The Inland Revenue Department (IRD) has ruled fund management fees should be GST-free, according to a leaked document.
As reported by Investment News NZ (IN NZ) last week, the GST on fees issue was expected to go out for public consultation in December.
But in the draft proposal obtained by IN NZ, the IRD concludes funds management sits squarely under the GST-free financial services definition.
“Our current view is that the entire amount of the fees are paid out for exempt supplies as they are payments for financial services or for services that are reasonably incidental and necessary to the supply of financial services by the manager,” the IRD proposal says.
Under the existing arrangement, 10 per cent of funds management fees attract GST. Dispensing with GST from fund fees would leave managers unable to claim back on input costs from third-party suppliers – meaning some firms would either have to increase base fees or absorb the extra costs in their businesses.
It is understood the move to zero-GST on fees would be more detrimental to boutique managers rather than big-end-of-town firms that were able to shift the tax impost across business units.
Further complicating the matter, the IRD argues outsourced funds management services may not automatically be exempt from GST.
“… we consider that investment management activities carried out by a third party under a contract with the manager are not necessarily financial services,” the IRD proposal says.
However, the IRD’s support of the zero-GST option has left many in the industry baffled, fearing the change would introduce inefficiencies and inequities in the funds business.
According to one manager the IRD call might be “correct at law but for several reasons it is just bad policy”.
The IRD would consider further submissions “before we reach a final view”, the draft proposal says.