House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon S. J. Morrison MP)

Chapter 1 Common Reporting Standard

Outline of chapter

1.1 This Bill amends Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to require certain financial institutions in Australia to report information to the Commissioner of Taxation (Commissioner) about financial accounts held by foreign tax residents. In turn, the Commissioner will provide this information to the foreign residents' tax authorities, and in parallel, will receive information on Australian tax residents with financial accounts held overseas.

1.2 In order to identify relevant reportable accounts, financial institutions will need to carry out the due diligence procedures outlined in the Standard for Automatic Exchange of Financial Account Information in Tax Matters, commonly known as the Common Reporting Standard (CRS).

Context of amendments

1.3 Globalisation and other technological advances have made it easier for individuals to hold investments in financial institutions overseas. Whilst investment income earned by Australian residents in financial institutions in other countries may form part of their Australian assessable income, this income may not be subject to tax if it remains unreported to the Australian Taxation Office (ATO).

1.4 Tax evasion is a global problem and international cooperation and sharing of high quality, predictable information between tax authorities will help them enforce compliance with local tax laws. The CRS is an international framework developed by the Organisation for Economic Co-operation and Development (OECD) and non-OECD G20 countries at the request of the G20 to tackle and deter cross-border tax evasion. It establishes a common international standard for financial institutions to identify the financial accounts of foreign tax residents, report information on those account holders and their financial accounts to their local tax authority and for the authority to exchange that information with the tax authority of the foreign resident.

The Common Reporting Standard

1.5 The CRS sets out the due diligence rules that financial institutions (known as Reporting Financial Institutions) of a Participating Jurisdiction must follow to identify Account Holders who are tax residents of another Participating Jurisdiction and to report the relevant account information to their local tax authority.

1.6 The CRS was endorsed by G20 Leaders at their meeting on 15 and 16 November 2014. To date, over 95 jurisdictions have committed to its implementation.

1.7 The CRS is based on and often mirrors the obligations imposed on financial institutions by the United States of America's (US) Foreign Account Tax Compliance Act (FATCA). These obligations are imposed on Australian financial institutions through the operation of Division 396 of Schedule 1 to the TAA 1953 which, following the passage of the Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014, took effect on 1 July 2014.

1.8 The decision by countries to base the CRS on FATCA was taken to minimise compliance costs for financial institutions and governments. Accordingly, financial institutions in Australia will be subject to similar due diligence and reporting requirements in the CRS as they currently are under FATCA. However, some adjustments have been made to adapt the CRS from a US-specific requirement to an international framework. For example, FATCA uses US citizenship information to determine an account holder's US tax residency, whereas the CRS uses other indicia (that is, it does not use citizenship as an indicium). In addition, the CRS applies to a wider range of financial institutions. For example, financial institutions with only low value accounts or with a local customer base (that do not need to comply with FATCA) are not specifically excluded under the CRS.

1.9 The Global Forum on Transparency and Exchange of Information for Tax Purposes has been requested by the G20 to establish a mechanism to monitor and review the implementation of the CRS. The Global Forum is the premier international body for ensuring the implementation of internationally agreed standards of transparency and exchange of information in the tax area.

The international framework for sharing information

1.10 There are different legal bases for Australia's automatic exchange of information, including Australia's bilateral tax treaties and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the Convention). The Convention provides for all forms of administrative cooperation and contains strict rules on confidentiality and proper use of information. Australia signed the amended Convention in 2011.

1.11 Automatic exchange under the Convention requires an administrative agreement between the ATO and other countries' tax authorities. On 3 June 2015, Australia signed the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (MCAA), which is based on Article 6 of the Convention. To date, this agreement has been signed by over 70 jurisdictions.

1.12 The MCAA provides a framework for the bilateral exchange of information with other jurisdiction signatories. For example, it includes broad guidelines on how countries should establish confidentiality safeguards, collaborate on compliance and enforcement issues and engage in consultation. However, arrangements relating to the specific timing and manner of the automatic exchange of information between countries that are to exchange CRS information will be made at the administrative level (between the ATO and other countries' tax authorities) and will take effect once each country notifies the OECD.

