Summary

  • FATCA is United States legislation which is designed to enable the IRS to obtain information about offshore accounts held by US. taxpayers.
  • The Australian government is pursuing an intergovernmental agreement with the U.S. but the scope and implementation date for that agreement remains uncertain.
  • Financial institutions in Australia, including fund managers, should understand the possible impact of FATCA for them and be ready for its implementation.

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is U.S. legislation which was enacted in March 2010. FATCA is designed to enable the U.S. Internal Revenue Service (IRS) to obtain information about offshore investments and accounts held by U.S. taxpayers in an effort to deter tax evasion.

FATCA generally requires a foreign financial institution (FFI) to report to the IRS certain information on offshore financial accounts held by U.S. taxpayers. A FFI that is non-compliant will generally be subject to a 30% withholding tax on U.S. sourced payments made to the FFI. Financial institutions which are subject to FATCA include certain Australian fund managers, responsible entities and trustees.

When is FATCA being implemented?

The FATCA legislation is being implemented in stages. In January 2013, the U.S. Department of the Treasury and the IRS issued final regulations implementing FATCA which made a number of changes including to the implementation timetable.

On 7 November 2012, the Australian Treasurer announced that Australia and the U.S. had commenced formal discussions on an intergovernmental agreement (IGA) to ease the compliance burden of FATCA on Australian businesses, based on the Model 1 IGA. The IGA will also facilitate the sharing of information between the ATO and the IRS. Although an IGA is expected to lessen the compliance burdens for Australian FFIs, who would generally not be required to withhold amounts under FATCA, an IGA will still have compliance implications for those Australian financial institutions which are subject to FATCA.

In addition, the content and implementation date for any IGA between Australia and the U.S. remains uncertain. Accordingly, affected FFIs should understand the possible impact of FATCA on them and be ready for its implementation.

The FATCA legislation, including the arrangement for its implementation, is detailed and complex.

Some key dates in relation to becoming a ‘participating’ FFI and withholding include:

Click here to view table.

What do you need to do to be FATCA ready?

To be FATCA ready, responsible entities, trustees and fund managers should:

  • identify whether they will be subject to FATCA and if they are, inform themselves about the implications of FATCA for them;
  • continue to monitor developments including the impact of any IGA entered into by the Australian government;
  • if necessary, review the investment strategies of affected funds which provide exposure to U.S. sourced income or assets;
  • if relevant, determine whether to become a participating FFI and whether doing so is in the best interests of their investors; and
  • where a fund manager wishes to become a participating FFI and enter into an agreement with the IRS, confirm whether any amendments are required to:
    • relevant fund constitutions to facilitate entry into and compliance with the  agreement;  and
    • fund disclosure documents and application forms.