Details about potential changes to the GST treatment of funds management fees should be known shortly, according to Matthew Hanley, tax partner with consultancy firm EY (formerly known as Ernst and Young).
Hanley said the Inland Revenue Department (IRD) was expected to let the industry know its preferred approach to GST on fund fees “in a few weeks”.
“The IRD hasn’t yet indicated where it’s likely land,” he said. “There’s a range of possible outcomes.”
The IRD has been reviewing the GST treatment of funds management fees since last year, seeking to modernise an agreement with industry that dates back to the early years of this century.
Hanley said under the current agreement – first inked with the Investment Savings and Insurance Association, predecessor of the Financial Services Council (FSC) – GST applies to only 10 per cent of funds management fees.
“Under GST laws, financial services are exempt,” he said. But while some fund management activities fall under the financial services description, other functions such as administration and reporting are considered outside its ambit.
Hanley said the “90/10” approach was a proxy method that the IRD has decided to clarify under a “principles-based” review.
Some fund managers, particularly those housed outside of larger financial conglomerates, would benefit from GST applying to 100 per cent of the fee, allowing them to claim back GST on input expenses.
Hanley said fund management operations in larger financial firms might source some services internally and not incur non-recoverable GST costs.
If the IRD recommends GST should apply to the whole funds management fee, consumers might not necessarily see investment costs rise, he said.
“There might be pressure for managers to reduce their base fees,” Hanley said. “Alternatively, maybe the IRD might exempt the entire fee from GST.”
The issue is already bubbling to the surface for some managers.
In a client letter detailing changes to KiwiSaver fees, Milford Asset Management pointed out that the IRD review of GST on fund fees was underway.
“Should a change in tax legislation occur this may mean that the fees stated in a fund’s prospectus, or any other document, will need to change to a GST exclusive basis,” the Milford letter says.