3 Financial accounts
Under the AEOI regimes, RFIs are required to review the Financial Accounts they maintain to see if any of those accounts need to be reported to the ATO. In general, a Financial Account is an account maintained by a Financial Institution.
The term ‘Financial Account’ includes five categories of accounts: Depository Accounts, Custodial Accounts, equity and debt interests, Cash Value Insurance Contracts and Annuity Contracts. The following table shows which Financial Institutions are considered to maintain each type of Financial Account.
Financial Institution is generally considered to maintain them
The Financial Institution obligated to make payments with respect to the account (excluding an agent of a Financial Institution)
The Financial Institution that holds custody over the assets in the account
Equity and debt interest in certain Investment Entities
The equity or debt interest in a Financial Institution is maintained by that Financial Institution
Cash Value Insurance Contracts
The Financial Institution obligated to make payments with respect to the contract
The Financial Institution obligated to make payments for the contract
The categories of Financial Accounts subject to review under the AEOI regimes are discussed in the following sections.
Some types of accounts are excluded from being Financial Accounts and so are not subject to the due diligence and reporting obligations. Under the CRS these are called Excluded Accounts. The concept is substantially the same for FATCA. For convenience this guidance uses the same term for accounts excluded from the meaning of Financial Account under FATCA (see section 3.9 for an explanation of Excluded Accounts).
An Account Holder of a Financial Account may be an individual or an Entity. As noted in section 2, 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, so it covers companies, associations, joint ventures, partnerships, limited partnerships, and trusts (including unit trusts and discretionary trusts). These types of Entities are the Account Holders of the accounts that they hold. Section 4.4 discusses how to identify an Account Holder of a Financial Account.
3.1 Depository Accounts
A Depository Account includes any commercial, checking, savings, time, or thrift account, or an account that is evidenced by a certificate of deposit, thrift certificate, investment certificate, certificate of indebtedness, or other similar instrument maintained by a Financial Institution in the ordinary course of a banking or similar business. It also includes an amount held by an insurance company pursuant to a guaranteed investment contract or similar agreement to pay or credit interest thereon.
An account evidenced by a passbook would generally be considered a Depository Account. As mentioned in the Commentary, negotiable debt instruments traded on a regulated market or over-the-counter market, distributed and held through financial institutions would not generally be considered Depository Accounts, but Financial Assets.
3.2 Depository accounts – overpayment of credit or loan facilities
A credit or revolving credit facility becomes a Depository Account when:
- a customer makes a payment in excess of a balance due
- the overpayment is not immediately returned to the customer
- the account is maintained by a Financial Institution in the ordinary course of a banking or similar business.
For the meaning of ‘banking or similar business’, see section 2.4 of this guidance. A credit or loan facility in any other circumstances is not a Depository Account.
An overpayment that is immediately returned does not cause an account to be a Depository Account. For this purpose, ‘immediate’ means the practical time it takes to return the overpayment after recognising an overpayment has occurred.
These rules apply to facilities whether or not interest is payable on any credit balance for that account. The meaning of 'deposit' means the amount of a payment in excess of the balance due.
Under the CRS, a Depository Account that exists solely because a customer makes a payment in excess of a balance due for a credit card or other revolving credit facility will qualify as an Excluded Account if the Financial Institution has policies and procedures in place to prevent or refund an overpayment of more than $50,000 within 60 days if it has not reduced in the meantime. Those policies and procedures must be in place from 1 July 2017 (or the date that the entity became a Financial Institution, if later).
Under FATCA a narrower exclusion applies. A credit card account or revolving credit facility (such as an overdraft) is not required to be reviewed, identified or reported provided that:
- the account is a New Entity Account, and
- the Financial Institution has policies and procedures in place to prevent an overpaid account balance exceeding U.S.$50,000.
The FATCA Agreement does not set a deadline by when the policies and procedures must be implemented. A Financial Institution will qualify for the exclusion from whatever date that it actually implements the policies and procedures. Any credit card account or revolving credit facility that recorded an overpayment from 1 July 2014 and before the implementation of the required policy will be a Depository Account as long as the account remains overpaid. (Note that a Depository Account may still be excluded from review, identification or reporting if, after any necessary aggregation with other Depository Accounts, the balance does not exceed $50,000 at the end of each calendar year).
