The new Common Reporting Standard (CRS) regime will apply to most Australian managed investment schemes from 1 July 2017. Additional procedures for collecting information from new investors will need to be introduced from this date and additional work will be required in respect of existing investors.

Overview of CRS

Many funds have implemented new processes for collecting information from investors to accommodate reporting and registration obligations under the FATCA1 regime.

Following the implementation of the FATCA regime, the OECD created the CRS, a set of rules for the exchange of financial account information between foreign jurisdictions. Many countries have signed up to the CRS and Australia has now passed law that imposes CRS obligations on Australian financial institutions (AFIs)2.

In broad terms, the CRS is similar to the FATCA regime in imposing reporting obligations in respect of managed funds, but the CRS has far broader application as it will require Australian funds to report on investors who are resident in all countries, and not just US residents, as required under FATCA.

The regime applies to most AFIs, which will broadly cover most Australian managed funds. The CRS regime requires funds to collect information from all investors regarding their residency status and report the details of non-residents to the ATO annually.

Penalties apply if the managed fund fails to comply with the CRS or if the reports they provide to the ATO are false or misleading (because the fund has failed to comply with its obligations).

Which managed funds are subject to the CRS regime?

The CRS regime will apply to AFIs. A managed fund will be a reporting entity under the CRS if it is any one of the following types of ‘Financial Institution’:

  • a Custodial Institution
  • a Depository Institution
  • an Investment Entity or
  • a Specified Insurance Company.

Most investment funds will be a reporting financial institution under the ‘Investment Entity’ category, of which there are two types:

  • The first (Type A) broadly includes an entity that primarily conducts specified investment and funds management activities as a business for or on behalf of customers.
  • The second (Type B) primarily (at least 50%) derives its gross income from investing or trading in financial assets and is managed by another entity, such as a trustee/responsible entity or its funds are managed by a professional investment manager that is a Financial Institution (a ‘Type A’ entity).

Most managed funds that are professionally managed by an investment manager will likely fall into the Type B category, but the position should be verified in each case. Funds that only hold direct interests in property may not be subject to the CRS regime.

CRS has fewer non-reporting financial institution exemptions than FATCA and it is, therefore, possible that Australian financial institutions that do not need to report under FATCA will have reporting obligations under the CRS.

What is reported to the ATO?

In broad terms, the ‘due diligence’ procedures in the CRS that an AFI must carry out are designed to identify accounts which are held by non-residents.

For accounts opened on or after 1 July 2017, the commencement of the CRS, the fund will generally be required to ask the person opening the account to certify their residence for tax purposes, unless an exemption from reporting applies. Practically speaking, application forms will need to be updated to assist in the collection of this information.

If the person is tax resident outside Australia, irrespective of whether that jurisdiction has adopted the CRS, then the details of the account (‘reportable accounts’) still need to be reported to the ATO.

For accounts existing at the date of commencement of the CRS (‘pre-existing accounts’), the general requirement is for the fund to use the information it has on file to establish whether information about the account holder needs to be reported unless the account holder is covered by an exemption. In some cases, additional information may need to be sought from the investor.

The annual reporting of reportable accounts must be carried out using an XML schema report. The report to the ATO must provide the name, address, tax identification number, date of birth (if an individual) and residence of the relevant account holder. If there are no foreign accounts, a nil report can be filed with the ATO but is not required.

What are the critical timelines for CRS?

As CRS starts on 1 July 2017, the following table outlines the key time critical dates for a managed fund.

CRS event CRS timing
Cut-off between Pre-existing and New Accounts 30 June 2017
Start of New Account due diligence procedures 1 July 2017
Completion of first review of Pre-existing Entity Accounts (accounts over A$250,000) 31 July 2018*
Completion of first review of Pre-existing Individual Accounts that were High Value accounts (more than A$1 million) on 30 June 2017 31 July 2018*
Completion of first review of Pre-existing Individual Lower Value Accounts (accounts up to A$1 million) 31 July 2019*

*Pre-existing accounts as at 30 June 2017 are retested every 31 December to determine whether they have moved from a Lower Value account to a Higher Value account.

How does CRS operate with FATCA?

The CRS does not alter FATCA obligations, but in order to be able to comply with reporting processes under the CRS, the fund may need to change and tailor their processes, such as the application form, previously designed solely for FATCA.

In addition, CRS reports to the ATO are separate data files to those provided for FATCA.

While the reporting theme of the CRS regime is similar to FATCA, there are a number of differences. It may be the case, for example, the accounts were exemption from reporting under FATCA because they were subject to a particular exemption or below a reporting threshold (for example, the ‘local client base’ and financial institutions with only low-value accounts exemptions under FATCA), may not be exempt under the CRS regime.

While there is also a registration obligation under the FATCA regime, no such registration is required under the CRS regime at this stage.

What should you be doing?

Trustees of managed funds will need to consider to whether their funds are an ‘Australian Financial Institution’. If they are, they will need to:

  • update their application forms so that new accounts from 1 July 2017 can be identified and the necessary information be obtained from the investor
  • implement procedures to identify which, if any, of their pre-existing investors (investors as at 30 June 2017) need to be reported to the ATO and
  • report all reportable investors to the ATO in the specified manner in the timeframes set out in the CRS.