1.13 To protect the confidentiality of account holders' information, the ATO will not automatically exchange information with the tax authority of another jurisdiction unless it has the legal and administrative capacity to ensure confidentiality. In addition, the ATO will be able to suspend the exchange of information with another jurisdiction's tax authority if it determines that there is or has been significant non-compliance with confidentiality safeguards.

Summary of new law

1.14 These amendments insert a new Subdivision, 'Subdivision 396-C - Common Reporting Standard' into 'Part 5-25 - Record-keeping and other obligations of taxpayers' in Schedule 1 to the TAA 1953.

1.15 To ensure consistency with the CRS, these amendments adopt meanings and concepts used in the CRS. This means the reporting obligations apply to 'Reporting Financial Institutions' in Australia that maintain at least one 'Reportable Account' in a calendar year. However, reporting obligations may also apply to financial institutions in Australia which receive a notice from the Commissioner requiring them to act as if they are a Reporting Financial Institution and to Reporting Financial Institutions which receive a notice from the Commissioner requiring them to report in relation to certain accounts.

Comparison of key features of new law and current law

Detailed explanation of new law

The Common Reporting Standard

1.16 The 'Common Standard on Reporting and Due Diligence for Financial Account Information' (the CRS) is contained in Part II.B of the Standard for Automatic Exchange of Financial Account Information in Tax Matters, which was approved on 15 July 2014 by the Council of the OECD. [Schedule 1, item 13, subsection 396-110(1) of Schedule 1 to the TAA 1953]

1.17 A copy of this document is available on the OECD website (www.oecd.org).

1.18 The CRS is accompanied by the Commentaries on the Common Reporting Standard (CRS Commentary) that provides additional information on how financial institutions should apply the due diligence procedures to ensure consistency across jurisdictions. For example, the CRS Commentary provides the type of documentary evidence required in applying the residence address test contained in subparagraph B(1) of Section III of the CRS. In determining their reporting obligations under the CRS, Reporting Financial Institutions should, subject to the specifications as set out in paragraphs 1.27 to 1.54, apply the CRS consistently with the CRS Commentary. [Schedule 1, item 13, subsection 396-110(2) of Schedule 1 to the TAA 1953]

Reportable accounts - the reporting obligation

1.19 Reporting Financial Institutions in Australia that maintain at least one Reportable Account (within the meaning of the CRS) at any time during a calendar year will need to give a statement to the Commissioner in relation to each account. This statement will need to contain information that the CRS states the financial institution must report. [Schedule 1, item 13, subsections 396-105(1) and (2) of Schedule 1 to the TAA 1953]

1.20 The concept of a Reporting Financial Institution is defined in Section VIII of the CRS. It generally includes banks and other deposit-taking institutions, custodial institutions, brokers that hold financial assets for the account of others, investment entities and arrangements, and insurance companies that issue or make payments to investment-linked life insurance or annuity contracts.

1.21 The Commissioner may require a Financial Institution (within the meaning of the CRS) to act as if it is a Reporting Financial Institution (within the meaning of the CRS) in the circumstances set out in paragraph 1.60. Such Financial Institutions may be required to give a statement to the Commissioner. [Schedule 1, item 13, subparagraph 396-105(1)(a)(ii) and subsection 396-130(4) of Schedule 1 to the TAA 1953]

1.22 Implicit in the reporting obligation is the requirement that Reporting Financial Institutions will need to collect the relevant information, although in relation to certain accounts, a Reporting Financial Institution may rely on information it already has on file. Australia's Privacy Act 1988 generally prohibits the use of personal information for a purpose other than for which it was originally collected but Australian Privacy Principle 6 provides an exception for entities that otherwise use or disclose such personal information to the extent this is required or authorised under an Australian law.

