Five benefits of the IGA for Australian financial institutions

You will not:

  • generally be subject to FATCA withholding;
  • have to enter into individual FFI agreements with the IRS;
  • have to report account holder information directly to the IRS;
  • have to close the accounts of “recalcitrant account holders”; and
  • have to deduct FATCA withholding from US withholdable payments they make to non-“participating” financial institutions, except in certain limited circumstances.

Five potential disadvantages of the IGA for Australian financial institutions

  • There is no escape, you must comply with FATCA;
  • Obligations under the IGA do not depend on you having US clients or receiving US source income;
  • You need to be ready by 1 July 2014;
  • It is not just the ATO who will want to know that you are FATCA compliant;
  • You may be a “financial institution” under the IGA even if you do not know it!

Key obligations for Australian financial institutions under the IGA

  • Registration with the IRS as a deemed compliant financial institution and obtaining a Global Intermediary Identification Number (GIIN) by 1 January 2015
  • Conduct FATCA due diligence on existing and new account holders
  • Annual reporting to the ATO on “US reportable accounts”, “recalcitrant account holders” and payments made to non-“participating” financial institutions.
  • Reporting to US payors on US source withholdable payments made to non-“participating” financial institutions in certain circumstances so that the US payor may deduct the necessary FATCA withholding

Next steps for the Australian Government

The Australian government must now pass domestic legislation to impose the IGA obligations into Australian law and to address privacy law issues in relation to the collection, use and disclosure of personal information that would otherwise arise under the IGA due diligence and reporting obligations.

Who gets an exemption?

Certain financial institutions are exempted from the IGA’s due diligence and reporting requirements. Also, certain types of accounts and products are excluded from FATCA.

Importantly, Australian superannuation entities and pooled superannuation trusts are to be exempt beneficial owners

Exempted and deemed-compliant financial institutions include:

  • the Australian Government, State and local governments and local authorities and their wholly owned agencies or instrumentalities, including certain named entities;
  • the Reserve Bank of Australia;
  • certain international, intergovernmental and supranational organisations;
  • superannuation entities and public sector superannuation schemes (including exempt public sector superannuation schemes) as defined in the Superannuation Industry (Supervision) Act 1993)
  • constitutionally protected funds and pooled superannuation trusts, as defined in the Income Tax Assessment Act 1997; 
  • certain local investment vehicles;
  • small local banks and deposit-taking institutions and certain qualified credit card issuers;
  • certain sponsored investment entities and trustee-documented trusts;
  • certain investment managers and investment advisors;
  • collective investment vehicles where the interests are held by certain types of investors (e.g. exempt beneficial owners, financial institutions that are not non-participating financial institutions etc).

Short term reprieve for listed FFI’s from certain obligations

The IGA provides for a transition period from the due diligence and reporting obligations for investment entities whose interests are quoted on the ASX (e.g. listed funds and quoted ETFs). This transition period is until 1 January 2016. Unresolved issues remain about how such a transition period will work for brokers, possible amendments to the CHESS system and whether such changes will occur prior to the transition period. What’s more, reporting financial institutions will still have to comply with other obligations under the IGA during the transition period.

Even if you are exempt, are you sure FATCA will not impact your investment decisions?

Financial institutions that can rely on Annex II will still need to consider FATCA as part of their business activities and relationships with other financial institutions.

Investors and Australian superannuation funds that invest in an offshore fund should consider the FATCA status of the offshore fund as part of its investment due diligence process. This is to ensure that its interest in the offshore fund and returns it receives from such fund will not have suffered FATCA withholding.

What should Australian financial institutions do now?

Your FATCA compliance program should include:

  • identifying the financial institutions in your “expanded affiliated group” and the financial accounts maintained;
  • registering with the IRS on the FATCA portal as a deemed compliant financial institution and obtaining a GIIN;
  • understanding your due diligence and reporting obligations;
  • updating your systems, processes and account opening documentation to comply with the due diligence and reporting requirements;
  • identifying whether any of your offshore group members are “non-participating FFIs” and, if so, procuring that they comply with certain rules set out in the IGA to protect your FATCA status being tainted or adversely affected;
  • negotiating FATCA provisions in transactional documentation and ensuring that that you are not subject to FATCA withholding in offshore deals;
  • determining whether your are likely to make US source withholdable payments to non-“participating” financial institutions and if so, assessing how the IGA provisions for reporting to US payors will affect you.

Australian financial institutions should address FATCA compliance as a matter of urgency, given the commencement of the IGA obligations on 1 July 2014.