FATCA and CRS: Australia's international tax-information regimes

Two regimes, one purpose

FATCA, enacted in the US in 2010, mandates that Australian financial institutions identify and report accounts held by US tax residents. This information is then transmitted from the Australian Taxation Office (ATO) to the US Internal Revenue Service. Australia’s implementation of FATCA is facilitated through an Intergovernmental Agreement with the US and the Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014.

CRS, or the OECD Common Reporting Standard, functions as a multilateral version of FATCA. Under CRS, Australian Reporting Financial Institutions are required to identify accounts held by tax residents of jurisdictions that participate in the CRS and report this information to the ATO. The ATO subsequently exchanges this data with the relevant partner jurisdictions.

Both FATCA and CRS share a common objective: to improve international tax compliance. They are administered by the ATO, ensuring a consistent approach to the reporting and exchange of financial account information.

Who is a Reporting Financial Institution

A Reporting Financial Institution in Australia encompasses a range of entities involved in financial activities. This includes depository institutions, such as banks and ADIs, custodial institutions, investment entities, and specified insurance companies. These institutions have obligations under both the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).

Investment entities are broadly defined and can include many managed funds. Furthermore, trust structures may be recognised as Investment Entities if they are professionally managed. This classification triggers reporting obligations.

Certain financial institutions are specifically excluded from reporting requirements. Non-reporting financial institutions, such as certain superannuation entities and broadly participating retirement funds, are carved out from these obligations.

Customer due diligence requirements

Financial institutions, known as Reporting Financial Institutions (RFIs), have specific customer due diligence requirements under FATCA and CRS. For new accounts, RFIs must obtain a self-certification of tax residency from the account holder at the point of onboarding. This self-certification must be verified as reasonable, using other due-diligence information available to the RFI. Identifying the beneficial owner identifier is also a key component of this process.

For accounts that existed before the implementation of these regimes, RFIs are required to undertake due diligence. This typically involves applying electronic searches and, above certain thresholds, paper-record searches to identify any indicia of foreign tax residency. This process helps RFIs determine if an account holder has reporting obligations.

The due diligence requirements extend to entities. RFIs must apply controlling-person reporting, which means identifying and reporting the natural persons who control passive non-financial entities. RFIs must retain records relating to these due diligence activities for a period of 5 years after the report year.

Penalties and enforcement

Administrative penalties may apply for non-compliance with FATCA and CRS obligations. These penalties are outlined in Schedule 1 to the Taxation Administration Act 1953 and are generally applied on a per-account and per-period basis.

The Australian Taxation Office (ATO) actively monitors compliance with FATCA and CRS. The ATO has undertaken compliance programs to review reporting financial institutions’ due-diligence frameworks.

Persistent failures to meet obligations can result in formal compliance action being initiated by the ATO.