For both the CRS and FATCA, it is the general policies and procedures that determine the exclusion. If the Financial Institution generally has a robust implementation of the policies and procedures, an isolated, exceptional and temporary breach of the account balance rules would not disqualify an account from exclusion.
For both the CRS and FATCA, the account balance threshold must take into account the aggregation rules for other accounts held by the customer with the Financial Institution or a Related Entity.
Both the CRS and FATCA make provision for Qualified Credit Card Issuers. See section 2.15 for an explanation of how such an entity qualifies as a Non-Reporting Financial Institution.
For FATCA, a credit or loan facility that has become a Depository Account is subject to the exclusion thresholds in Annex I of the FATCA Agreement if the Reporting AFI has elected to apply the threshold. For example, a credit card account held by an individual who has made an overpayment of $7,000 on the account will not be subject to review, identification or reporting if the Reporting AFI has applied the exclusion for Depository Accounts and their aggregate balance of all Depository Accounts with the Reporting AFI does not exceed $50,000 at the end of the calendar year.
3.3 Depository accounts – payment cards or pre-loaded cards
For an account to be a Depository Account, it must be maintained by a Financial Institution in the ordinary course of a banking or similar business. Pre-loaded payment cards, including travel cards, gift cards and pre-loaded payment cards used for online payments, are part of the definition of 'Depository Account'. The entity which issues and maintains the card must be a Financial Institution, maintain the card in the ordinary course of a banking or similar business and the holder must be designated.
A store gift card will not be considered a Depository Account if it is only redeemable for value at specified stores. A stored value card will also not be considered a Depository Account if it is purchased with a non-reloadable stored value.
3.4 Custodial Accounts
A Custodial Account means an account (other than an Insurance Contract or Annuity Contract) that holds one or more Financial Assets for the benefit of another person.
The term Financial Asset is intended to encompass any assets that may be held in an account maintained by a Financial Institution, except a non-debt, direct interest in real property. It does not include physical goods.
Examples of Financial Assets include a security, partnership interest, commodity, swap, Insurance Contract or Annuity Contract, or any interest in a security, partnership interest, commodity, swap, Insurance Contract, or Annuity Contract. Security examples include a share in a corporation; partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust; note, bond, debenture, or other evidence of indebtedness. Swap examples include interest rate swaps, currency swaps, basis swaps, interest rate caps, interest rate floors, commodity swaps, equity swaps, equity index swaps, and similar agreements. Interests include a futures or forward contract or option.
3.5 Equity or debt interests in investment entities
Generally any equity or debt interest in an investment entity will constitute a financial account under the CRS. The same general rule also applied under the FATCA Regulations.
The FATCA Agreement provides a slightly narrower general rule. An equity or debt interest will only be a Financial Account if it is in an entity that is a Financial Institution solely because it is an Investment Entity. Equity or debt interests in an Investment Entity could be excluded under the FATCA Agreement if the entity is also a Financial Institution in another capacity, for example, as a Custodial Institution.
Both the CRS and FATCA supplement the general rule with an anti-avoidance rule. Equity or debt interests in a financial institution not covered by the general rule explained above may constitute financial accounts where the class of interest was established to avoid reporting under the relevant AEOI regime.
The CRS provides a special exclusion for equity and debt interests in investment advisers and investment managers. It excludes from the definition of Financial Account any equity or debt interest in an Entity that is an Investment Entity solely because it renders investment advice to, acts on behalf of, or manages portfolios for customers for the purpose of investing, managing, or administering Financial Assets deposited in the name of the customers with other Financial Institutions.
Unlike the CRS, the FATCA Agreement does not provide a special exclusion for equity and debt interests in investment advisers and investment managers. Instead, relief is provided to investment advisers and investment managers by treating such entities as Non-Reporting AFIs.
3.6 Equity or debt interests regularly traded on an established securities market under the AEOI regimes
Under the FATCA Agreement certain equity or debt interests in Investment Entities are specifically excluded from the definition of ‘Financial Account’. This exclusion is not replicated in the CRS.
