Glossary
The following abbreviations and acronyms are used throughout this explanatory memorandum.
Abbreviation	Definition	
ATO	Australian Taxation Office	
Commissioner	Commissioner of Taxation	
FATCA	Foreign Account Tax Compliance Act	
Intergovernmental Agreement	Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA	
IRS	Internal Revenue Service	
TAA 1953	Taxation Administration Act 1953	
US	United States of America	
USD	US Dollars	

General outline and financial impact
FATCA
Schedule # to this Bill amends Schedule 1 to the Taxation Administration Act 1953 to require Australian financial institutions to collect information about their customers that are likely to be taxpayers in the United States of America and to provide that information to the Commissioner of Taxation who will, in turn, provide that information to the US Internal Revenue Service.
These amendments give effect to the Australian Government’s commitments as set out in the Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA.
Date of effect:  1 July 2014
Proposal announced:  On 6 November 2013, the Government announced its intention to work towards signing and enacting a treaty‑status intergovernmental agreement with the United States of America to enable the financial sector to comply with Foreign Account Tax Compliance Act (FATCA) reporting rules (Treasurer’s Media Release No. 17 of 6 November 2013).
This followed an earlier announcement on 7 November 2012 by the then Treasurer that Australia had commenced formal discussions with the United States of America for an intergovernmental agreement (Treasurer’s Media Release No. 110 of 7 November 2012).
Financial impact:  Nil

Chapter 1	
FATCA
Outline of chapter
1.1	Schedule # to this Bill amends Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to require Australian financial institutions to collect information about their customers that are likely to be taxpayers in the United States of America (US) and to provide that information to the Commissioner of Taxation (Commissioner) who will, in turn, provide that information to the US Internal Revenue Service (IRS).
1.2	These amendments give effect to the Australian Government’s commitments as set out in the Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA (the Intergovernmental Agreement).
Context of amendments
The Foreign Account Tax Compliance Act
1.3	The Foreign Account Tax Compliance Act (FATCA) is a unilateral anti-tax evasion regime enacted by the US Congress as part of the US Hiring Incentives to Restore Employment Act 2010.  FATCA is aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the IRS.  The relevant provisions are contained in the US Internal Revenue Code 1986 and are supplemented by extensive US Treasury FATCA regulations that were issued on 17 January 2013 (and have been subject to subsequent amendment).
1.4	The substantive FATCA requirements for financial institutions generally start on 1 July 2014.  
1.5	From that date, FATCA will require all foreign (that is, non-US) financial institutions, including custodial institutions, depository institutions, investment entities and specified insurance companies, to conclude individual agreements with the IRS under which they will periodically report certain information about their account holders who are US citizens or US resident individuals (or individuals who fail to rebut a presumption of being a US citizen or US resident individual) or are specified entities established in the US or controlled by US persons.
1.6	In order to comply with their reporting obligations, financial institutions will need to follow specific due diligence procedures in identifying all relevant accounts. 
•	The level of due diligence required depends on whether the account is held by an individual or an entity and whether or not the account was opened prior to 1 July 2014.
•	For example, the due diligence requirements generally do not apply to accounts held by individuals unless the account balance exceeds USD 50 000.
1.7	Financial institutions that do not comply with FATCA will be subject to a 30 per cent US withholding tax on their US source income.
1.8	A broad range of Australian financial institutions, including banks, some building societies and credit unions, specified life insurance companies, private equity funds, managed funds, exchange traded funds and some brokers will be subject to FATCA.  As most major Australian financial institutions operate or otherwise invest in the US, the US withholding tax creates a strong commercial incentive for these entities to comply with FATCA. 
1.9	This means that those Australian financial institutions that intend to comply with FATCA would need to commence relevant due diligence procedures from 1 July 2014 in anticipation of reporting to the IRS.  However, Australian privacy laws generally prevent compliance with these US‑based obligations and some Australian State and Territory anti‑discrimination laws could also prevent the interrogation of customer accounts based on US citizenship.
1.10	In recognition of the fact that many countries’ domestic laws would otherwise prevent foreign financial institutions from fully complying with FATCA, the US has developed an intergovernmental agreement approach to manage these legal impediments, simplify practical implementation, and reduce compliance costs for relevant financial institutions.  The US has signed a number of intergovernmental agreements with a range of jurisdictions including Bermuda, Canada, the Cayman Islands, Chile, Costa Rica, Denmark, France, Germany, Guernsey, Hungary, Ireland, the Isle of Man, Italy, Japan, Jersey, Malta, Mauritius, Mexico, the Netherlands, Norway, Spain, Switzerland and the United Kingdom of Great Britain.  A complete list of countries with intergovernmental agreements with the US is available on the US Department of the Treasury’s website. 
