Written by Sylvester Urban and Nelson Phan.
The Australian Taxation Office (ATO) has published new Common Reporting Standard (CRS) guidance which requires Australian reporting financial institutions (RFIs) to implement "strong measures" to obtain self-certifications from account holders.
RFIs will be required to:
- apply a block on transactions; or
- threaten to close the account,
to compel a valid and reasonable self-certification to be provided. Penalties will be imposed for a failure to take these measures where required.
This is the strongest public statement yet that the ATO is unhappy with compliance rates for obtaining self-certifications.
RFIs should ensure they have the processes and functionality in place to compel the production of self-certifications in this way.
The CRS due diligence obligations of RFIs generally require them to ask account holders to provide a self-certification of their CRS status as part of the account opening procedure. The RFI must then also confirm the reasonableness of the self-certification based on information obtained through opening the account, including any documentation collected pursuant to AML/KYC procedures. RFIs should also have procedures to identify and address a relevant change in the account holder's circumstances.
The ATO has previously indicated that RFIs should generally not open an account until the account holder has provided a self-certification.
In practice, some RFIs allow an account to be opened even though the self-certification is pending. It is particularly difficult for listed investment entities to obtain self-certifications prior to a secondary trade, due to the nature of the ASX and CHESS systems.
The ATO has recognised this difficulty in the past, noting that in limited circumstances obtaining a self-certification on "day one" of the account opening is not possible. In past guidance, the ATO has given RFIs a 90-day period in which the self-certification should be obtained and validated where "exceptional circumstances" apply. This administrative concession was subject to having robust procedures in place to obtain and report the required information by the date for reporting.
The ATO has seemingly become increasingly concerned with compliance rates in obtaining self-certifications. In relation to "exceptional circumstances", the ATO recently updated its guidance to suggest that the threshold for exceptional circumstances is very high, and does not extend to situations where it is merely difficult to obtain self-certifications at account opening. This appears to set a high bar while not being definitive as to the sectors that would be regarded as having exceptional circumstances (apart from certain specified examples, such as on a secondary trade of interests in a listed investment entity).
ATO's stronger stance
On 13 May 2021, the ATO issued standalone guidance on their website for obtaining self-certifications for all new accounts. Whereas the ATO's previous guidance indicated that RFIs should apply "all reasonable measures to compel the Account Holder to comply", the guidance now suggests that RFIs must take "strong measures" to compel production of a valid self-certification. Examples of strong measures are said to include:
- blocking all transactions on the account until such time as a valid and reasonable self-certification is received; and
- closing the account.
It will not be considered a strong measure if the RFI reports on new accounts based on an indicia search.
The ATO has also stated that RFIs should keep records of all instances where a valid self-certification has not been obtained and that a "day two process" should only be adopted if the RFI has the ability to implement the strong measures listed above.
The ATO specifically stated that penalties may apply if the RFI fails to take strong measures. RFIs that adopt strong measures may not be subject to penalties (if they have otherwise taken reasonable steps to ensure compliance).
While the guidance is in relation to the CRS, it is plausible that the ATO may also apply this approach to RFIs' obligations under the Australian rules implementing the U.S. Foreign Account Tax Compliance Act (FATCA), as the rules are in very similar terms.
With this stronger stance on obtaining self-certifications, RFIs will need to be careful to ensure they have the systems and processes in place to strongly follow up account holders to compel them to provide a valid and reasonable self-certification.
The ATO has been consulting with Treasury to discuss a possible legislative solution for the difficulties faced by listed investment entities. It is unclear whether, or when, a solution for listed investment entities will be implemented.