The excluded interests under the FATCA Agreement are interests that are 'regularly traded on an established securities market'. However, the exclusion only covers interests held under a ‘depository model’, that is, through a custodial arrangement. The exclusion is based on interests being held through and reported by the RFI maintaining a Custodial Account in which the interests are contained (that is, held by that RFI as an intermediary) and so reporting is ensured.
Interests held in what is commonly known as 'client name', or under a ‘non-depository model’ do not benefit from the 'regularly traded' exclusion. This is discussed further under 'Investor registered on the books of the Investment Entity'.
The conditions for an interest to be considered 'regularly traded on an established securities market' are described in the following information. A relevant RFI that issues such interests will not be required to undertake FATCA due diligence and reporting for interests that meet these conditions.
While the FATCA exclusion may relieve an issuer from reporting on its equity or debt interests, it does not change the obligation of a Custodial Institution to report on Custodial Accounts in which those interests qualifying for the exclusion may be held.
Under the CRS, there is no similar exclusion from the definition of ‘Financial Account’ for equity or debt interests in Investment Entities regularly traded on an established securities market. Under the CRS, equity or debt interests in Investment Entities (whether or not they are regularly traded on an established securities market) are considered Financial Accounts maintained by the RFI that issues the interests. In practice under the CRS, if interests in an RFI are held through an intermediary that is a Financial Institution, duplicated reporting will generally be avoided. The RFI issuing the interests will identify the intermediary as the Account Holder and will not be required to report it. This is because it is a Financial Institution, unless it is a type B Investment Entity and is not a Participating Jurisdiction Financial Institution, which has Passive NFE status under the CRS and must be documented. See section 2.5 for an explanation of type B Investment Entities.
In certain circumstances an issuing RFI may not possess information or have a relationship with the Account Holder that would enable it to comply with its reporting obligations. For example, trades of equity interests in an exchange traded fund are made by brokers but the end investors are directly registered in the fund’s interest register, as described above. Both FATCA and the CRS contain provisions allowing the use of third party service providers to assist a Financial Institution to meet its due diligence and reporting obligations in such circumstances.
Under FATCA and the CRS, the term 'regularly traded on an established securities market' is also relevant for an RFI for determining the status of some of its Entity Account Holders. Under FATCA, an Entity Account Holder that is a U.S. or other corporation, as applicable, whose stock is 'regularly traded on one or more established securities markets' is excluded from the definition of Specified U.S. Person in Article 1.1(ff) of the FATCA Agreement and from the definition of Reportable Person in subparagraph D(2) of section VIII of the CRS (that is, Financial Accounts held by such corporations are not reportable). In addition, an Entity Account Holder whose stock is 'regularly traded on an established securities market' is considered an Active NFFE under subparagraph B(4)(b) of section VI of Annex I and subparagraph D(9)(b) of section VIII of the CRS. Accordingly, Financial Accounts held by such an Active NFFE are not reportable.
An RFI can rely on a self-certification provided by the Account Holder, or information in its possession or that is publicly available, to determine whether stock in the corporation is regularly traded.
'Regularly traded on an established securities market' and ‘regularly traded on one or more established securities markets’
As discussed, these phrases are used for various and separate purposes in the AEOI regimes. They are used interchangeably in the following discussion, which is to provide guidance to RFIs on the meaning of the terms.
Article 1.1(s) of the FATCA Agreement provides that for the definition of Financial Account, an interest is 'regularly traded' if there is a meaningful volume of trading on a continuous basis. Article 1.1(s) further provides that an 'established securities market' means an exchange that is officially recognised and supervised by a governmental authority in which the market is located and that has a meaningful annual value of shares traded on the exchange.
RFIs may reasonably determine there is a 'meaningful volume of trading on a continuous basis' of an interest, or that an exchange has a 'meaningful annual value of shares traded' based on historical trading volumes.
As noted, the terms are also used in the FATCA Agreement’s definitions of Specified U.S. Person and Active NFFE. They can be interpreted in these contexts according to the same principles.