1.23 Whether a financial institution maintains a Reportable Account (within the meaning of the CRS) is determined by the financial institution applying the due diligence procedures described in the CRS consistently with the CRS Commentary. This means financial institutions need to have completed the relevant due diligence procedures, by the time they are required to provide a statement to the Commissioner. [Schedule 1, item 13, subsection 396-105(3) of Schedule 1 to the TAA 1953 and item 14, table items 2 and 6 of subitem (2)]

1.24 An account will be treated as a Reportable Account (within the meaning of the CRS) if the account would have been a Reportable Account had the Reporting Financial Institution applied the due diligence procedures described in the CRS (consistently with the CRS Commentary) in relation to that account. A financial institution cannot avoid its reporting obligations by failing to apply the due diligence procedures or applying them incorrectly. [Schedule 1, item 13, subsection 396-120(5) of Schedule 1 to the TAA 1953]

1.25 An account will also be treated as a Reportable Account (within the meaning of the CRS) in the circumstances set out in paragraphs 1.55 to 1.57. [Schedule 1, item 13, subsection 396-130(1) of Schedule 1 to the TAA 1953]

1.26 A Reporting Financial Institution that does not maintain any Reportable Accounts or accounts which are required to be treated as Reportable Accounts does not need to provide such a statement to the Commissioner.

The due diligence procedures

1.27 The due diligence procedures to be undertaken by a Reporting Financial Institution to identify a Reportable Account are described in Sections II through VII of the CRS. In general, these may require a Reporting Financial Institution to conduct electronic and paper record searches and collect self-certifications from its customers, in which customers declare their jurisdiction of residence for tax purposes. A self-certification will inform a Reporting Financial Institution if a customer's Financial Account is a Reportable Account and a Reporting Financial institution may be liable for an administrative penalty for failing to collect a self-certification (refer paragraph 1.79).

1.28 The CRS also provides that a Reporting Financial Institution cannot rely on a self-certification and documentary evidence if it knows or has reason to know that the self-certification is incorrect or unreliable (paragraph A of Section VII of the CRS). In relation to some accounts, the CRS also requires that a Reporting Financial Institution must treat an account as a Reportable Account if a relationship manager has actual knowledge that the Account Holder is a Reportable Person (subparagraph C(4) of Section III of the CRS).

1.29 In general, the due diligence rules specified in the CRS differ according to:

•

whether the account is held by an individual or another type of entity;

•

whether the account is a Preexisting Account or New Account; and

•

whether it is classified as a High Value Account or a Lower Value Account.

1.30 Australia is specifying how Reporting Financial Institutions are to apply certain due diligence procedures specified in the CRS and the CRS Commentary. These specifications are designed to give effect to particular matters that the CRS and the CRS Commentary allows implementing jurisdictions to specify in order to minimise the compliance costs for financial institutions. [Schedule 1, item 13, subsection 396-120(1) of Schedule 1 to the TAA 1953]

Non-Reporting Financial Institutions

1.31 The definition of a Non- Reporting Financial Institution is provided in paragraph B of Section VIII of the CRS.

1.32 For the purposes of meeting the definition of a Non-Reporting Financial Institution because the Financial Institution is a Qualified Credit Card Issuer, a Financial Institution must implement the relevant policies and procedures, outlined in subparagraph B(8)(b) of Section VIII of the CRS, by 1 July 2017. [Schedule 1, item 14, table item 8 of subitem (2)]

1.33 Some government entities, international organisations, Australia's central bank and retirement funds, as set out in Annex II of the FATCA Agreement, will generally be treated as being Non-Reporting Financial Institutions except in relation to some commercial activities. [Schedule 1, item 13, paragraph 396-115(1)(a) and subsection 396-115(2) of Schedule 1 to the TAA 1953]

1.34 Such entities do not need to identify if they maintain any Reportable Accounts or provide a statement to the Commissioner.

