCA Agreement provides for collaboration between the ATO and the IRS on compliance and enforcement of FATCA obligations. Article 5 makes a distinction between minor and administrative errors, dealt with in Article 5.1, and significant non-compliance, covered by Article 5.2. Any non-compliance other than minor or administrative errors may be considered 'significant non-compliance'. Minor errors include isolated instances of having incomplete or missing data fields, lodging corrupted data, use of an incompatible format and other similar issues.

The following is regarded as significant non-compliance:

  • ongoing failure to lodge a report or repeated late lodgment
  • failure to register
  • ongoing or repeated failure to supply accurate information or establish appropriate governance or due diligence processes
  • intentional or negligent provision of incorrect information or omission of required information.

Significant numbers of minor errors in the same statement, continually making the same minor error in multiple reports, and not fixing the error when requested may also amount to significant non-compliance.

Under Article 5.2, significant non-compliance by an RFI is a matter for determination by the IRS. If the IRS detects significant non-compliance by an RFI, the IRS will notify the ATO. Under the FATCA Agreement, the IRS is required to defer any action or sanctions for 18 months while the ATO seeks to resolve the non-compliance using domestic law (including consideration of applicable penalties under domestic law).

The ATO will contact the RFI to discuss areas of non-compliance, including the reasonableness of any particular position adopted. The ATO will work with the RFI to find solutions to resolve the existing non-compliance issues and prevent future non-compliance. The RFI will have 18 months from the time that the ATO is notified of the significant non-compliance to resolve the issue. If it is not resolved within that time, the RFI will be treated by the U.S. as a Non-Participating financial institution.

6.3 Collaboration on compliance and enforcement – CRS

Similar to FATCA, Australia's international agreements that support the CRS give a foreign tax administration the ability to notify the ATO when it has reason to believe an error may have led to incorrect or incomplete information reporting, or there is non-compliance with the CRS's due diligence and reporting requirements by an Australian RFI. In such situations, the ATO is obliged to take all appropriate measures under Australian law, including applying penalties to the RFI, to address errors or non-compliance.

The ATO has a reciprocal ability to notify foreign tax administrations of errors or non-compliance by RFIs in those countries about their reporting to the ATO of accounts held by Australian tax resident account holders.

6.4 Anti-avoidance measures – CRS

Treating an account as a reportable account

If the ATO reasonably believes that an RFI or an Account Holder has made a transaction or entered into an arrangement for the dominant purpose of avoiding a financial institution identifying the account as a Reportable Account (within the meaning of the CRS), the ATO may serve a notice on the financial institution requiring it to treat the account as reportable.

For example, the ATO audits a random sample of foreign resident pre-existing entity accounts of an RFI and discovered transfers to, and from, offshore accounts just before and after the end of a calendar year (so that the account balances fluctuate below reporting thresholds at the time the thresholds are to be applied). In the absence of an apparent commercial or private administration reason for these transfers, it is reasonable for the ATO to believe that the year-end account balances were manipulated to avoid the reporting of the accounts.

Similarly, if an RFI did not create any electronic records for a Lower Value Account (such that an electronic record search would not yield any results) or maintains computerised systems artificially dissociated (to avoid the entity account aggregation rules), then in the absence of a commercial reason, it is reasonable for the ATO to believe these arrangements were established to avoid the relevant accounts being reported.

An RFI may object to a decision by the ATO to issue such a notice.

Requiring a financial institution to act as an RFI

If the ATO reasonably believes that a financial institution undertook a transaction or entered into an arrangement for the dominant purpose of causing the financial institution not to be a RFI, the ATO may serve a notice on the institution requiring it to act as a RFI.

6.5 Undocumented accounts – CRS

As explained in section 5.7, the term "undocumented account" has a specific meaning for the CRS. The “hold mail” or “in-care-of” circumstances for Pre-existing Individual Accounts described in section 5.7 are the only situations where a reported account should be reported as "undocumented".