On 18 September 2015, Treasury released exposure draft legislation in relation to the implementation of the Organisation for Economic Co-operation and Development’s (OECD) Common Reporting Standard (CRS) for the automatic exchange of financial account information.
The CRS is intended to reduce international tax evasion and represents the next significant wave of compliance for taxpayers, both financial institutions and account-holders. Under the implementing legislation, Australian financial institutions will need to carry out due diligence procedures to identify the tax residence of account holders and report relevant data to the Australian Tax Office (ATO).
The exposure draft is open to public consultation with comments due by 9 October 2015.
Broadly, the CRS (formally known as the Standard for Automatic Exchange of Financial Account Information in Tax Matters) and implementing legislation will require in scope Australian financial institutions to identify account-holders using prescriptive due diligence procedures.
Once Australian financial institutions have identified their account-holders, they will be required to report to the ATO information on financial accounts held by foreign residents. The ATO will provide this information to the relevant foreign residents’ tax authority whilst at the same time receiving information on Australian residents with financial accounts overseas.
The CRS will apply to Australian financial institutions from 1 January 2017, with a first reporting deadline of 31 July 2018. There is an option to defer due diligence and reporting obligations for 12 months by written notice to the ATO.
The concept of a financial institution for CRS purposes generally includes banks and other deposit-taking institutions, custodial institutions or entities that hold financial assets for the account of others, investment entities and insurance companies that issue investment-linked life insurance or annuity contracts.
Similar to Foreign Account Tax Compliance Act (FATCA), certain types of entities (notably, superannuation funds) are carved out from the definition of a financial institution for CRS purposes.
Certain retirement and pension accounts, and other tax-favoured accounts, are excluded from the definition of a financial account. For these financial institution and financial account exclusions, the draft exposure legislation links back to the FATCA legislation, with the ability for further exclusions to be added by way of legislative instrument.
The exposure draft legislation mirrors the policies and procedures in the CRS with some small modifications.
The legislation is drafted in a flexible manner and authorises Australian financial institutions to make any of the elections permitted in the CRS in determining their obligations. This should facilitate the ease of implementation of the CRS in Australia.
Alignment to FATCA
As the CRS is based on, and often mirrors the model intergovernmental agreement in relation to FATCA, organisations that have already implemented FATCA have an opportunity to leverage existing people, process and technology solutions.
However, there are certain key distinctions that will make process and system integration difficult. A primary difference between FATCA and CRS is the multilateral nature of the CRS. As certain countries are not committed to the CRS, the on-boarding and due diligence process in jurisdictions that have opted in will be complex. A particular hurdle in this regard is the fact that Australian financial institutions will be required to identify the controlling persons of investment entity account-holders based in non-CRS jurisdictions, whereas this was not the case under FATCA. In addition, there will be an increased volume of data reported under the CRS as the CRS is not focused on one territory but rather multiple.
Other distinctions between the regimes include some differences in definitional scope and the fact that CRS does not use citizenship as an indicium of tax residency.
On the account-holder side, individuals and entities may be required to identify themselves for CRS purposes and self-certify their status to Australian and foreign financial institutions when requested. Account-holders that provide a self-certification to a reporting financial institution that is false or misleading in a material way may be subject to an administrative penalty under the general penalty provisions that taxpayers are subject to.
All taxpayers will need to navigate through this new information reporting regime. In the first instance, clients should consider whether they are subject to the CRS rules, bearing in mind the broad definition of a ‘financial institution’. For those organisations that are in scope, an assessment of how best to manage data, streamline systems and processes while achieving an appropriate level of oversight and governance is now required.
All other taxpayers should be aware of an increased level of scrutiny over their affairs and will at some stage in the future be asked to identify themselves for CRS purposes.