1.35 To provide flexibility in the future, the Minister may prescribe additional entities by legislative instrument as being Non-Reporting Financial Institutions if such entities present a low risk of being used to evade tax and are similar to a certain Non-Reporting Financial Institution specified in the CRS. [Schedule 1, item 13, paragraph 396-115(1)(b) of Schedule 1 to the TAA 1953]

Excluded Accounts

1.36 The definition of an Excluded Account is provided in subparagraph C(17) of Section VIII of the CRS.

1.37 For the purposes of meeting the definition of an Excluded Account because the account is a certain Depository Account, a Financial Institution must implement the relevant policies and procedures, outlined in subparagraph C(17)(f)(ii) of Section VIII, by 1 July 2017. [Schedule 1, item 14, table item 11 of subitem (2)]

1.38 Retirement and pension accounts and some non-retirement savings accounts, as set out in Annex II of the FATCA Agreement, will generally be treated as being Excluded Accounts (and therefore excluded under the CRS from being Reportable Accounts). [Schedule 1, item 13, paragraph 396-115(3)(a) of Schedule 1 to the TAA 1953]

1.39 To provide ongoing flexibility, the Minister may also prescribe additional Excluded Accounts by legislative instrument if such accounts present a low risk of being used to evade tax and are similar to certain Excluded Accounts specified in the CRS. [Schedule 1, item 13, paragraph 396-115(3)(b) of Schedule 1 to the TAA 1953]

Preexisting Accounts and New Accounts

1.40 Generally, all accounts opened by financial institutions on or after 1 July 2017 will be treated as New Accounts; all other accounts (that is, those accounts maintained by financial institutions on 30 June 2017) will be treated as Preexisting Accounts. [Schedule 1, item 13, subsections 396-120(6) and (7) of Schedule 1 to the TAA 1953].

1.41 However, in certain circumstances, financial institutions may treat accounts of pre-existing customers opened on or after 1 July 2017 as Preexisting Accounts. [Schedule 1, item 13, paragraph 396-115(5)(b) of Schedule 1 to the TAA 1953]

1.42 When applying the due diligence procedures for Preexisting Accounts:

•

the period from 1 January 2017 to 30 June 2017 is taken to be a separate calendar year from the period 1 July 2017 to 31 December 2017 (this ensures that the standard CRS rules, which are designed to apply on a calendar year basis, operate as intended for the first six month period (refer paragraphs 1.86 and 1.87)); and

•

the following dates need to be read into the CRS.

-

For the purposes of determining whether a Preexisting Individual Account is a High Value Account, the test date to be read into subparagraphs C(6) of Section III and C(15) of Section VIII of the CRS is 30 June 2017.

-

For the purposes of determining whether a Preexisting Individual Account is a Lower Value Account, the test date to be read into subparagraph C(14) of Section VIII of the CRS is 30 June 2017.

-

The deadline for completing reviews of Preexisting Individual Accounts, in relation to Lower Value Accounts, to be read into paragraph D of Section III of the CRS is 31 July 2019.

-

The deadline for completing reviews of Preexisting Individual Accounts, in relation to High Value Accounts to be read into paragraph D of Section III of the CRS is 31 July 2018.

-

For the purposes of determining whether a Preexisting Entity Account has an aggregate account balance or value that does not exceed USD $250,000, the test date to be read into paragraphs A and B of Section V of the CRS is 30 June 2017.

-

For the purposes of determining whether a Preexisting Entity Account has an aggregate account balance or value that exceeds USD $250,000, the test date to be read into subparagraphs E(1) and E(2) of Section V of the CRS is 30 June 2017.

-

The deadline for completing reviews of Preexisting Entity Accounts with a balance exceeding USD $250,000 to be read into subparagraph E(1) of Section V of the CRS is 31 July 2019.

