US Foreign Account Tax Compliance Act – New information gathering and reporting obligations for funds

  • The new FATCA rules apply to all registered and unregistered managed investment schemes. The trustees, fund managers and custodians of Australian funds will need to consider the extent to which the new regime impacts the fund.
  • Each fund’s internal processes and external investor interfaces (application forms, PDS etc) need to be ready to comply with the new rules from 1 July 2014.
  • From 1 July 2014, funds will need to obtain sufficient information on their new US investors to comply with new FATCA reporting obligations.
  • Funds with pre-existing investors will have additional time to identify whether they need to report on those investors who are US tax resident.
  • Funds may need to register with the US tax authority (IRS) to avoid being subject to a FATCA withholding on US sourced income.

Why are these new obligations imposed on funds?

The US enacted the Foreign Account Tax Compliance Act (FATCA) several years ago to enable the US tax authority to counter tax evasion by US taxpayers by requiring the disclosure of information about their offshore investments.

As a result of the recent signing of an agreement between Australia and the US to improve cross-border tax compliance (the Intergovernmental Agreement), Australian funds need to undertake new reporting to the ATO and check whether their systems are capable of collecting the information they are required to report.

Are these reporting requirements relevant to my fund?

In short, yes.  Registration and reporting obligations, discussed below, are imposed on all applicable managed investment schemes regardless of whether they have US investors or invest in US assets.  Each fund will need to need to assess whether their current processes collect sufficient information in order to enable them to form a view on their compliance obligations or whether new processes need to be implemented.

Complying Australian superannuation funds will generally fall within an exemption from the new rules.

What do I need to do?

New due diligence to be undertaken

Managed funds will be required to undertake due diligence on their pre-existing and new US investors from 1 July 2014 in order to assess whether reporting to the ATO is required.

Each fund will need to review its internal information and reporting systems (and update them accordingly) in order to obtain the information required for the due diligence process.

The purpose of the due diligence process is to enable the fund to determine which of their investors are or could be US tax resident.

New investments from 1 July 2014 will be subject to enhanced reporting requirements to identify US tax resident investors in their funds.

Due diligence reporting obligations on pre-existing investors as at 1 July 2014 will be staggered. Due diligence on high value, pre-existing individual accounts (investments over US$1m) must be completed by 30 June 2015 (and by 31 December 2014 for investments held by Australian financial intermediaries).

Although due diligence is not required on pre-existing or new investments of less than US$50,000, practically, most funds will find it necessary to implement new or enhanced information gathering processes (e.g. application forms) across their entire investor base rather than on a piecemeal basis.

Australian reporting obligations

A fund that has US tax resident investors will need to report this information to the ATO annually.  For the first reporting period, ending on 31 December 2014, the fund will need to lodge a FATCA report by 15 July 2015.

IRS registration – does my fund need to be registered?

Each fund will need to consider whether they need to register with the IRS.  Registration will be necessary to avoid FATCA withholding if the fund receives US sourced income.

Registration with the IRS by 1 January 2015 as a deemed compliant foreign financial intermediary means that the fund can obtain a Global Intermediary Identification Number (GIIN) that can be quoted to avoid a FATCA withholding on their US sourced income.

Disclosure documents

Any documentation that is sent to investors, including PDSs, IMs and Reference Guides, needs to be reviewed to assess whether additional or new disclosures are required and whether that disclosure should take the form of a supplementary or replacement PDS or an website update pursuant to ASIC Class Order 03/237.

Privacy concerns

The IGA and the legislation implementing the IGA should address many of the privacy law compliance issues previously raised regarding FATCA (in particular issues relating to disclosing information to an overseas tax authority).

However funds should review any privacy law compliance or other privacy issues that may arise as a result of their compliance with FATCA.

What if the fund doesn’t comply?

The Government has released draft legislation to mandate compliance with the IGA.

Australian funds must comply with the new reporting regime or risk being subject to penalties for non-compliance with Australian domestic tax law.

If the fund fails to register with the IRS, it runs the risk of being subject to a 30% withholding on receipt of US sourced income.

What needs to be done now?

In preparation for FATCA implementation, fund managers would need to take the time to make sure that the following is in place:

  • appropriate procedures should be put into place to ensure that there are adequate systems for identifying new and pre-existing US tax resident investors. This may include updating of information collection on application forms and implementing procedures to determine which existing investors are US tax residents;
  • consider whether a update to disclosure documents (including PDSs, Information Memorandum and Privacy Policies) is required;
  • review information collection and storage procedures to ensure that due diligence, reporting and record keeping requirements under FATCA are met;
  • register with the IRS if your fund receives US sourced income;
  • undertake training for employees and contractors and ensure that third party services providers such as registry and administration providers are appropriately prepared; and
  • monitor further ATO guidance on this issue.


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