The Inland Revenue Department (IRD) plans to release a public consultation document detailing proposed changes to GST on funds management fees this July.
According to industry sources, the IRD Office of the Chief Tax Counsel (OCTC) will issue an ‘interpretation statement’ in July, laying out proposals on how GST applies to funds management fees.
Last October the IRD surprised local managers after declaring in its initial private discussion document that funds management fees should attract zero GST. Under the current long-standing industry agreement, GST applies to 10 per cent of fund fees.
However, in 2015 the IRD began sounding out the funds industry on whether the GST policy needed an upgrade. The 10 per cent threshold was introduced well before both the portfolio investment entity (PIE) and KiwiSaver regimes were established in 2007.
Matthew Hanley, EY tax partner, told Investment News NZ (IN NZ) last October that the IRD was considering three options: no change; applying the sales tax to 100 per cent of unit trust fees, and; a zero GST approach.
At the time, Hanley told IN NZ that the latter option did have some historical precedence.
“Super schemes have been fully exempt from GST since it was introduced in 1986,” he said. “Given the close links between managed funds and super schemes it probably wouldn’t be out of order to see [zero GST] as an option.”
But many fund managers, particularly boutiques, favoured the 100 per cent tax impost as it would’ve enabled them to recoup GST on input costs, possibly leading to a reduction of base fees.
Conversely, the IRD’s preferred zero-GST policy could see managers hike base fees to cover increased costs or shift their focus to running discrete mandates outside the PIE system.
In its original paper, the IRD deems “supplies made by the manager of a unit trust” as financial services and therefore exempt from GST.
The IRD document says the financial services label applies across the four broad unit trust management activities, namely: issuing or redeeming units; handling cash flows; making and implementing investment decisions, and; administration.
However, while administration – including fund accounting, unit pricing and registry – delivered in-house would be GST-exempt, the IRD paper says outsourced admin services may attract the sales tax impost.
“The services provided by a third party to the manager are not necessarily financial services or an exempt supply,” the IRD says.
While the fund management fee GST issue was not yet listed on the IRD consultation schedule, a spokesperson for the tax department told IN INZ earlier that the matter would be dealt with “sometime this year”
Previously, the IRD has dealt with some thorny GST questions including how it applies to: futures contracts; late return fees such as “library fines and parking overstay charges”; lotteries, raffles, sweepstakes and prize competitions, and; exemption for “sail-away boats”.
The IRD was not able to confirm the fund fee consultation timetable prior to press-time.