[Schedule 1, item 14, table items 1 to 7 and 9 to 10 of subitem (2) and subitem (3)]

1.43 It is not necessary to specify a date for the purposes of subparagraph C(10) of Section VIII of the CRS, as 'New Account' is defined by reference to the concept of a Preexisting Account (see paragraph 1.40). Paragraphs 1.32 and 1.37 outline other dates that should be read into the CRS.

'Look through' due diligence procedures

1.44 A Reporting Financial Institution must apply the due diligence procedures set out in subparagraph D(2) of Section V and subparagraph A(2) of Section VI of the CRS to identify Passive NFE (Non-Financial Entity) accounts with respect to which reporting is required ('look through' due diligence procedures). That is, the Reporting Financial Institution must look through, among other entities, certain investment entities that are not Participating Jurisdiction Financial Institutions to identify Controlling Persons who are Reportable Persons (see paragraph C of Section V, subparagraph D(2) of Section V and subparagraph D(8) of Section VIII of the CRS).

1.45 For the purposes of these rules, a Participating Jurisdiction is a jurisdiction with which an agreement is in place pursuant to which it will automatically exchange information on Reportable Accounts with Australia and is identified on a published list (subparagraph D(5) of Section VIII of the CRS).

1.46 The Commissioner is expected to provide guidance regarding a list of Participating Jurisdictions to assist Reporting Financial Institutions to determine whether they have an obligation to apply the 'look through' due diligence procedures to certain accounts. Of note, specific transitional arrangements will be in place until 31 December 2019, which will also assist Reporting Financial Institutions in this regard (refer to paragraphs 1.88 to 1.90).

Elections by financial institutions

1.47 Unless otherwise specified, a financial institution may make any of the elections permitted in the CRS (including elections that follow as a consequence of choices Australia has made) in determining its obligations under the CRS. These include, for example;

•

using third party service providers to fulfil their obligations;

•

applying the due diligence procedures for New Accounts to Preexisting Accounts;

•

applying the due diligence procedures for High Value Accounts to Lower Value Accounts;

•

applying the residence address test for Lower Value Accounts;

•

excluding Preexisting Entity Accounts with an aggregate value or balance of USD $250,000 or less from its due diligence procedures;

•

applying alternative documentation procedure for certain employer sponsored group insurance contracts or annuity contracts (refer to paragraph 1.54 below);

•

making use of existing standardised industry coding systems for the due diligence process;

•

using a single currency translation rule (discussed at paragraphs 1.49 to 1.50 below);

•

applying the expanded definition of Preexisting Account (refer to paragraph 1.41 above);

•

applying the expanded definition of Related Entity (refer to paragraph 1.41 above); and

•

aligning the reporting obligations for trusts that are Passive NFEs with trusts that are Financial Institutions.

[Schedule 1, item 13, subsection 396-115(4) of Schedule 1 to the TAA 1953]

Reportable Jurisdictions

1.48 All jurisdictions (other than Australia) are to be treated as being Reportable Jurisdictions for the purpose of identifying Reportable Accounts. This requires Australian financial institutions to apply the due diligence rules to identify all of its customers that are foreign tax residents. [Schedule 1, item 13, subsection 396-120(3) of Schedule 1 to the TAA 1953]

Dollar amounts

1.49 Financial institutions may apply the dollar amounts specified in the CRS in Australian dollars (rather than as US dollars). This means financial institutions do not need to undertake currency conversion procedures to determine the balance or value of accounts in US dollars. [Schedule 1, item 13, subsection 396-120(8) of Schedule 1 to the TAA 1953]

1.50 For example, an account will be a High Value Account if it has a balance exceeding USD $1,00,000 as of 30 June 2017 or, if a financial institution chooses to apply the dollar threshold in Australian dollars, AUD $1,000,000 as of 30 June 2017.

Other modifications

1.51 Also, in determining its reporting obligations, a financial institution:

•

will need to treat Australia as being a Participating Jurisdiction;

•

will need to disregard the requirements in paragraph F of Section 1 of the CRS; and

•

may apply the inclusion in paragraph 13 of the CRS Commentary on Section VII (Special Due Diligence Rules).

