IRD wants to make fund management fees exempt GST

Currently, most fund managers pay GST on 10% of the funds they manage because that was the estimated component that constituted “investment advice.”

However, KiwiSaver managers generally don't pay any GST on their fees because retirement savings vehicles are exempt, while over time, some other managers have applied GST to 100% of their fees.

While providing financial services is exempt from GST, providing investment advice is liable for GST, as is administrative services farmed out to a third party, such as registry services.

However, when a fund manager farms out investment management services to a third party, whether or not GST should be applied to fees paid for those services will depend on the terms of the external manager's appointment, IRD says in its draft exposure on the subject.

“Where a third-party investment manager has authority to make and implement investment decisions, the investment manager makes an exempt supply of financial services,” IRD's paper says.

However, if the third-party manager's investment recommendations are subject to a high level of oversight and scrutiny, and the third-party manager doesn't have authority to implement its recommendations, that would constitute inveswtment advice and the fees charged would therefore be subject to GST.

However, there's a grey area; if a manager has the right to veto an investment decision made by a third-party investment manager, fees for that service may still be exempt GST so long as the first manager's veto rights amount to simply checking that the third-party manager is complying with its mandate.

According to law firm MinterEllisonRuddWatts, IRD's latest proposal is the opposite to what the previous Labour government had proposed in 2022.

A bill applying the full 15% GST rate on all fees charged by fund managers was introduced into parliament but then withdrawn within 24 hours.

IRD's latest proposal “is intended to encourage consistency,” MinterEllisonRuddWatts says.

Deloitte's indirect tax national leader Allan Bullot says the regulatory impact statement published with the 2022 proposal shows IRD's proposal would cost the government about $22 million a year in lost tax revenue, “even less than a rounding error.”

Applying GST to all investment management fees, including KiwiSaver management fees, would have brought in about an extra $225 million a year in tax revenue, but the Financial Markets Authority had estimated that would have cost KiwiSavers about $103 billion by 2017 and non-KiwiSaver investors about $83 billion, Bullot says.

Law firm DLA Piper says while some fund managers will welcome IRD's proposal, it will be costly for some investment fund managers.

“It could remove their ability to recover any GST on their costs. It will also result in a bias towards insourcing functions, rather than incurring the irrecoverable GST charged by an oursourced provider,” DLA Piper says.

IRD is calling for submissions on its proposal by Oct 25.

“Given the long history and complexity associated with this issue, we expect there will be some debate before IRD finalises its position,” DLA Piper says.