How can they do that?

Have you opened a bank or investment account lately? Were you asked about other citizenships? Place of birth? Since mid-2014 Australian financial institutions have been ferreting out US Persons. At most institutions, every new account holder is asked these questions. And, if you are found to be a US Person, you must complete a form W-9 (or equivalent) disclosing your US connection and Social Security Number. This data will be sent to the ATO, who will forward it on to the IRS.

Think about that.

Private Australian financial information of Australian citizens and permanent residents is being sent to a foreign government.

How can they do that? Do they really have the authority to send private financial data to the IRS?

As we all know by now, this data transmission is required by the FATCA IGA signed by the Australian government in 2014 and the enabling legislation passed by Parliament. That’s right – Australia changed its domestic laws so that Australian financial institutions could comply with US law with regard to transactions occurring entirely within Australia.

Of course, this wasn’t done completely voluntarily, The US forced its friends, allies, and enemies to enforce US law on foreign soil. The 30% penalty on US transactions was just too big a stick to ignore. In recommending passage of the IGA, the Joint Standing Committee on Treaties said:

The Committee, despite reservations about the Agreement, appreciates that it makes the best of a less than satisfactory situation.[1]

The IGA is a compromise – it saves Australian financial institutions from not only the expense of dealing directly with the IRS, but also of the risk of being forced to send private data overseas without account holder permission – a clear violation of Australian privacy law. Instead of having the financial institutions send data to the IRS, the ATO does it. The IGA requires Australian financial institutions to send data about US Persons to the ATO rather than the IRS. Once the ATO has this data, it needs some authority to send the data on to the IRS. The IGA clearly states in Article 2, paragraph 1 that the authority for FATCA data exchange is Article 25 of tax treaty (see FOI Take 2). But, does Article 25 really allow the collection and transmission of US tax data by the ATO?

Let’s explore that a bit more…

Article 25, paragraph (1) states:

(1) The competent authorities shall exchange such information as is necessary for carrying out the provisions of this Convention or for the prevention of fraud or for the administration of statutory provisions concerning taxes to which this Convention applies provided the information is of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes.

Take a look at the last phrase of paragraph (1) – “provided the information is of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes.” Doesn’t the FATCA data violate that by definition? While the ATO can query bank balances, it is not part of their regular administrative practices to collect this data (or at least it wasn’t until FATCA and CRS were adopted) – and FATCA is requiring banks to collect data they would not otherwise have obtained from account holders (SSN, US status), and data that have nothing to do with Australian taxes.

So, my question is, how do you interpret that last sentence in paragraph (1)? Is it sufficient that the information can be obtained under local law, or does the clause “with respect to its own taxes” limit the type of information that can be exchanged to information that is relevant to Australian taxes? or information that is normally collected by the ATO? Once the IGA implementing legislation passed, the FATCA information was “normally” collected by the ATO because that legislation required its collection. SSN and US Person status, however,  are not collected for the administration of Australian taxes – they are collected for the administration of US taxes!

I guess it depends on how you parse that sentence – how/whether “with respect to its own taxes” limits the “laws and administrative practices” that can be used to collect the data to be exchanged.

If the authority of the treaty is required for the ATO to transmit FATCA data to the IRS, then interpretation of this sentence is key. If the data that can be transferred under the treaty is restricted to data the ATO collect to administer Australian tax, then perhaps the FATCA data transmission could be challenged, not only in Australia, but in any other country with similar treaty provisions.

Of course, I am not a lawyer. I would appreciate feedback in the comments as to whether this might be a possible avenue for challenging the data exchange. [2]

[1] http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Treaties/13_May_2014/Report_140
[2] We are all hopeful that FATCA will be repealed, rendering this whole argument irrelevant. But until the repeal bill is passed by Congress and signed by the President, we have to deal with the law as it stands.