Australian funds need to consider whether or not they are affected by the US’ FATCA regime.  The US Government recently announced that the application of the regime to foreign funds, initially expected to apply from 1 January 2014, would be delayed until 1 July 2014.  This postponement has provided trustees, custodians and responsible entities of funds with more time to get their house in order.

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) was enacted several years ago to enable the US tax authority (the IRS) to counter tax evasion by US taxpayers by requiring the disclosure of information about their offshore investments.

Why is FATCA relevant to Australian funds?

While the focus of the FATCA regime is on US taxpayers and their investments, the legislation requires a foreign financial institution (FFI) to report to the IRS certain information on the non-US financial accounts held by US taxpayers.  In simple terms, an Australian managed fund may be considered an FFI and may be required to disclose information to the IRS about its US investors or unitholders.

Currently, we are awaiting the release of a draft “Intergovernmental Agreement” (IGA) between Australia and the US.  An IGA with the US will mean streamlined reporting obligations for Australian funds and is expected to remove the risk that Australian funds would be subject to the 30% FATCA withholding tax on their US sourced income.  The trade-off is that the IGA will be brought into legal effect under Australian tax law, so that compliance with FATCA will become an Australian tax compliance obligation.

In short, Australian funds must comply with the FATCA regime or risk being subject to penalties for non-compliance with Australian domestic tax law.

Is FATCA relevant to my fund?

Most Australian managed funds will need to consider whether the FATCA rules apply to them.  The rules may not affect those managed funds whose constituent documents only permit investment in Australian assets or limit their investor intake to Australian residents.

In most cases, some investigation and analysis will be required to make a decision whether or not the FATCA regime poses a significant enough risk that needs to be mitigated or addressed.

Complying Australian superannuation funds may be able to fall within an exemption under the rules that applies to retirement funds.

If FATCA may apply to my fund, what do I need to do?

In order to determine whether FATCA applies and how the fund needs to comply with FATCA will require a collaborative effort across a number of disciplines, requiring input from the investment, legal, finance and tax functions.  It may be that the fund will need to review and update its internal information and reporting systems.

Each fund may need to consider its investment strategy in further detail and the identity of its unitholder base.  It may well be the case that the fund’s constitution, disclosure documents and application forms need to be updated.

Next steps

The trustees, fund managers and custodians of Australian funds will need to consider the extent to which the FATCA regime applies to their funds.  Such an assessment will require a multi-disciplinary approach.  A draft Australian IGA is expected to be released before the end of the 2013 calendar year.  Given the imminent release of the IGA with the US, it is timely to consider the impact of the regime before the practical start-date of 1 July 2014.