Australian superannuation funds will not be exempt from the Foreign Account Tax Compliance Act (FATCA), the United States regulations that require financial institutions around the world to report account details of US citizens.

This means funds will face a new set of onerous compliance requirements, on top of the current regulatory changes taking place in Australia.

Initially, the industry was hoping super funds would fall outside the US-imposed regulations because funds are not accessible until retirement, but the latest draft of the regulations indicates they will not qualify under the retirement plan exemptions.

"We had hoped that we would get a nice exemption for the Australian super industry, but unfortunately there is no blanket exemption," Deloitte taxation partner Noelle Kelleher said.

"In fact, the retirement fund exemption that previously was in the draft regulations has been modified in such a way that it is going to make it very difficult for the Australian super industry to comply with FATCA.

"Everything we've talked about what the banks have been doing, effectively the super funds will be doing."

Super funds are not retirement plans

Under the regulations, retirement funds are exempt from FATCA, but Kelleher said Australian super funds were unlikely to pass any of the tests that would classify them as such.

"The test that is going to cause us the biggest problem is that all contributions need to either be employer/government or employer contributions, which from an Australian perspective, all of our funds are actually set up to take voluntary contributions," she said.

"We will fall out where we've got self-employed people and where we've got members making voluntary contributions.

"If anything, it is going to be easier for a self-managed super fund to qualify under FATCA than an industry fund or a retail fund."

If Australian super funds do not get an exemption, they will need to enter into an agreement with the US taxation office, the Internal Revenue Service, by 30 June 2013.

Association of Superannuation Funds of Australia (ASFA) chief executive Pauline Vamos said she had little hope the US government would be open to further lobbying from the sector.

"ASFA will be putting in another submission, but we do not hold out much hope of getting an exemption from the regime. The key issue appears to be the capacity of people to make large voluntary contributions," Vamos said.

"There will be compliance costs for super funds, but these have been reduced under the current set of draft rules. We are analysing the administration and compliance impacts for funds."

Funds focus on domestic regulations

At the same time, the current raft of regulatory changes in Australia under Stronger Super and the Future of Financial Advice, combined with a high level of consolidation in the super industry, has pushed FATCA down the list of priorities for many funds.

Kelleher said some super funds even considered simply exiting the US altogether to avoid having to pay the withholding tax of 30 per cent that would apply on US investments of non-compliant institutions.

"Some of the comments that I've heard from the super world have been along the lines of: 'Well, we won't invest in the US,'" she said.

"So they will remove their direct investments into the US on the basis of: 'If we don't have any direct investments, we don't have to worry about FATCA.'"

But this approach is not only difficult to achieve, considering the large amounts of investment funds that flow in some way through the US, or US-domiciled managers, but also because Deloitte expects most large financial institutions, including banks, will not want to deal with non-compliant entities.

Compliance costs

Deloitte has argued that most financial institutions will be able to keep compliance costs down through the use of their existing anti-money laundering infrastructure and processes.

But many doubt FATCA will have only a minor impact on costs.

"The amount of reporting, the amount of administrative burden which it is going to put on the custodians, the super funds, the investment managers, administrators is going to be huge and we need to make sure that our voice is heard," BNP Paribas Australia and New Zealand managing director Pierre Jond said.

"This is going to be a huge undertaking for the market. The US wants to turn a financial institution into a body that will screen its clients and identify anybody who could be potentially deemed a US person - that is, hold a green card, be a citizen - and report that person to the US authorities. It is something very onerous."

Not only is the reporting process complex, it also creates some regulatory issues relating to the privacy of clients.

"We have a number of banking privacy obligations, which is making the topic particularly complex," Jond said.

A number of super funds contacted by Investor Weekly admitted FATCA was not a top priority for them currently, but those funds that had started to look into the issue did not see a straightforward solution either.

Christian Super chief executive Peter Murphy said it had referred the issue to its tax advisers, but did not rule out that FATCA might restrict its investment universe further.

"Christian Super is aware of the present state of play with the proposed FATCA legislation and see serious unintended consequences of the present course of action as it touches the key areas of our organisation," Murphy said.

"We are in discussions with our tax adviser how best to ensure that our investment universe is not seriously depleted due to the legislation, however, this might necessitate in us capturing more information than we would normally require for our members."