[Schedule 1, item 13, paragraph 396-115(5)(a) and subsections 396-120(2) and (4) of Schedule 1 to the TAA 1953]

1.52 Specifying that Australia is a Participating Jurisdiction for the purposes of the CRS ensures that financial institutions in Australia satisfy the definition of a Reporting Financial Institution in subparagraph A(1) of Section VIII of the CRS.

1.53 Disregarding the requirements in paragraph F of Section 1 of the CRS means that financial institutions must report about gross proceeds from the sale or redemption of certain Financial Assets (as described in subparagraph A(5)(b) of Section I of the CRS) in accordance with the due dates for a statement to the Commissioner outlined in paragraph 1.65.

1.54 Paragraph 13 of the CRS Commentary on Section VII provides an alternative due diligence procedure for certain employer-sponsored group insurance contracts or annuity contracts that simplifies the due diligence procedures otherwise applicable.

Anti-avoidance measures

Commissioner may require an account to be treated as a Reportable Account

1.55 If the Commissioner reasonably believes that a Reporting Financial Institution or an Account Holder has made a transaction or entered into an arrangement with the dominant purpose of avoiding the financial institution from identifying the account as being a Reportable Account (within the meaning of the CRS), then the Commissioner may serve a notice on the financial institution requiring it to treat the account as a Reportable Account. [Schedule 1, item 13, subsections 396-130(1) and (2) of Schedule 1 to the TAA 1953]

1.56 For example, if the ATO were to audit a random sample of foreign resident Preexisting Entity Accounts of a Reporting Financial Institution and discovered transfers to, and from, offshore accounts just before and after the end of a calendar year so that the account balances fluctuate below reporting thresholds at the time the thresholds are to be applied, then, in the absence of an apparent commercial or private administration reason for these transfers, it would be reasonable for the Commissioner to believe that the year-end account balances were manipulated to avoid the reporting of the accounts.

1.57 Similarly, if a Reporting Financial Institution did not create any electronic records for a Lower Value Account (such that an electronic record search would not yield any results) or maintains computerised systems artificially dissociated (to avoid the entity account aggregation rules) then, in the absence of a commercial reason for these arrangements, it would be reasonable for the Commissioner to believe these arrangements were entered into to avoid the relevant accounts from being reported.

1.58 A financial institution may object to a decision by the Commissioner to issue such a notice. [Schedule 1, item 13, subsection 396-130(3) of Schedule 1 to the TAA 1953]

1.59 A financial institution that receives a notice from the Commissioner may wish to advise the account holder of this.

Commissioner may require a Financial Institution to act as a Reporting Financial Institution

1.60 If the Commissioner reasonably believes that a Financial Institution undertook a transaction or entered into an arrangement with the dominant purpose of causing the Financial Institution not to be a Reporting Financial Institution (within the meaning of the CRS), then the Commissioner may serve a notice on the institution requiring it to act as a Reporting Financial Institution. [Schedule 1, item 13, subsections 396-130(4) and (5) of Schedule 1 to the TAA 1953]

1.61 The Financial Institution may object to a decision by the Commissioner to issue such a notice. [Schedule 1, item 13, subsection 396-130(6) of Schedule 1 to the TAA 1953]

1.62 These rules complement the rule described at paragraph 1.24, which is designed to prevent financial institutions from circumventing their reporting obligations.

Reportable Accounts - statements to the Commissioner

1.63 Reporting Financial Institutions must give the statement to the Commissioner in the 'approved form'. The concept of approved forms is used in the taxation laws to provide the Commissioner with administrative flexibility to specify the form of information required and the manner of providing it. The ATO has committed to the early development and publication of guidance material and it is expected that the ATO will develop the approved form in consultation with financial institutions. [Schedule 1, item 13, subsections 396-105(4) and (5) of Schedule 1 to the TAA 1953]

1.64 Section 388-50 of Schedule 1 to the TAA 1953 provides the legislative basis for the use of approved forms. 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.

