LIC Governance Spotlight: FATCA & CRS

In this update we examine the ATO’s Guidance on the Automatic Exchange of Information regimes under FATCA and CRS as they apply to a Listed Investment Company (LIC). There are a number of reporting obligations that may be imposed on LICs and key dates that need to be met. An implementation timeline is provided at the end of this update.

Background

Australia is party to two (2) Automatic Exchange of Information (AEOI) regimes for the exchange of financial account information with other nations. These regimes are knowns as the:

1. Foreign Account Tax Compliance Act (FATCA) for exchange of financial account information with the United States; and
2. The Common Reporting Standard (CRS) for the exchange of financial account information with other participating nations.

The purpose of the AEOI regimes is to reduce tax evasion by, “global cooperation and sharing of high quality, predictable information between revenue authorities”. The revenue authority in Australia is the ATO who are charged with managing the implementation of FATCA & CRS in Australia. Penalties will apply to those entities that do not comply with the FATCA & CRS regimes.

Implementation

The FATCA & CRS regimes can be complicated in their application to LICs. However, the ATO provides detailed guidance that breaks the implementation of the AEOI into the following broad steps:

1. Determine whether your LIC is a Reporting Financial Institution for the purpose of FATCA and CRS.
2. Register your LIC with the US Internal Revenue Service (IRS) (where required).
3. Review your Financial Accounts to identify Reportable Accounts.
4. Complete due diligence procedures in accordance with FATCA, CRS and domestic law.
5. Report relevant information to the ATO.

Application to LICs

The requirement to collect and provide information to “revenue authorities” is imposed by both FATCA & CRS on ’Financial Institutions’. Australian law defines ‘Financial Institutions’ to include “Investment Entities”. LICs need to seek their own advice on whether their fund, investment structure and business satisfies the definition imposed under FATCA & CRS.

Registration Requirement

Registration is only required under FATCA. LICs subject to FATCA are required to register with the IRS to receive a Global Intermediary Identification Number (GIIN). This is irrespective of whether they receive payments directly from US sources.

Please note that this registration requirement should have been completed at the end of 2016. The US IRS has a registration portal that has registration details here.

Reporting Requirement and Prescribed Due Diligence

LICs subject to FATCA and CRS will be required to report to the ATO account holders whose investments are held or controlled by a foreign tax resident. To determine whether an account needs to be reported, LICs will need to complete the prescribed due diligence procedures detailed in the Intergovernmental Agreement for FATCA and the procedures detailed in the Tax Laws Amendment (Implementation of the Common Reporting Standard) Act 2016 for CRS.

Simply put, CRS will require the LIC to determine whether a holder of securities is a tax resident in a foreign jurisdiction. Under FATCA tax residency can be a result of citizenship or residency.

Due diligence requirements can include an analysis of the shareholder register, AML/KYC procedures and declarations from individual account holders. Although LICs may outsource this function, the responsibility and obligation to ensure the quality and completeness of the due diligence will remain with the LIC.

Please note that the due diligence required on existing accounts and new accounts (starting 1 July 2017) differ.

Implementation Timeline

The following is extracted from the ATO’s guidance on AEOI under FATCA and CRS. The full guidance is available here.

CRS event	CRS timing	FATCA equivalent
Cut-off between Pre-existing and New Accounts	30 June 2017	30 June 2014
Test date for Pre-existing Individual Lower Value Account review threshold	No review threshold	30 June 2014 ($50,000, or $250,000 for cash value insurance or annuity contract only)
Test date for Pre-existing Individual Account High Value review threshold	30 June 2017, 31 December 2017 and 31 December of subsequent calendar years	30 June 2014, 31 December 2015 and 31 December of subsequent calendar years
Test date for Pre-existing Entity Account review threshold	30 June 2017, 31 December 2017 and 31 December of subsequent calendar years ($250,000)	30 June 2014 ($250,000), 31 December 2015 and 31 December of subsequent calendar years ($1,000,000)
Start of New Account due diligence procedures	1 July 2017	1 July 2014
Completion of first review of Pre-existing Individual Accounts that were High Value accounts on 30 June 2017	31 July 2018*	30 June 2015
Completion of first review of Pre-existing Individual Lower Value Accounts	31 July 2019*	30 June 2016
Completion of first review of Pre-existing Entity Accounts	31 July 2018*	30 June 2016
First reporting of Reportable Accounts to the ATO	31 July 2018	31 July 2015
First exchange of Reportable Accounts with exchange partners	30 September 2018	30 September 2015

Please note that there are transitional arrangements in place for LICs in relation to FATCA reporting for the period ended 31 December 2016. Further details are available here.

This update is prepared by the Company Secretarial Team at Boardroom Pty Limited. The update is designed to provide general information and is not designed to replace legal or tax advice or a detailed review of the subject matter nor is it intended to cover all circumstances.

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