While the Australian Taxation Office (ATO) is taking a pragmatic approach to the inability of listed investment entities to obtain self-certifications from investors prior to them acquiring securities in that entity, the ATO has raised concerns about reasonableness checks not being conducted on self-certifications received from investors and also flagged that the US Internal Revenue Service (IRS) will be examining the provision of US Taxation Identification Numbers (TINs) in FATCA reports for the 2020 calendar year.
The Treasury is also working on legislative change to facilitate listed investment entities being able to collect self-certification pre-trade.
The ATO provided a teleconference update to an industry group on 17 December 2020 in relation to Foreign Account Tax Compliance Act (FATCA)/ Common Reporting Standard (CRS) compliance issues and recent developments.
Collection of self-certification on pre-trade basis
It has been an ongoing issue that the current Australian regulatory regime does not allow listed investment entities (LIEs) to comply with the requirement under both FATCA and CRS to collect self-certification from investors on a pre-trade basis.
While the ATO acknowledges the legislative limitations, it still expects that LIEs use best endeavours to collect self-certifications from investors post-trade. The ATO expects LIEs to follow-up with investors that have not provided self-certification immediately post-trade, and then at least twice-yearly subsequently.
Treasury has been working in consultation with the ATO on legislative changes to address this gap. A number of options are still being considered but the ATO preference is for a pre-trade solution.
The ATO is undertaking a program of work with Reporting Financial Institutions in relation to CRS compliance. The ATO has indicated that they expect reasonableness checks to be conducted on self-certification provided by investors and are concerned that some third party providers (eg. share registries that collect self-certification on behalf of LIEs) are not doing this. The ATO is not focused on missing self-certification where investors fail to provide this, and in these circumstances, the ATO considers it sufficient if the investor is followed up a couple of times a year (as noted above).
Taxpayers should review whether checks are included in their internal processes after collecting self-certification, or where the collection of self-certification is outsourced, they should review the procedures of the third party provider and press for further measures if they are insufficient. Taxpayers should also ensure that the policies and procedures that they (or third parties) have in place are documented.
The ATO emphasised that the IRS is the key decision maker in relation to FATCA compliance activities. In March 2020, the IRS wrote to Australia about US TINs and DOBs missing from FATCA reports. The ATO contacted the relevant entities to discuss their obligations for next year when this will be mandatory.
Specifically, transitional relief under IRS Notice 2017-46 applied in relation to TINs up until 31 Dec 2019, but from the 2020 calendar year, FATCA reports with missing or invalid TINs will generate an error message. The IRS will evaluate in these scenarios whether there is significant non-compliance, and the absence of a TIN does not automatically mean there is significant non-compliance, but it will depend on the reasons why the TIN could not be obtained and whether the entity had adequate procedures. If it is determined that there is significant non-compliance, the entity will have at least 18 months to correct the TIN error before the IRS takes any further action. This is outlined on the IRS’s “FATCA – FAQs General” webpage, under Question 3 for Reporting.
Taxpayers should review their US reportable account holder information for missing TINs and consider following up with the relevant account holders.
Tax administration penalties
The ATO is not contemplating applying general penalties under the Taxation Administration Act 1953 (Cth) (eg. failure to lodge penalty) in the context of FATCA. The one penalty unit per investor administrative penalty may be applied where the post-trade self-certification procedures for CRS (as noted above) are not followed.
Taxpayers should review their self-certification systems to ensure reasonableness checks are being conducted, investors who fail to provide self-certification are followed up a couple of times each year and that US TINs have been collected for US reportable account holders. Contact us for an assessment of any gaps.