Under the CRS, for the purposes of subparagraphs D(2)(i) and D(9)(b) of section VIII of the CRS (definitions of Reportable Person and Active NFE, RFIs may make the same reasonable determination. Alternatively, they may use the principles discussed at paragraphs 112-115 of the Commentary on section VIII. RFIs may also use the CRS Commentary to interpret the terms in the context of the FATCA Agreement.
Alternatively, an RFI can rely on the following to interpret the terms under each of the AEOI regimes. An equity or debt interest is considered to be 'regularly traded on an established securities market' if the interest:
- is admitted to quotation for trading on a licensed Australian financial market (within the meaning of the Corporations Act 2001) or an approved stock exchange (within the meaning of the Income Tax Assessment Act 1997 (ITAA 1997)
- is widely held.
An interest is considered to be widely held if the entity either:
- satisfies the conditions of paragraph (b) of the definition of 'widely held company' in subsection 995-1(1) of the ITAA 1997 (if the entity is a company)
- is not closely held within the meaning of paragraphs 272-105(2)(a) and 272-105(2A)(a) of Schedule 2F to the Income Tax Assessment Act 1936 (if the entity is a trust).
A qualifying RFI must meet any ongoing requirements prescribed by the operator of the financial market on which the relevant interests are listed and by the Australian Securities and Investments Commission (ASIC) or other relevant government regulator.
Licensed Australian financial markets include the Australian Securities Exchange, the National Stock Exchange of Australia, Chi-X Australia as well as other exchanges licensed by ASIC on which equity or debt interests in relevant Financial Institutions can be traded.
As a further alternative for FATCA only, RFIs may apply the provisions of the Regulations in determining whether an interest is 'regularly traded on an established securities market'.
Under FATCA Agreement’s definition of Financial Account an equity or debt interest is treated as a Financial Account where there is evidence of deliberate practices to avoid reporting under the FATCA Agreement or facilitate tax evasion. For instance, if a particular interest or class of interests was issued to avoid reporting under the FATCA Agreement, the interests are reportable Financial Accounts from the moment they were issued.
Investor registered on the books of the investment entity for the purposes of the FATCA Agreement’s definition of financial account
While interests that are 'regularly traded on an established securities market' are excluded from the FATCA Agreement’s definition of 'Financial Account', these interests will be treated as Financial Accounts and subject to due diligence and reporting where the holder of the interest in the RFI (other than a Financial Institution acting as an intermediary) is registered on the books of that RFI (see the last sentence of Article 1.1(s)). This generally refers to interests held under what is known as a ‘non-depository model’, which is common in the Australian and certain foreign securities markets.
This means that an RFI that issues interests held directly by investors on the share registry (instead of in the name of a Financial Institution intermediary) has due diligence and reporting obligations for those interests even if they are 'regularly traded'.
This safeguard is intended to ensure that reporting always occurs where people hold the interests directly on the books of the Financial Institution (non-depository model) rather than through a Financial Institution such as a custodian or nominee arrangement (depository model). In Australia, investors often hold investments in their own name. In the absence of this safeguard, investors could, contrary to the intent of the FATCA Agreement, avoid reporting for their Financial Account if the relevant interests were not acquired or held through an RFI. For instance, interests could be acquired with the assistance of a non-reporting execution-only broker and be held directly by the investor.
Transitional arrangements for exchange-traded product issuers
Some RFIs that issue exchange-traded products face challenges to comply with the FATCA Agreement's requirements. The Australian Government is working closely with these RFIs to ensure their compliance.
The U.S. Government has informed the Australian Government that it will recognise these RFIs' compliance if they follow certain procedures during a transitional period lasting until 1 July 2017, before fully implementing the FATCA Agreement's requirements.
Section 8.1 of this Guidance describes in detail the transitional due diligence and reporting rules that apply to exchange-traded product issuers, and provides a link to the U.S. letter.
Summary of treatment of equity or debt interests in relevant RFIs under Article 1.1(s) of the FATCA Agreement and the CRS
Equity or debt interests in relevant RFIs that are not 'regularly traded on an established securities market' are treated as Financial Accounts and subject to due diligence and reporting requirements under the general FATCA Agreement rules.
