FATCA Update Australian Superannuation Industry

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1 May 2014 FATCA Update Australian Superannuation Industry Intergovernmental agreement signed with US, and draft enabling legislation released In welcome news for the Australian superannuation industry and the broader financial services sector, the Treasurer announced on 28 April 2014 that Australia and the United States (US) had signed an intergovernmental agreement (IGA) to facilitate the implementation of the Foreign Account Tax Compliance Act (FATCA) regime to Australian financial institutions. Accompanying this announcement was Treasury s release of Exposure Draft (ED) legislation and explanatory material to give effect to the IGA by incorporating its requirements into the Australian taxation legislation. The purpose of this update is to summarise the impact of these FATCA developments as they affect superannuation funds and certain related entities. To provide some context around this, a brief recap on FATCA and its potential application to the Australian superannuation industry is also included below. Separate FATCA updates shall be provided by KPMG for other affected sectors of the Australian financial services market, including further details of the specific account identification procedures and reporting required under the IGA (as appropriate). Key points for superannuation funds The Australian IGA includes a specific FATCA exemption for superannuation entities, public sector superannuation schemes, constitutionally protected funds and pooled superannuation trusts as they are defined under existing Australian superannuation and taxation legislation. Entities which are wholly-owned by such entities (such as certain investment vehicles) are also included within the exemption. The IGA definition of entity includes a trust. The exemption from FATCA extends to self managed superannuation funds. The impact of the exemption is that these entities should neither be subject to the US account holder identification and reporting obligations under FATCA, nor have any income or other amounts which they receive in relation to their investments withheld upon at the 30 percent rate. Australian legislation is required to give effect to the IGA. A draft version was released on 28 April 2014 for consultation, with submissions due by 9 May The US has agreed to treat the IGA as though it is already in effect, pending enactment of the legislation and other internal procedures occurring by 30 September These developments should alleviate superannuation funds and other FATCA exempt Australian entities from being required to apply for FATCA registration and to obtain a Global Intermediary Identification Number (GIIN). Australian superannuation funds and related entities should consider this important update in terms of their proposed FATCA actions, which may include communications with stakeholders (such as fund managers and custodians) and completion of US tax forms (such as the new W8-BEN-E). A table which summarises the impact of FATCA (based on the final FATCA regulations and the IGA) on Australian superannuation funds, and the associated risks and potential action items, is attached as an Appendix. FATCA overview for superannuation funds (excluding the impact of the IGA) Broadly, the FATCA regime is being introduced by the US Department of Treasury as a measure to combat tax evasion by US persons using foreign financial accounts. It operates by requiring non-us financial institutions to provide reporting in respect of their US account holders, with failure to do so potentially exposing those non-us financial institutions to a 30 percent US withholding tax on certain income and other payments received on their investments. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional

2 The FATCA rules are contained in US legislation which was actually enacted in March 2010, although the commencement of the specific requirements is being phased in over a number of years (beginning from 1 July 2014 for certain new account identification procedures). The primary US legislation from 2010 was intended to be supplemented by detailed FATCA guidance. To this end, preliminary guidance was firstly contained in Notice issued by the IRS in August This was followed by the more extensive draft FATCA regulations issued by the Department of Treasury and the IRS on 8 February In both cases, whilst a carve out was proposed for certain retirement plans, the class of retirement funds to be excluded from FATCA was limited and was defined in terms which would have been unlikely to cover Australian complying superannuation funds. Spain and the United Kingdom regarding an intergovernmental approach to improving international tax compliance and implementing FATCA. Whilst supportive of the objectives underlying the FATCA regime, these countries had expressed concerns to the US including certain legal impediments to financial institutions being able to comply with the various FATCA obligations. The joint statement expressed mutual intent to pursue a government-to-government approach in order to overcome the legal impediments and to also simplify FATCA implementation, thereby reducing the FATCA burden. Further collaboration by the US with other governments during 2012 led to the development of two model IGAs (Model 1 and Model 2) as an alternative means of implementing FATCA. Accordingly, there was a substantial risk that all Australian superannuation funds would potentially be subject to the FATCA rules and obligations in their entirety. Aside from the impact that any 30 percent FATCA withholding tax might have had on investment returns, the implementation and ongoing operation of FATCA related systems and processes was anticipated to represent a significant compliance burden on funds, as well as their administrators and custodians. These concerns were reduced to some extent upon the release of the final FATCA regulations in February 2013, which contained an updated and expanded carve out for retirement plans. In particular, a new concept of treatyqualified retirement fund was introduced within the category of exempt beneficial owner, along with certain entities whollyowned by such retirement funds or other exempt beneficial owners. Summary of impact for Australian superannuation funds Whilst the final FATCA regulations were a positive step for the Australian superannuation industry, there remained some uncertainty given that the exemption did not explicitly apply to Australian superannuation funds (and wholly owned entities thereof) and was also contained in US regulations that may be susceptible to future amendment. The development of the IGA approach Broadly, under both model IGAs, the partner country must require all non-us financial institutions located within its jurisdiction (that are not otherwise exempt) to identify and report on US accounts. An important difference between the Model IGAs is that under Model 1, the non-us financial institution must provide the required FATCA reporting to the local tax authority (who in turn reports such information to the IRS), whereas under Model 2 the non-us financial institution provides reporting directly to the IRS. The evolution of the Australian IGA On 7 Novermber 2012, the former Australian Treasuer announced that Australia had commenced formal discussions for an IGA with the US to minimise the impact of FATCA on Australian institutions. Subsequently, the new Australian Government confirmed on 6 November 2013 that it was working towards signing and enacting the IGA. The US Department of Treasury website has been updated to include Australia as having a signed IGA (refer to On the same day that the draft FATCA regulations were released (8 February 2012), the US Department of Treasury also jointly issued a statement with France, Germany, Italy,

