The first intergovernmental agreement (IGA) on the Foreign Account Tax Compliance Act (FATCA), signed earlier this month between the United States and United Kingdom, gives hope that Australian superannuation funds would be carved out from the onerous new tax requirement.
Treasury is currently assessing whether Australia should enter into an agreement with the US, and this could pave the way for super funds to become exempt.
The agreement provided the first insight into what the US tax office, the Internal Revenue Service (IRS), was willing to accept, Minter Ellison partner Karen Payne said.
"The difficulty with FATCA is that the story is still unfolding, but the UK and the US have entered into an IGA, and this provides some insights into how the US will negotiate the agreement."
The agreement provided for UK retirement funds to be exempt from the US tax rules that could see a 30 per cent withholding tax being applied to non-complying foreign financial institutions (FFI) that derive income from US investments.
The Financial Services Council (FSC) has lobbied extensively for an intergovernmental agreement between the US and Australia.
It put forward a submission to the US inquiry into FATCA and FSC chief executive John Brogden appeared at a public hearing in Washington in February to argue the case for super funds.
FSC global markets and tax senior policy manager Carla Hoorweg said Australian super funds would find it nearly impossible to comply with the US legislation.
"It is not always possible for us to track down members," Hoorweg said at a Minter Ellison presentation.
"We have a huge lost super issue and we have compulsory superannuation, which means that when people start working at 19 and then move on to the chemist down the road and then get a real job and move into the corporate world [they] might have three or four super accounts.
"As a superannuation trustee who needs to track down these people, they might not necessarily have address or contact details, and so you could not honestly say to the IRS we contacted every customer we have."
An FSC delegation returned in mid-2012 to speak with members of Congress and Hoorweg said there was little chance FATCA would be repealed.
"When we met with Democrats, who were responsible for drafting the legislation, we got responses such as: 'Oh my god, we didn't know about these superannuation funds.' But we got a strong commitment to work through the issues from those people," she said.
Surprisingly, the Republicans were not keen on repealing FATCA either.
"When we met with the Republicans and when we asked . 'will you repeal FATCA?', [they answered:] 'Oh no, sorry, it wouldn't look good for us, because we have these problems with [Republican presidential candidate] Mitt Romney having been accused of hiding money offshore and it would be awkward for us to repeal it.'
"So basically, FATCA is here to stay, unfortunately."
But she said she was hopeful about the prospects of an agreement.
"The IGA doesn't have many disadvantages; there are a few technical issues which are slightly confusing, but the model itself is a template and it hasn't been changed," she said.
"Where the negotiations come in is in the annex where there is an opportunity to carve out entities and products, and that can be, as we have seen in the UK agreement, be applied to our super industry."
Minter Ellison senior associate Vasuki Sivaloganathan said FATCA posed problems for Australian privacy, anti-discrimination and even anti-money laundering laws.
"In order to identify US accounts, an FFI would require consent from US persons to disclose their personal information under the Privacy Act. Where such consent is not obtained, the FFI would have to close the person's account," Sivaloganathan said.
But in closing such an account, an Australian FFI could be caught under anti-discrimination laws on the basis that the rules only applied to US citizens.
"Collecting such information is also inconsistent with the anti-money laundering and counter-terrorism financing laws, as it requires collecting such information on the basis of someone's nationality," Sivaloganathan said.