Summary of new law
1.11	These amendments insert a new Division, ‘Division 396 — FATCA’, into ‘Part 5-25 — Record-keeping and other obligations of taxpayers’ in Schedule 1 to the TAA 1953.
1.12	To ensure consistency with the Intergovernmental Agreement, these amendments adopt meanings and concepts used in that agreement.  
•	This means the substantive amendments apply to ‘Reporting Australian Financial Institutions’ that maintain at least one ‘U.S. Reportable Account’ in a calendar year.
•	In addition, transitional obligations apply to ‘Reporting Australian Financial Institutions’ that make payments to ‘Nonparticipating Financial Institutions’ in 2015 and 2016. 
Comparison of key features of new law and current law
New law	Current law	
Reporting Australian Financial Institutions that maintain U.S. Reportable Accounts will need to follow specific due diligence procedures and provide information about those accounts as specified in the Intergovernmental Agreement to the Commissioner. 	No equivalent.	
Reporting Australian Financial Institutions that make payments to Nonparticipating Financial Institutions in 2015 and 2016 will need to follow specific due diligence procedures and provide information about those payments as specified in the Intergovernmental Agreement to the Commissioner.	No equivalent.	
Reporting Australian Financial Institutions that report information to the Commissioner will need to keep records for five years that explain the procedures used for determining the information reported. 	No equivalent.	
Detailed explanation of new law
The Australian Intergovernmental Agreement with the US
1.13	Broadly, the Intergovernmental Agreement establishes a framework for reporting by Australian and US financial institutions of some financial account information to their respective tax authorities (being the ATO and the IRS respectively).  Article 25 (Exchange of Information) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income (which has the force of law under subsection 5(1) of the International Tax Agreements Act 1953) requires the tax authorities to automatically exchange that information.
1.14	The Intergovernmental Agreement consists of four parts.  
•	(1) The Agreement which:
–	defines specific concepts used in the Agreement — per Article 1;
–	requires Australia to obtain information about ‘Reportable Accounts’ — per Article 2;
–	sets out the process for exchanging information with the US — per Article 3;
–	specifies how ‘Reporting Australian Financial Institutions’ will be treated under FATCA — per Article 4;
–	provides for compliance and enforcement mechanisms — per Article 5;
–	articulates a mutual commitment between Australia and the US to enhance the effectiveness of information exchange and transparency — per Article 6;
–	grants Australia the benefit of more favourable terms under Article 4 or Annex I provided by the US to other jurisdictions — per Article 7;
–	allows for consultation and amendment of the agreement and specifies the terms of the agreement — per Articles 8 and 10; and
–	incorporates Annex I and Annex II as integral parts of the agreement — per Article 9.
•	(2) Annex I requires Reporting Australian Financial Institutions to apply specific due diligence procedures in identifying ‘U.S. Reportable Accounts’ and accounts held by ‘Nonparticipating Financial Institutions’.
•	(3) Annex II deems specific Australian ‘Entities’ to be complying with or exempt from FATCA or specific Australian accounts to be excluded from the definition of ‘Financial Accounts’ for the purposes of FATCA.
•	(4) The Memorandum of Understanding to the Agreement. 
1.15	Paragraph 4 of Article 5 of the Intergovernmental Agreement requires Australia to implement measures, as necessary, to prevent financial institutions from adopting practices designed to circumvent the relevant reporting obligations.  Although the Australian Government does not propose to introduce a specific anti‑avoidance rule at this stage, it has given an undertaking to the US that it will do so if it becomes apparent that Reporting Australian Financial Institutions are adopting practices designed to circumvent their reporting obligations.
1.16	It is important to note that a Reporting Australian Financial Institution that complies with all of its reporting obligations under these amendments will still need to comply with additional obligations directly imposed by the IRS to avoid becoming subject to a 30 per cent US withholding tax on its US source income.  These additional obligations are contained in subparagraphs (1)(c), (d) and (e) of Article 4 of the Intergovernmental Agreement.