Equity or debt interests in relevant RFIs that are 'regularly traded on an established securities market' and the holders of which (other than a Financial Institution acting as an intermediary) appear registered on the books of the RFI are treated as Financial Accounts only if the interest is first registered on the books on or after 1 July 2014. Transitional due diligence and reporting rules, described in section 8.1 of this Guidance, apply to RFIs that are exchange-traded product issuers until 1 July 2017.
Equity or debt interests in relevant RFIs that are 'regularly traded on an established securities market' and the holders of which are not registered on the books of the RFI are not treated as Financial Accounts and not subject to due diligence and reporting by the AFI under Annex I.
Equity or debt interests in relevant RFIs are treated as Financial Accounts and are subject to due diligence and reporting requirements under the general CRS rules.
3.7 Cash value insurance contracts
A Cash Value Insurance Contract means an Insurance Contract (other than an indemnity reinsurance contract between two insurance companies) that has a Cash Value.
Cash Value is a defined term in the CRS and in the FATCA Agreement. It means the greater of:
- the amount that the policyholder is entitled to receive upon surrender or termination of the contract (determined without reduction for any surrender charge or policy loan)
- the amount the policyholder can borrow under or with regard to the contract.
Both the CRS and the FATCA Agreement do not include an amount payable under an Insurance Contract:
- solely by reason of the death of an individual insured under a life insurance contract
- as a personal injury or sickness benefit or other benefit providing indemnification of an economic loss incurred upon the occurrence of the event insured against
- as a refund of a previously paid premium (less cost of insurance charges, whether or not actually imposed) under an insurance contract (other than an investment-linked life insurance or annuity contract), due to cancellation or termination of the contract, decrease in risk exposure during the effective period of the contract, or arising from correcting a posting or similar error on the premium for the contract; or
- a policyholder dividend based upon the underwriting experience of the contract or group involved, except the CRS limits this exclusion to a dividend that relates to an Insurance Contract under which the only benefits payable are as a personal injury or sickness benefit or other benefit providing indemnification of an economic loss incurred upon the occurrence of the event insured against.
The CRS provides one further exclusion from Cash Value that is not expressly provided by the FATCA Agreement. It excludes a return of an advance premium or premium deposit for an Insurance Contract where the premium is payable at least annually, if the amount of the advance premium or premium deposit does not exceed the next annual premium payable under the contract.
3.8 Annuity contracts
An Annuity Contract means a contract under which the issuer agrees to make payments for a period of time determined in whole or in part by reference to the life expectancy of one or more individuals.
The term also includes arrangements in Australia commonly referred to as annuities, under which the issuer agrees to make payments for a term of years. It will include any annuities described and regulated under the Superannuation Industry (Supervision) Regulations 1994.
3.9 Excluded accounts
Certain Financial Accounts are seen to be low risk of being used to evade tax and are excluded from review and reporting under the AEOI regimes. Such accounts are specifically excluded from the definition of ‘Financial Account’ and are called ‘Excluded Accounts’.
The following are Excluded Accounts:
- retirement and pension accounts - see section 3.10
- certain escrow accounts - see section 3.11
- term life insurance contracts - see section 3.12
- accounts held solely by a deceased estate - see section 3.13
- employee share schemes and employee share trusts as defined in the Income Tax Assessment Act 1997
- a first home saver account (FHSA) as defined in the Income Tax Assessment Act 1997
- a funeral policy as defined in the Income Tax Assessment Act 1997
- a scholarship plan as defined in the Income Tax Assessment Act 1997.
The range of Excluded Accounts is generally the same between FATCA and the CRS, but see section 3.2 for a difference relating to overpayment of credit or loan facilities.
3.10 Retirement and pension accounts
Certain savings accounts that are retirement or pension accounts are Excluded Accounts. These are:
- a complying superannuation/FHSA life insurance policy as defined in the Income Tax Assessment Act 1997
- an exempt life insurance policy as defined in the Income Tax Assessment Act 1997, other than a policy referred to in subparagraphs (e)(i) or (iii) of subsection 320-246(1) of that Act
- a retirement savings account as defined in the Retirement Savings Accounts Act 1997.
