Australia: FATCA compliance now mandatory for certain AFSL holders

As originally announced, the application of FATCA to Australian AFSL holders was optional, with no apparent downside to non-compliance, other than the fact that US-source income may be withheld. However, following Australia entering into the IGA with the United States, FATCA compliance has become mandatory for certain AFSL holders.

The key question is of course, does FATCA apply to me?


FATCA is the Foreign Account Tax Compliance Act, enacted by US Congress in 2010. The purpose of the Act is to improve compliance with US tax laws, particularly in relation to schemes where US reportable income is moved offshore, to and through foreign financial institutions, without being reported to the IRS.

The principal way FATCA does this is by requiring Foreign Financial Institutions (FFIs) to report whether they have US-source clients, or US-source income. Obviously the US government has no jurisdictional power over foreign entities, so to implement the FATCA regime, the Act mandates that US entities must withhold 30% of payments they make to FFIs. This has the potential to have wide ranging operational and financial implications for those entities dealing with US clients, partners, suppliers and/or service providers.

Australia has recently entered into an Intergovernmental Agreement (IGA) with the US that is designed to assist Australian entities captured by FATCA (reporting Australian Financial Institutions) meet their FATCA reporting obligations. While the IGA exempts many Australian Financial Institutions from FATCA compliance, it makes FATCA reporting mandatory for those still covered by it.

Does FATCA apply to me?

This is the key question. Unfortunately answering it is not as simple as whether or not you have US clients. If your organisation meets the definition of an Australian Financial Institution (and does not meet the exceptions, of which there are many), then FATCA will apply to you. This means you will need to implement a due diligence program that determines whether any of your current and future clients are US based or if you or they receive US source revenue.

The key to understanding FATCA, and whether it applies, is in understanding the relevant definitions.

Below are a couple of key definitions:

Australian Financial Institution (AFIs): A Financial Institution in Australia.

Financial Institution: A custodial institution, depository institution, Investment Entity, or specified insurance company.

Investment entity: Any entity that conducts as a business one or more of the following activities or operations for or on behalf of a customer:

  1. trading in money market instruments (cheques, bills, certificates of deposit, derivatives etc.);
  2. foreign exchange;
  3. exchange, interest rate and index instruments;
  4. transferable securities;
  5. commodity futures trading;
  6. individual and collective portfolio management; or
  7. otherwise investing, administering or managing funds or money on behalf of other persons.

Are there any exceptions?

FATCA has a range of exceptions. Four are listed below:

  1. Investment Advisors/Managers: if your activities are limited to giving investment advice or managing portfolios, investment schemes/funds, and you do not hold legal title to the relevant assets, offer custodial services or offer financial accounts, it is likely you will meet this exception. This is designed to exclude financial planners and some managers of investment funds from FATCA. The determinative feature in this exception is whether you hold legal title to the relevant assets, or not.
  2. Superannuation Funds: includes all types of Australian superannuation schemes (including SMSFs).
  3. Local client base financial institution: if at least 98% of your accounts (by value), are held by residents of Australia and New Zealand, you might meet this definition.
  4. Sponsored entity & controlled foreign corporation: if you are controlled and wholly owned (directly/indirectly) by a foreign corporation, share a common electronic accounts system, and the controlling foreign corporation is FATCA compliant (and reporting), then they may be able to report on your behalf and you will be exempt.

The FATCA regime is complex, the application broad, and the exceptions many. If you are a non-super product issuer, provide custodial or depository services, or provide forex, CFD or remittance services then it is likely that FATCA will apply to you.

If you're unsure of its application to your business, seek legal advice.

We are able to look at your business operations and advise as to whether they are impacted by FATCA.

We are also developing a FATCA due diligence policy for reporting AFIs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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