1.17	How each Reporting Australian Financial Institution chooses to comply with these additional obligations will be a matter for that institution and the IRS.  Although the ATO has a role in acting as an intermediary between Reporting Australian Financial Institutions and the IRS, the formal obligations on the ATO under Article 5 of the Intergovernmental Agreement are limited to applying Australia’s domestic taxation laws, where applicable, to resolve any non‑compliance.  Accordingly, these obligations will only apply in situations where the non‑compliance has led to a contravention of Australia’s domestic taxation laws. 
The reporting obligation — U.S. Reportable Accounts
1.18	Reporting Australian Financial Institutions that maintain one or more U.S. Reportable Accounts at any time during a calendar year will need to give a statement to the Commissioner in relation to each of those accounts.  This statement must contain all of the necessary information about that account that would allow the Australian Government to fulfil its obligations under the Intergovernmental Agreement.  [Schedule #, item 2, subsections 396-5(1) and (2) of Schedule 1 to the TAA 1953]
1.19	As noted in paragraph 1.12 the concepts of Reporting Australian Financial Institutions and U.S. Reportable Accounts are defined in Article 1 of the Intergovernmental Agreement.  However, generally speaking:
•	banks, some building societies and credit unions, specified life insurance companies, private equity funds, managed funds, exchange traded funds and some brokers will typically be Reporting Australian Financial Institutions; and
•	U.S. Reportable Accounts will typically include cheque and transaction accounts, savings accounts, term deposits, debt interests and equity interests (including derivatives).
Superannuation entities, including pooled superannuation trusts, and government entities will generally not be Reporting Australian Financial Institutions — per Annex II of the Intergovernmental Agreement.
1.20	However, paragraph 7 of Article 4 of the Intergovernmental Agreement allows Australia to permit Australian Financial Institutions to use a definition in the relevant US Treasury regulations in lieu of a corresponding definition in the Intergovernmental Agreement where the application of such a definition would not frustrate the purposes of the Agreement.
1.21	In complying with this reporting obligation, an Australian Financial Institution may elect to use any alternative definition in the relevant US Treasury regulations, provided the use of that definition does not frustrate the purposes of the Intergovernmental Agreement.  Such a definition would be within the meaning of the Intergovernmental Agreement.  An entity must have made any relevant elections by the time it gives the statement to the Commissioner and the way the entity has prepared its statement provides sufficient evidence of any elections it may have made.  That said, an entity that provides a statement to the Commissioner has an obligation to keep necessary records about the procedures it has used to determine the information given to the Commissioner (including any elections made) — further information about this obligation is contained in paragraphs 1.43-1.49.
1.22	Article 2 of the Intergovernmental Agreement sets out Australia’s obligations in relation to the collection of information about U.S. Reportable Accounts.  This includes collecting the following information, for example, in relation to each U.S. Reportable Account:
•	the name, address and US Tax Identification Number of each Specified US Person that is an Account Holder (or each Specified US Person that is a Controlling Person, as well as the name, address and US Tax Identification Number of the controlled Non-US Entity);
•	the account number or equivalent;
•	the name and identifying number of the Reporting Australian Financial Institution;
•	the account balance or value at the end of the calendar year (or, if the account was closed during the year, immediately before its closure);
•	the total amount of income generated by the account (such as interest, dividends) and paid into the account (or with respect to the account) — but only with respect to 2015 and subsequent years; and
•	in some cases, the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year — but only with respect to 2016 and subsequent years. 
1.23	The statement to the Commissioner must be given in the ‘approved form’.  The concept of approved forms is used in Australia’s domestic taxation laws to provide the Commissioner with administrative flexibility to specify the precise form of information required and the manner of providing it.  [Schedule #, item 2, subsections 396-5(3) and (4) of Schedule 1 to the TAA 1953]
1.24	Section 388-50 of Schedule 1 to the TAA 1953 provides the legislative basis for the use of approved forms.  Of note, subsection 388‑50(2) allows the Commissioner to combine more than one statement in the one approved form and paragraph 388-50(1)(c) allows the Commissioner to require any necessary additional information. 
1.25	Each statement is due to the Commissioner by 31 July of the following year to which the information relates.
•	However, section 388-55 of Schedule 1 to the TAA 1953 allows the Commissioner to defer the time that entities must lodge a statement in the approved form.
•	This means Reporting Australian Financial Institutions may lodge these statements by a later date where that has been approved by the Commissioner.
