Banks to share customer details with the world

Australian financial institutions will be required to provide financial information relating to foreign tax resident clients to governments worldwide under the Common Reporting Standard (CRS), if draft legislation introduced into Parliament in December 2015 comes into effect.

The CRS is a global reporting regime developed by the OECD and non-OECD G20 countries. Under the CRS, governments will share financial account information collected from ‘Reporting Financial Institutions’ to facilitate the fight against offshore tax evasion.  Currently, over 100 countries, including Australia, have indicated they will implement the CRS.

Obligations are already imposed on Australian financial institutions by the US FATCA (Financial Account Tax Compliance Act) regime, broadly requiring them to report information on US account holders and in some cases US individuals who control entity account holders. The CRS is largely modelled on that reporting regime to minimise compliance costs, but the proposed reporting will apply to all foreign tax resident account holders and relevant controlling individuals.

The proposed regime will apply to Australian ‘Reporting Financial Institutions’. This term is given a wide meaning, and will include banks, deposit-takers, custodians, brokers that hold financial assets, investment entities such as managed funds and certain insurance companies. There are a small number of exclusions for ‘Non-Reporting Financial Institutions’, including government entities and pension funds.

The scope is slightly wider than FATCA reporting financial institutions, as certain exclusions from FATCA have not been replicated (eg, financial institutions with a local client base, small ADIs and sponsored investment entities). Also, the Australian Commissioner of Taxation may deem an entity to be a Reporting Financial Institution if it is regarded as having entered into an arrangement with a dominant purpose of causing the institution not to be a Reporting Financial Institution.

As with the existing FATCA regime, there are two key aspects of the CRS:

• first, each Reporting Financial Institution will have to carry out due diligence procedures to determine which of its customers and accounts are to be reported on; and
• second, the information must be reported to the Australian Taxation Office (in a uniform format to facilitate global exchange) and retained by the Reporting Financial Institution for at least 5 years.

Failure to comply with the proposed regime may result in administrative penalties.

The information to be reported includes:

• in respect of account holders, name, address, country of residence and tax identification number issued by their country of residence, and for individuals, date and place of birth; and
• in respect of reportable accounts, the account number, an annual balance, and depending on the account type, the total of certain types of payment amounts paid in during the relevant year.

Reporting Financial Institutions will to a large extent be able to rely on information already collected in relation to existing clients, and information already required to be obtained as a part of anti-money laundering (AML) and know your client (KYC) checks. However, affected financial institutions will need to review their client on-boarding procedures to ensure the right information is captured.

The current proposal is that, should the legislation be enacted, the regime will commence in Australia on 1 July 2017, with the first reporting of information (relating to the period from 1 July to 31 December 2017) to occur by 31 July 2018.