3.11 Escrow accounts
Accounts where money is held by a third party on behalf of other parties (that is, escrow accounts) can be Excluded Accounts under the AEOI regimes where they are established in connection with any of the following (provided applicable provisions in paragraph D of section V of Annex II to the FATCA Agreement and subparagraph C(17)(e) of section VIII of the CRS are met):
- a court order or judgment
- a sale, exchange, or lease of real or personal property, provided certain conditions in the abovementioned provisions are met
- an obligation of a Financial Institution servicing a loan secured by real property to set aside a portion of a payment, to facilitate payment of taxes or insurance related to the real property at a later time
- an obligation of a Financial Institution solely to facilitate the payment of taxes at a later time,
Where a Financial Account similar to an Escrow Account is not covered above and the account is held by a non-financial intermediary (such as a solicitor, real estate agent or insurance broker account) on behalf of clients, the RFI is only required to undertake the due diligence procedures for the non-financial intermediary provided that:
- the funds of underlying clients of the non-financial intermediary are held on a pooled basis
- the only person identified to satisfy AML/KYC requirements relating to the account is the non-financial intermediary.
Where a non-financial intermediary operates an account with an RFI and the underlying client or clients of the intermediary are identified by the RFI as part of the account opening process, the RFI must review the account to identify whether any underlying client is a Reportable Person.
3.12 Term life insurance contracts and pure risk insurance products
Life insurance contracts with a coverage period that will end before the insured individual attains age 90 are not Financial Accounts, provided that the contract satisfies the following requirements:
- periodic premiums, which do not decrease over time, are payable at least annually during the period the contract is in existence or until the insured attains age 90, whichever is shorter
- the contract has no contract value that any person can access (by withdrawal, loan, or otherwise) without terminating the contract
- the amount (other than a death benefit) payable upon cancellation or termination of the contract cannot exceed the aggregate premiums paid for the contract, less the sum of mortality, morbidity, and expense charges (whether or not actually imposed) for the period or periods of the contract’s existence and any amounts paid prior to the cancellation or termination of the contract
- the contract is not held by a transferee for value.
As explained at section 3.7, an insurance contract that has a Cash Value (other than an indemnity reinsurance contract between two insurance companies) is a Cash Value Insurance Contract and therefore a Financial Account. An insurance contract that does not have a Cash Value is not a Financial Account.
Pure risk insurance products are not considered to have a Cash Value and so it is unnecessary for the AEOI regimes to specifically exclude them from the definition of Financial Account (that is, as a type of Excluded Account).
In Australia, pure risk life (and other) insurance products will generally display the following features, which are listed to illustrate the notion of 'pure risk':
- benefits are paid only on death, terminal illness, disablement or trauma (specified illness or injury)
- there are no policy loans
- there are no policyholder dividends (including termination dividends) or other payments
- there are no surrender charges
- these products require regular payment of premiums on a 'pay as you go' basis
- premiums are usually either age-based stepped premiums (low becoming high) or level for the contract duration (no increases); there are also some instances where level premiums switch to being stepped from a certain age
- they do not have a surrender value, an investment element value or any characteristic resembling a cash value (this is also the case for level premiums)
- advance payments of premiums may be permitted, but interest is not paid on them
- the policy expires if the next premium due is not paid or if cancelled by the policyholder
- if the policyholder cancels the policy, the premium refund relates only to the unexpired period of future cover paid for (for example, cancellation part way through a period for which a premium was paid – other than for 'cooling off' periods, where the full premium is refunded)
- if the policyholder reduces cover, premium refund relates only to the amount of the reduction to cover for the unexpired period of future cover paid for (for example, reduction to sum insured part way through a period for which a premium was paid)
- death benefits may not be age limited – the cover may run until a contractually specified expiry age (for example, age 99) or indefinitely as long as premiums continue to be paid
- disability and trauma benefits are not age limited (other than after age 99, although narrower coverage can apply from earlier ages, such as age 75 or 65) – the cover runs until the contractually specified expiry age of 99 years.
3.13 Deceased estates
An account may be held by a deceased estate. Such accounts are not Financial Accounts under the AEOI regimes where:
- the account is held solely by an estate
- the RFI is in possession of documentation for the account which includes a copy of the deceased’s will, death certificate or a grant of probate or letters of administration for the deceased and the executor or administrator of the estate
- in the case of FATCA, the account is maintained in Australia.