[Schedule #, item 2, subsection 396-5(5) of Schedule 1 to the TAA 1953]
1.26	The ATO has published a range of information and guidance about how the Commissioner administers the approved form provisions.  In particular, practice statement PS LA 2005/19 provides information about the processes for approving an approved form and practice statement PS LA 2011/15 provides information about general lodgement obligations and the process for seeking to defer these obligations.
The requirement to follow specific due diligence procedures 
1.27	In effect, complying with this reporting obligation will require all Reporting Australian Financial Institutions that maintain Financial Accounts (within the meaning of the Intergovernmental Agreement) to determine if they maintain any U.S. Reportable Accounts.  This requires applying the due diligence procedures specified in the Intergovernmental Agreement to determine the information to be reported.  [Schedule #, item 2, section 396-20 of Schedule 1 to the TAA 1953]
1.28	Annex I to the Intergovernmental Agreement specifies these due diligence procedures.  However, Clause C of Section I of Annex I allows Australia to permit Reporting Australian Financial Institutions to elect to apply the due diligence procedures specified in the US Treasury regulations as an alternative to the procedures described in Annex I to determine whether an account is a U.S. Reportable Account or not.  
1.29	In complying with the due diligence obligations, a Reporting Australian Financial Institutions may elect to use any alternative procedures described in the US Treasury regulations.
Consequences of not complying
1.30	Australia’s domestic taxation laws contain a range of sanctions for entities that do not comply with their reporting obligations.  Specifically:
•	Division 284 of Schedule 1 to the TAA 1953 sets out the penalties that apply to entities that make false or misleading statements about tax-related matters; and
•	Division 286 of Schedule 1 to the TAA 1953 sets out the penalties that apply to entities that fail to lodge statements on tax-related matters in time.
1.31	This means, for example, that:
•	a Reporting Australian Financial Institution that makes a false or misleading statement because of an intentional disregard of Australia’s domestic taxation laws may be liable to an administrative penalty of 60 penalty units — per table item 3A of subsection 284-90(1) of Schedule 1 to the TAA 1953; 
•	a Reporting Australian Financial Institution that makes a false or misleading statement through recklessness to the operation of Australia’s domestic taxation laws may be liable to an administrative penalty of 40 penalty units — per table item 3B of subsection 284-90(1); or
•	a Reporting Australian Financial Institution that makes a false or misleading statement because of a failure to take reasonable care to comply with Australia’s domestic taxation laws may be liable to a penalty of 20 penalty units — per table item 3C of subsection 284-90(1).
1.32	Similarly, a Reporting Australian Financial Institution that fails to provide a statement on time or in the approved form may be liable under subsection 286-80(2) of Schedule 1 to the TAA 1953 to a base administrative penalty of one penalty unit for each period of up to 28 days from when the document was due, up to a maximum of five penalty units (subsections 286-80(3) and (4) of Schedule 1 to the TAA 1953 increase these penalty amounts for some entities).  This could include a Reporting Australia Financial Institution that fails to identify any U.S. Reportable Accounts that it maintains and lodge a statement with the Commissioner.
1.33	Section 4AA of the Crimes Act 1914 provides the value of a penalty unit.  The current value is $170.
1.34	Division 298 of Schedule 1 to the TAA 1953 contains a range of machinery provisions relating to this penalty framework.  This includes section 298-20 which allows the Commissioner to remit all, or part, of an administrative penalty and section 298-30 which allows entities to object to the Commissioner’s penalty assessment.
1.35	The ATO has also published a wide range of information and guidance about the operation of this penalty regime.  Relevant practice statements include PS LA 2012/4 which relates to false and misleading statements and PS LA 2011/19 which relates to failing to lodge.
1.36	It is important to note that a Reporting Australian Financial Institution that fails to comply with this reporting obligation may also be deemed by the IRS to be a Nonparticipating Financial Institution under subparagraph 2(b) of Article 5 of the Intergovernmental Agreement notwithstanding any compliance action undertaken by the ATO using Australia’s domestic taxation laws.
The reporting obligation — payments to Nonparticipating Financial Institutions
1.37	As noted in paragraph 1.12, Reporting Australian Financial Institutions that make payments to Nonparticipating Financial Institutions in 2015 and 2016 will also need to provide information about this to the Commissioner.
