Pre-existing individual accounts Overview In broad terms, a pre-existing individual account is an account that is both: maintained by a Reporting NZFI as of 30 June 2017; and held by an individual. An additional account opened by a pre-existing customer on or after 1 July 2017 is also treated as a pre-existing account in the following circumstances: the account holder holds with the Reporting NZFI (or a related entity in New Zealand) a financial account that is a pre-existing account; the Reporting NZFI (and any related entity) treats both accounts as a single account for the purposes of satisfying the “standards of knowledge” requirements and determining the balance or value of the account when applying any account thresholds; if the financial account is subject to AML/KYC procedures, the Reporting NZFI is permitted to satisfy such procedures for the financial account by relying on the AML/KYC procedures performed for the pre-existing account; and opening the financial account does not require the account holder to provide new, additional or amended customer information other than for the purposes of the CRS. A Reporting NZFI is generally required to out due diligence on all pre-existing individual financial accounts to determine whether they are held by relevant foreign tax residents. There is no de minimis threshold (compared with FATCA, which has various de minimis thresholds). However, a Reporting NZFI is not required to review a pre-existing individual account that is a cash insurance contract or annuity contract if they are effectively prohibited by law from selling the contract to relevant foreign tax residents. The type of due diligence procedures that the Reporting NZFI will need to carry out on pre-existing individual accounts will depend on whether: the account is a value-account: With a balance or value of USD 1,000,000 or less (which a Reporting NZFI can simply treat as NZD 1,000,000) as of 30 June 2017; or
account holders (and other persons connected with accounts – such as intermediaries that hold funds for other persons, and controlling persons). The specific types of penalties that will be imposed under New Zealand legislation are outlined in detail further below. Some of these penalties also apply for the purposes of FATCA, where similar compliance issues arise. Penalties regime – financial institutions In brief terms, financial penalties will apply to Reporting NZFIs that fail to undertake their due diligence obligations, fail to report the requisite information, or who provide inaccurate or false information (i.e. Reporting NZFIs that fail to comply with their CRS obligations under Part 11B of the Tax Administration Act 1994). This includes: civil absolute liability penalties; penalties for failing to take reasonable care; and criminal knowledge-based penalties. These penalties are all mutually exclusive. For example, if a penalty is imposed on a Reporting NZFI for a failure to take reasonable care an additional absolute liability penalty would not be able to be imposed for that same failure. This guidance now outlines how these “financial institution” penalties would apply in practice. Civil absolute liability penalties A Reporting NZFI that does not comply with its CRS obligations could (depending on the circumstances) be liable for the following absolute liability penalties: Section 142H(1) of the Tax Administration Act 1994: $300 per failure (capped at $10,000 per reporting period) to comply with any CRS obligation than failing to obtain a for a new account – see below). This will be subject to the following defences: that the failure was due to circumstances beyond the Reporting NZFI’s control; and for a transitional period ending 30 June 2019, that the Reporting NZFI made reasonable efforts to meet its CRS requirements (including making reasonable efforts to correct any failure within a reasonable period of time becoming aware of the failure). Section 142H(3) of the Tax Administration Act 1994: $300 per account (capped at $10,000 per reporting period) for failure to obtain a required self-certification on account opening. This will be subject to the following defence:
a specified insurance company. These types of financial institution are outlined in detail in paragraph 3.1 of this guidance. They generally require that the entity carries on a particular type of business for customers (such as a bank – depository business for customers). However, as explained further below, an entity (such as a trust) can be a “managed investment entity” even if it does not carry on a business for customers. The following chart provides a high-level summary of the circumstances when a trust will be a financial institution: Step Yes No 1 Does the trust carry on a “business” for customers? Go to step 2 Go to step 3 2 Is the any of the following financial institutions? an “in business” investment entity that is not excluded from the definition of the “investment entity”; or another type of financial institution? The trust is an “in business” financial institution Go to Step 3 3 Does the trust meet all of the following: is it managed by a financial institution; is its gross income primarily attributable to investing, reinvesting or trading in financial assets; and is it not excluded from the definition of “investment entity”? The is a “managed” investment entity financial institution The trust is a NFE The type of financial institution that is most likely to apply to trusts is the investment entity category. Therefore, the following guidance focuses on this category. A trust will be an investment entity in the following circumstances:
contract’s existence and any amounts paid prior to the cancellation or termination of the contract; and the contract is not held by a transferee for value. d) an account that is held solely by an estate if the documentation for such account includes a copy of the deceased’s will or death certificate. e) an account established in connection with any of the following: a court order or judgment. a sale, exchange, or lease of real or personal property, provided that the account satisfies the following requirements: the account is funded solely with a down payment, earnest money, deposit in an amount appropriate to secure an obligation directly related to the transaction, or a similar payment, or is funded with a Financial Asset that is deposited in the account in connection with the sale, exchange, or lease of the property; the account is established and used solely to secure the obligation of the purchaser to pay the purchase for the property, the seller to pay any contingent liability, or the lessor or lessee to pay for any damages relating to the leased property as agreed under the lease; the assets of the account, including the income earned thereon, will be paid or otherwise distributed for the benefit of the purchaser, seller, lessor, or lessee (including to satisfy such person’s obligation) when the property is sold, exchanged, or surrendered, or the terminates; the account is not a margin or similar account established in connection with a sale or exchange of a Financial and the account is not associated with an account described in subparagraph C(17)(f).
an obligation of a Financial Institution servicing a loan secured by real property to set aside a portion of a payment solely to facilitate the payment of taxes or insurance related to the real property at a later time. an obligation of a Financial Institution solely to facilitate the payment of taxes at a later time. f) a Depository Account that satisfies the following requirements: the account exists solely because a customer a payment in excess of a balance due with respect to a credit card or other revolving credit facility and the overpayment is not immediately returned to the customer; and beginning on or before 1 July 2017, the Financial Institution implements policies and procedures either to prevent a customer from making an overpayment in excess of USD50,000, or to ensure that any customer overpayment in excess of USD50,000 is refunded to the customer within 60 days, in each case applying the rules set forth in paragraph C of Section VII for currency translation. For this purpose, a customer overpayment does not refer to credit balances to the extent of disputed charges but does include credit balances resulting from merchandise returns. g) any other account that presents a low risk of being used to evade tax, has substantially similar characteristics to any of the accounts described in subparagraphs C(17)(a) through (f), and is defined in domestic law as an Excluded Account, provided that the status of such account as an Excluded Account does not frustrate the purposes of the Common Reporting Standard. Appendix 6: Definition of “Non-Reporting Financial Institution” Section VIII of the CRS provides relevant definitions. Section VIII.B(1) defines a “Non-Reporting Financial Institution” as: 1. The term “Non-Reporting Financial Institution” means any Financial Institution that is: a Governmental Entity, International Organisation or Central Bank, other than with respect to a payment that is derived from an obligation held in connection with a