The new CRS regime is likely to apply to Australian managed investment schemes and investment entities of family offices from 1 July 2017. Understanding your obligations now is therefore critical.
Overview
From 1 July 2017, Australian Financial Institutions will need to start applying the Common Reporting Standard (“CRS”) in Australia. The CRS is very similar to FATCA, however it will have much broader application and will run parallel (and in addition) to FATCA.
The meaning of the term Australian Financial Institution is very broad and will cover most managed investment schemes, as well as a number of investment entities of family offices.
The CRS will require Australian Financial Institutions to report details of non-residents that hold Reportable Accounts to the ATO on an annual basis. Penalties will apply to those entities that are not compliant with the new CRS regime.
The following is just a brief summary of the CRS regime, which spans over 600 pages of legislation and guidance materials from the ATO and the OECD. For further details about how CRS may apply to your entities, please contact Pitcher Partners.
What is an Australian financial institution under CRS?
Broadly speaking, there are four types of financial institutions under CRS. They are: (1) an Investment Entity; (2) a Custodian Institution; (3) a Depository Institution; and (4) a Specified Insurance Company. The category that is more likely to apply to an entity is the first category, being an Investment Entity.
There are two types of Investments Entities. The first (Type A) broadly includes an entity that primarily conducts (as a business) specified investment activities for or on behalf of customers. The second (Type B) primarily derives its gross income from investing or trading in Financial Assets and is an entity that is managed by a Financial Institution.
Example: Family Trust that is professionally managed
This example helps to demonstrate the breadth of the new CRS regime. Assume that the ABC Trust is a trust that earns more than 50% of its gross income from investing, reinvesting or trading in financial assets. The ABC Trust has engaged a professional manager, Investment Advisors Pty Ltd, which is in the business of managing and administering financial investments.
Investment Advisors Pty Ltd would likely satisfy the definition of a “Type A” Investment Entity as it is in the business of conducting investment activities on behalf of customers.
As the ABC Trust derives more than half of its income from investing activities and is an entity that is managed by another Financial Institution, it would also likely satisfy the definition of being a “Type B” Investment Entity.
We note that this is a simple example and that the term “managing an entity” involves one entity having a significant degree of discretionary decision-making and responsibility for the other entity’s business. Accordingly, appropriate analysis will need to be conducted on a case by case basis to determine the role of the professional manager in each case and whether the provisions will have application.
What is reported to the ATO?
In simple terms, the CRS requires an Australian Financial Institution to report accounts held by a foreign resident or accounts held by an entity controlled by a foreign resident.
It will not always be possible to determine whether an account will be reportable, whether a person is a foreign resident, or whether an entity is foreign controlled. Accordingly, due diligence procedures are prescribed so that the Australian Financial Institution can determine whether such accounts are to be reportable or not.
The due diligence procedures are different for accounts that exist prior to 1 July 2017 and for new accounts established on or after 1 July 2017. The procedures also depend on the value of the account held and whether the account is held by an individual or an entity.
If there are Reportable Accounts, the Financial Institution must report certain details to the ATO in an XML schema report. The report to the ATO must provide the name, address, tax identification number, date of birth (if an individual) and residence of the relevant account holder. The report must also provide the account number, the year-end account balance, the total amount paid or credited to the account holder. The first reporting period is from 1 July to 31 December 2017, and must be reported to the ATO by 31 July 2018. If there are no foreign accounts, a nil report is not required (but can be lodged).
What are the critical timelines for CRS?
As CRS starts on 1 July 2017, the following table outlines the key time critical dates that will need to be adhered to by a Financial Institution.
| CRS event |
CRS timing |
| Cut-off date of a Pre-existing Account and a New Account |
30 June 20017 |
| Start of New Account due diligence procedures |
1 July 2017 |
| Completion of first review of Pre-existing Individual Accounts that were High Value accounts on 30 June 2017 |
31 July 2018 |
| Completion of first review of Pre-existing Individual Lower Value Accounts on 30 June 2017 |
31 July 2019 |
| Completion of first review of Pre-existing Entity Accounts |
31 July 2018 |
| First reporting of Reportable Accounts to the ATO |
31 July 2018 |
| First exchange of Reportable Accounts with exchange partners |
30 September 2018 |
In addition to the above dates, accounts are retested at 31 December 2017 and 31 December of each subsequent calendar year to determine whether they have moved from a Lower Value account to a Higher Value account.
How does CRS interact with FATCA?
While CRS is similar to FATCA, there are a number of differences. For example, US residents that are excluded from reporting under FATCA (e.g. due to an exemption or a certain transaction threshold) may need to be reported under CRS where such an exemption or transaction threshold does not exist.
In many cases, the CRS provisions are more aligned to those contained in the FATCA regulations contained in US law, rather than the rules contained in the FATCA Intergovernmental Agreement (IGA) signed with the Australian Government.
The IGA allows an entity to choose to utilise the FATCA regulations rather than the IGA. This can help to align the processes for FATCA and CRS as much as possible, so that a dual system is not required in many cases.
It is therefore important that Australian Financial Institutions appropriately understand the differences between the two regimes and ensure that FATCA and CRS reporting is appropriately conducted.
What should you be doing?
For managed investment schemes and investment companies, it is critically important for you to start considering how the CRS regime may potentially apply. There is a basic four step process that we recommend you adopt, being:
- Identifying whether the relevant entity is an Australian Financial Institution.
- Reviewing all Financial Accounts of the entity.
- Identifying all Reportable Accounts of the entity, by:
- Applying Due Diligence procedures to pre-existing accounts
- Applying Due Diligence procedures to new accounts.
- Reporting the relevant information to the ATO by the required timeframes.
While these procedures can be performed manually, there are a number of software applications that can assist in the implementation of CRS. These programs can be incorporated into your KYC, AML and FATCA procedures to help simplify the administrative requirements of the new CRS regime.
Pitcher Partners can assist in any of the steps required to help you understand your CRS obligations and have worked with software providers that can provide solutions for your business. Please call us to organise a meeting or to obtain further information.