For this purpose, the RFI must treat the account as having the same status that it had prior to the death of the Account Holder until the date it obtains such documentation.
In cases where a deceased person held a jointly held account and upon death their entitlement automatically transfers to the surviving joint holder or holders, the account would retain its status as a Financial Account and be subject to due diligence and reporting on the joint holders (before the time the RFI receives notification of the deceased’s death) or only for the surviving joint holder (from the time the RFI is notified of such death).
Where a Reportable Person held a Financial Account at the time of death, there is an account closure for them for AEOI purposes. See section 5.6 for reporting on closed accounts.
Foreign tax residency of the executor or administrator of an estate with an account held by the estate Financial Account is not relevant to qualifying as an Excluded Account.
While acknowledging that the time to administer an estate can vary widely, the exclusion of an account held by a deceased estate is not intended to be indefinite. An RFI may need to refresh its knowledge of the account if the status is not resolved over an unduly long period of time.
3.14 Dormant accounts
An RFI may identify an account as a dormant account under applicable laws or regulations or the normal operating procedures of the RFI consistently applied for all accounts maintained by that RFI in Australia. Dormant accounts are not excluded from due diligence procedures or reporting.
Where the application of the relevant due diligence procedures indicates the account is a Reportable Account, the RFI must report the account whether or not there was contact with the Account Holder.
3.15 Collateral and derivative arrangements – custodial accounts
Whether the holding of collateral constitutes a Custodial Account depends on the nature of the collateral and the broader contractual arrangements between the parties. For a Custodial Account to exist it must be an account held for the benefit of another person and the account must hold:
- a financial instrument or contract held for investment (FATCA), or
- one or more Financial Assets (CRS).
Simply being a party to a contract or a financial instrument would not generally create a custodial relationship with the counterparty for the contract or financial instrument. In these circumstances each party acts on its own behalf, subject to the terms of the contract or financial instrument.
Some financial or derivatives arrangements include the holding of collateral as security for the finance or fulfilment of the derivatives obligation. If the account under which the collateral is held is not an account held for the benefit of another person and the holding of the collateral is a subsidiary and integral element of the overall arrangement between the two parties, it will not be a Custodial Account.
If collateral is provided on a full title transfer basis so that the collateral taker has full legal and beneficial ownership of the asset, taking or holding the asset does not create a Custodial Account. Whether the beneficial ownership of an asset was transferred depends on weighing the contractual arrangements between the parties.
An account that is not a Custodial Account may nevertheless be a Financial Account for another reason; for example, an account maintained by an Investment Entity.
Ozex Ltd ('Ozex') operates a money exchange and remittance business. In addition to spot exchanges, some customers open accounts with Ozex and engage in various derivatives transactions, such as options and forward contracts. Ozex transacts in these derivatives directly with those customers. Ozex also engages in other transactions with banks as part of its hedging strategies, but these are separate to transactions with its customers.
The derivatives transactions with its customers do not cause the client accounts to be Custodial Accounts. As counterparty to the derivative transactions, Ozex acts on its own behalf and does not have a custodial relationship with the customer for those derivatives.
Further to the previous example, Ozex has contractual agreements with some customers which require an amount of money to be deposited by the client to cover or mitigate the risk that the client may not follow through with a transaction if exchange rates move unfavourably. Ozex records these deposits in its internal records and pools client funds in an account with an unrelated bank. The holding of these funds is not the holding of a relevant financial instrument or contract (FATCA). Although the holding of money is the holding of Financial Assets for CRS purposes, viewed objectively the holding of the money is subsidiary and integral to the transactions or contracts between Ozex and the customer. The accounts are not Custodial Accounts.
Interex Ltd ('Interex') conducts a business that trades over-the-counter-derivatives. A counterparty trades with Interex, subject to the standardised contract developed by the International Swaps and Derivatives Association (ISDA). From time to time collateral is provided or adjusted for transactions under the relevant ISDA Credit Support Annex documentation. Under this Annex, the collateral provided is on a full title transfer basis.
The financial instruments provided as collateral will not give rise to a Custodial Account because full ownership title to the collateral is legally and beneficially transferred from the client to Interex.