1.65 Each statement is due to the Commissioner by 31 July of the year following the year to which the information relates. Of note, transitional arrangements that apply in 2017, require a statement that relates to a Reportable Account that is either a Lower Value Account or a Preexisting Entity Account be given to the Commissioner by 31 July 2019 [Schedule 1, item 13, subsection 396-105(6) of Schedule 1 to the TAA 1953 and item 15, subitems (3) and (4)]. 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 Financial Institutions may lodge these statements by a later date where that has been approved by the Commissioner.

1.66 The due date for providing a statement to the Commissioner depends on the calendar year in which an account is maintained. It is not contingent on when a Reporting Financial Institution carries out the due diligence to identify the account as a Reportable Account. See paragraph 1.23 for discussion of when due diligence must be completed. [Schedule 1, item 13, paragraph 396-105(1)(c) and subsections 396-105(2), (3) and (6) of Schedule 1 to the TAA 1953]

Consequences of not complying

1.67 Australia's domestic tax laws contain a range of sanctions that may be applied to Reporting Financial Institutions 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.

1.68 This means, for example, that:

•

a Reporting Financial Institution that makes a false or misleading statement because of an intentional disregard of the 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 Financial Institution that makes a false or misleading statement through recklessness as to the operation of the 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 Financial Institution that makes a false or misleading statement because of a failure to take reasonable care to comply with the taxation laws may be liable to a penalty of 20 penalty units - per table item 3C of subsection 284-90(1).

1.69 Similarly, a Reporting 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).

1.70 Section 4AA of the Crimes Act 1914 provides the value of a penalty unit. The current value is $180 (this value will be subject to future indexing in accordance with subsection 4AA(3) of the Crimes Act 1914).

1.71 A Reporting Financial Institution that fails to comply with the due diligence procedures in identifying any Reportable Accounts is unlikely to be able to provide complete and accurate information to the Commissioner. For example, a Reporting Financial Institution that fails to collect a customer's self-certification upon account opening would have difficulty in identifying and reporting on that account holder's jurisdiction of residence for tax purposes.

1.72 Accordingly, a Reporting Financial Institution that does not collect an account holder's self-certification may be subject to:

•

an administrative penalty for providing a false or misleading statement to the Commissioner (particularly if the Commissioner requests information in the approved form about whether the institution has collected a self-certification as required by the CRS); or

•

an administrative penalty for failing to lodge a statement with the Commissioner.

1.73 In addition, financial institutions that fail to collect a self-certification as required by the CRS may be liable to an additional administrative penalty. Further information about this penalty is in paragraphs 1.79 to 1.81.

The requirement to keep records of relevant procedures

1.74 Similar to Australia's income tax regime and FATCA-related reporting obligations on a financial institution, the CRS reporting obligations on a Reporting Financial Institution will operate on a self-assessment basis. Under self-assessment, a taxpayer typically performs certain functions and exercises some responsibilities that might otherwise be undertaken by the tax authority. One consequence of a self-assessment approach is 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.

1.75 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 other domestic taxation laws.

1.76 Specifically, a Reporting Financial Institution that provides a statement to the Commissioner will need to keep records for five years (from the date of providing that statement to the Commissioner) that:

•

correctly records 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 1, item 13, subsection 396-125(1) and paragraph 396-125(2)(a) of Schedule 1 to the TAA 1953]

1.77 A Reporting Financial Institution that does not provide a statement to the Commissioner in a particular year will need to keep records until 31 July of the sixth year after that year that correctly record the procedures by which it determined that it did not need to provide a statement to the Commissioner. [Schedule 1, item 13, paragraph 396-125(2)(b) of Schedule 1 to the TAA 1953]

1.78 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.