3 Summary of impact for Australian superannuation funds Given the intention since late 2012 for Australia to pursue an IGA, then notwithstanding that the final FATCA regulations released in 2013 contained an expanded and improved exemption for retirement plans (as discussed above), the preferred position of the Australian superannuation industry has been that an unequivocal and comprehensive exemption for complying superannuation funds and certain related entities should be contained within the IGA. The FATCA status of superannuation funds and certain related entities under the IGA The Australian IGA dated 28 April 2014 is a Model 1 version, whereby any FATCA reporting is only provided to the ATO. Relevantly, Part II of Annex II provides that the following entities are treated as Non-Reporting Australian Financial Institutions for the purposes of the IGA, and also as exempt beneficial owners for the purposes of the US FATCA regime: A. Australian Retirement Funds. 1. Any plan, scheme, fund, trust, or other arrangement operated principally to administer or provide pension, retirement, superannuation, or death benefits that is a superannuation entity or public sector superannuation scheme (including an exempt public sector superannuation scheme) as defined in the Superannuation Industry (Supervision) Act 1993, or a constitutionally protected fund as defined in the Income Tax Assessment Act A pooled superannuation trust as defined in the Income Tax Assessment Act Any Entity that is wholly owned by, and conducts investment activities, accepts deposits from, or holds financial assets exclusively for or on behalf of, one or more plans, schemes, funds, trusts, or other arrangements referred to in subparagraphs (1) or (2) of this paragraph. B. Investment Entity Wholly Owned by Exempt Beneficial Owners. An Entity that is an Australian Financial Institution solely because it is an Investment Entity, provided that each direct holder of an Equity Interest in the Entity is an exempt beneficial owner, and each direct holder of a debt interest in such Entity is either a Depository Institution (with respect to a loan made to such Entity) or an exempt beneficial owner. Impact for the Australian superannuation industry The above definition provides a broad and effective exemption for Australian superannuations entities (including self managed superannuation funds), as well as various wholly-owned entities (including investment vehicles) that might otherwise have been subject to the FATCA regime. In this regard, the IGA definition of entity includes a trust. Accordingly, these entities should neither be subject to the US account holder identification and reporting obligations under FATCA, nor have any income or other amounts which they receive in relation to their investments withheld upon at 30 percent. Is the Australian IGA now in effect? A Memorandum Of Understanding (MOU) which accompanied the IGA acknowledges that Australia must complete internal procedures for the entry into force of the IGA. This includes the passage of implementing legislation, which was released in draft on 28 April 2014 and for which submissions have been invited by 9 May In accordance with the MOU and also based on the US Department of Treasury website, the US has agreed to treat the IGA as though it is already in effect, provided that the IGA is legally in force by 30 September 2015 (or potentially a later date up to 30 September 2016). What should superannuation funds do? The IGA and related developments should alleviate superannuation funds and other FATCA exempt Australian entities from being required to apply for FATCA registration and obtain a GIIN. Australian superannuation funds should consider this important update in terms of their current plans for FATCA related actions, which may include communications with stakeholders (such as fund managers and custodians) and completion of US tax forms (such as the new W8-BEN-E). To this end, a table which summarises the impact of FATCA (based on the final FATCA regulations and the IGA) on Australian superannuation funds, and the associated risks and potential action items, is attached below as an Appendix.

4 Appendix High level summary of FATCA impact including risks and actions, based on final FATCA regulations and Australian IGA Entity type: Australian complying superannuation fund (assuming no complex investment structures) FATCA status: Non-Reporting Australian Financial Institution under IGA (Annex II, Part II, paragraph A.1.), and Exempt Beneficial Owner for purposes of sections 1471 and 1472 of the US Internal Revenue Code FATCA Risk Area Risk Assessment Action Required OVERALL Minimal Exposure Perform and document formal analysis to confirm likely FATCA position across risk areas below WITHHOLDING Being withheld upon technical exposure Nil Nil Being withheld upon practical exposure Minimal Active communication with underlying custodians and investment managers to ensure awareness of exempt status and that custodians / managers are appropriately managing FATCA to ensure no indirect withholding risk. On US investments, ensure that new W-8BEN-E forms are appropriately completed to manage any US withholding risk (FATCA or otherwise). Having to withhold from others N/A Nil ACCOUNT IDENTIFICATION / DUE DILIGENCE Updating on-boarding processes N/A Nil Remediation of existing accounts (KYC) N/A Nil REGISTRATION Registering with IRS to obtain a GIIN N/A Nil REPORTING Reporting on US accounts and other financial N/A Nil institutions to the ATO Reporting on US accounts and other financial institutions to the IRS N/A Nil

5 Contact us For further information please contact Melbourne Sheena Kay stkay@kpmg.com.au Dana Fleming dfleming@kpmg.com.au Jacinta Munro jacintamunro@kpmg.com.au Sydney Damian Ryan dryan@kpmg.com.au Jeremy Hirschhorn jhirschhorn@kpmg.com.au Mike Ritchie mikeritchie@kpmg.com.au Richard Philip rphilip1@kpmg.com.au Alternatively, visit our website at kpmg.com.au The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such informati without 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional