Financial institution
A financial institution is an entity which carries out activity relating to deposit taking, investment activity, insurance, or custody services. The types of entity that would fall within this definition include Banks, Building Society, Insurance Company, Custodial institutions, and Investment entities. Quilter falls within the definition of a Financial Institution.
An Investment Entity is one that primarily conducts one or more of the following activities on behalf of a customer, such as:
- trading in money market instruments, foreign exchange, exchange, interest rate and index instruments, transferable securities, or commodity future trading
- individual and collective portfolio management; or
- otherwise investing, administering or managing financial assets or money on behalf of other persons.
In some circumstances it may be possible that a trust holding an insurance policy will be categorised as an Investment Entity, for example, where a trust is professionally managed by a trustee service provider (such as a solicitor or company) is acting as trustee.
If an entity does not fall within the Financial Institution definition, then it is likely that entity will be either a Passive NFFE or an Active NFFE.
Active NFFE
An Active NFFE is generally an actively trading non-financial services business. This includes all actively trading companies and partnerships that are not financial institutions and do not exist to simply hold investments, or to receive income.
If an entity does not meet the definition of an Active NFFE, it will be a Passive NFFE.
An entity is an Active NFFE if it meets any of the following criteria:
- It is active by reason of income and assets. This requires less than 50% of its gross income for the preceding calendar year or other appropriate reporting period to be passive income and less than 50% of its assets held in the same period to be assets that produce or are held for the production of passive income.
- Its stock is regularly traded on an established securities market or it is a related entity of such an entity.
- It is a Government Entity International Organisation, Central Bank, or a wholly owned subsidiary of such an entity.
- It is holding company for a Non-Financial Entity that are members of a non-financial group. It will not qualify as an Active NFFE where these holdings are part of a business as an investment fund or vehicle whose purpose is to acquire or fund companies and then hold interests as capital assets for investment purposes.
- It is a start-up Non-Financial Entity which is not yet operating a business and has no prior operating history but is investing capital into assets with the intention of operating a business other than that of a financial institution. This category only applies during the first 24 months after the date that the Non-Financial Entity was first formed.
- It is a Non-Financial Entity that has not been a financial institution in the last 5 years and which is in the process of liquidating its assets or is reorganising with a view to continuing or recommencing business operations other than as a financial institution.
- It is a treasury centre of a non-financial group engaging in financing and hedging transactions with or for related entities.
- It is a not for profit organisation set up for religious, charitable, scientific, artistic, cultural, athletic or educational purposes; or it is established and operated as a professional organisation, business league, chamber of commerce, labour organisation, agricultural or horticultural organisation, civic league or an organisation operated for the promotion of social welfare.
In all cases the organisation must be exempt from income tax and its income and assets cannot be applied other than for the express purposes for which the organisation is established.
Passive NFFE
A Passive NFFE is an entity which is a non-financial services business. It does not actively trade and has the primary purpose to hold financial assets. For example, where an individual is a trustee or protector of a Discretionary Trust and the asset(s) is a single premium life assurance policy or collective investments.
You would expect a Passive NFFE to hold investments or income on behalf of another, such as:
- a private company.
- a partnership; or
- other legal arrangement such as a non-professionally managed trust, for example where none of the trustees is a solicitor or a company which provides trustee services.
If an entity does not meet the definition of an Active NFFE, it will be a Passive NFFE.