Penalties relating to self-certifications

Failure to collect self-certification

1.79 A Reporting Financial Institution that is required to obtain a self-certification when applying the CRS due diligence procedures may be liable to an administrative penalty of 1 penalty unit if it has not collected the self-certification by the time it is required to provide a statement to the Commissioner (see paragraph 1.65) or would be required to provide such a statement to the Commissioner if the account was a Reportable Account. [Schedule 1, item 2, section 288-85 of Schedule 1 to the TAA 1953]

1.80 This administrative penalty complements the due diligence requirements contained in the CRS to collect specific self-certifications at the time the financial account is opened and supplements the due diligence requirements described in paragraph 1.23. Furthermore, a Reporting Financial Institution that does not collect an account holder's self-certification may be subject to the administrative penalties discussed at paragraphs 1.71 to 1.72.

1.81 In practice, a Reporting Financial Institution would need to collect a self-certification for each new Financial Account opened on or after 1 July 2017.

False or misleading self-certification

1.82 A customer that provides a self-certification (as permitted by the CRS) to a Reporting Financial Institution that is false or misleading in a material particular may be subject to an administrative penalty under subsection 284-75(4) of Schedule 1 to the TAA 1953. [Schedule 1, item 13, section 396-135 of Schedule 1 to the TAA 1953]

Consequential amendments

1.83 This Schedule makes consequential amendments to define the 'CRS' and 'CRS Commentary' in section 995-1 of the Income Tax Assessment Act 1997. [Schedule 1, item 1]

1.84 These amendments include guide material for Subdivision 396-C. [Schedule 1, item 13, section 396-100 of Schedule 1 to the TAA 1953]

1.85 Minor amendments have been made to Subdivision 396-A of Schedule 1 to the TAA 1953 to ensure consistency between that Subdivision and these amendments and some additional amendments, contingent on the Tax and Superannuation Laws Amendment (2015 Measures No. 5) Act 2015, are made to Division 396 more generally. [Schedule 1, items 3 to 12 and 16 to 19]

Application and transitional provisions

1.86 These amendments apply to the period 1 July 2017 to 31 December 2017, as if the period were a calendar year, and to later calendar years. [Schedule 1, item 14]

1.87 This commencement date provides a balance between minimising compliance costs for financial institutions in Australia and ensuring that Australia's CRS implementation is consistent with its commitment at the G20 Leaders' Meeting in November 2014 to exchange information by the end of 2018.

Transitional arrangements for 'look through' due diligence procedures

1.88 Certain entities are considered to not be Passive NFEs for a transition period for the purposes of triggering the 'look through' due diligence procedures set out in subparagraph D(2) of Section V and subparagraph A(2) of Section VI of the CRS. This arrangement applies for an Investment Entity described in subparagraph A(6)(b) of Section VIII of the CRS that is not a Participating Jurisdiction Financial Institution but would be a Participating Jurisdiction Financial Institution if the jurisdictions declared to be committed jurisdictions by the Commissioner were Participating Jurisdictions. The Commissioner may, by legislative instrument, declare one or more jurisdictions to be committed jurisdictions. This arrangement will apply until 31 December 2019. [Schedule 1, item 15, subitems (1) and (2)]

1.89 To date, over 95 jurisdictions have committed to implement the CRS and it is expected that 2017 to 2020 will be transitional years for operationalising all of these commitments and putting in place information exchanges between such jurisdictions. This presents operational challenges for financial institutions that would otherwise need to determine whether they need to apply the 'look through' due diligence procedures to the accounts of such Investment Entities on the basis of whether an Investment Entity's jurisdiction is a Participating Jurisdiction.

1.90 Instead, this transitional rule allows a Reporting Financial Institution to make this determination based on whether the Investment Entity's jurisdiction is one the Commissioner has declared to be a committed jurisdiction. This removes the need for a Reporting Financial Institution to adjust its processes in response to changes to a jurisdiction's status from a committed jurisdiction to a Participating Jurisdiction. See paragraphs 1.44 to 1.46 for arrangements that apply from 1 January 2020.