1.38	Specifically, Reporting Australian Financial Institutions that make payments to Nonparticipating Financial Institutions in 2015 and 2016 will need to give a statement to the Commissioner in relation to each of these payments.  Each statement must contain all of the necessary information about those payments that would allow the Australian Government to fulfil its obligations under the Intergovernmental Agreement.  [Schedule #, item 2, subsections 396-10(1) and (2) of Schedule 1 to the TAA 1953]
1.39	This statement is due to the Commissioner by 31 July of the year following the year to which the information relates and must be given in the approved form.  Paragraphs 1.23‑1.25 provide further information about the consequences of providing these statements in the approved form.  [Schedule #, item 2, subsections 396-10(3), (4) and (5) of Schedule 1 to the TAA 1953]
1.40	Reporting Australian Financial Institutions that provide such a statement will need to apply the due diligence procedures specified in the Intergovernmental Agreement in determining the information to be contained in that statement.  [Schedule #, item 2, section 396-20 of Schedule 1 to the TAA 1953]
1.41	In complying with these due diligence obligations, a Reporting Australian Financial Institutions may elect to use any alternative procedures described in the US Treasury regulations as specified in the Intergovernmental Agreement under Clause C of Section I of Annex I.
1.42	A Reporting Australian Financial Institution that does not comply with this obligation may be liable to specific sanctions under Australia’s domestic taxation laws and may also be deemed by the IRS to be a Nonparticipating Financial Institution.  Paragraphs 1.30 to 1.36 provide further details about these different sanctions.
The requirement to keep records of relevant procedures
1.43	Similar to Australia’s income tax regime and the lodgement of income tax returns, the reporting obligations on Reporting Australian Financial Institutions will operate on a self-assessment basis.  This means that whilst the Commissioner may initially accept an entity’s statement at face value, the Commissioner may subsequently seek to verify the accuracy of that statement, particularly if there are potential compliance risks.
1.44	Accordingly, reporting entities will need to keep adequate records about the procedures they used in preparing the relevant statement to ensure the Commissioner can properly assess whether they have, in fact, complied with their reporting obligations.  This record‑keeping obligation is similar to other record keeping provisions in Australia’s domestic taxation laws.
1.45	Specifically, a Reporting Australian Financial Institution that provides a statement to the Commissioner needs to keep records for five years (from the date of providing that statement to the Commissioner) that:
•	correctly record the procedures by which it determined what information to include in the statement; and
•	are in English, or are readily accessible and easily convertible into English.
[Schedule #, item 2, section 396-25 of Schedule 1 to the TAA 1953]
1.46	This record-keeping obligation particularly applies in relation to the due diligence procedures followed by the Reporting Australian Financial Institution in identifying relevant accounts or payments as well as any elections made by the institution in relation to terms used in the Intergovernmental Agreement.  However, entities need not create specific records just to comply with this obligation.  Internal guidelines or similar documents about the procedures relevant staff should follow, for example, may be sufficient, particularly if there is also evidence that staff do, in fact, routinely follow these guidelines.
Consequences of not complying
1.47	Section 288-25 of Schedule 1 to the TAA 1953 provides that an entity that fails to keep or retain records as required by the taxation laws is liable to an administrative penalty of 20 penalty units.
1.48	The ATO has published a practice statement, PS LA 2005/2, which provides further information about these record keeping obligations.
1.49	In addition, a Reporting Australian Financial Institution that fails to keep adequate records may be exposed to the possibility of being deemed by the IRS to be a Nonparticipating Financial Institution.
Consequential amendments
1.50	These amendments refer to the Intergovernmental Agreement as the ‘FATCA Agreement’.  [Schedule #, item 2, section 396-15 of Schedule 1 to the TAA 1953]
1.51	In addition, these amendments amend the definitions in section 995-1 of the Income Tax Assessment Act 1997 to incorporate a reference to the FATCA Agreement.  [Schedule #, item 1, subsection 995-1(1) of the Income Tax Assessment Act 1997]
1.52	These amendments also insert relevant guide material for Division 396.  [Schedule #, item 2, section 396-1 of Schedule 1 to the TAA 1953]
Application and transitional provisions
1.53	These amendments commence on Royal Assent.
1.54	These amendments apply in relation to:
•	all U.S. Reportable Accounts maintained by Reporting Australian Financial Institutions on or after 1 July 2014 [Schedule #, item 3, paragraph (1)]; and 
•	any payments made in 2015 or 2016 by Reporting Australian Financial Institutions to Nonparticipating Financial Institutions [Schedule #, item 3, paragraph (2)].