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You are here: Home / Investment News / Frustration mounts as IRD stands firm on fee GST position

Frustration mounts as IRD stands firm on fee GST position

February 12, 2017

NZ boutique fund managers have all but given up hope of winning the long-running dispute on the GST treatment of fees after the Inland Revenue Department (IRD) confirmed its commitment to zero-rating last week.

In the brace of much-delayed ‘questions we’ve been asked’ (QWBA) draft exposure documents released last Thursday, the IRD essentially condemns fund managers using outsourced administrative services to wear extra input costs without teh ability to recoup GST on their own fees.

The IRD position – explained in the two QWBAs covering GST on unit trust fees and outsourced services, respectively – upholds its previous draft ruling released in October 2015 deeming fund manager fees as ‘financial services’ exempt from the sales tax impost.

In the exposure draft, the IRD says services supplied to fund managers will be exempt from GST if:

  • each of the activities carried on by the manager is one of the activities listed in the definition of ‘financial services’, or
  • some of the activities carried on by the manager are listed in the definition of ‘financial services’ and any other services supplied by the manager are reasonably incidental and necessary to the financial services supplied by the manager.

Local fund managers contacted by Investment News NZ have expressed frustration with the latest IRD policy proposals, which give no ground to industry arguments.

Following the initial IRD discussion paper in 2015, which tabled the move to zero GST from the current rating applied to 10 per cent of fees, a group of boutiques hired consultancy firm EY to put the case.

The boutiques argued removing GST on manager fees, while not exempting input costs on outsourced services, was inequitable and ran counter to offshore jurisdiction rules such as Australia.

“I feel like we’ve put our best foot forward, which the IRD has ignored,” one manager said. “While these are exposure drafts I don’t think there’s much point in us making any more submissions.”

In the exposure draft published last week, the IRD says services such as fund accounting and registry would not attract GST if performed in-house but:

“If any of the services supplied by a third party to the manager of a unit trust are taxable supplies, the manager will not be entitled to an input tax credit on those supplies.

“This is because the services are acquired by the manager for the purpose of making exempt supplies.”

Those managers who use outsourced administration services would either have to wear the cost, increase their base fees, or restructure their businesses to minimise the damage.

According to another boutique manager, the IRD position provides a perverse incentive for managers to favour in-house administration – an option typically open to larger, institutionally-owned businesses.

“The government should be encouraging the use of independent, third-party investment administration,” the manager said.

Furthermore, the manager said the IRD has never provided an analysis detailing the fiscal cost of the GST change and who would stands to gain or lose under the proposal.

As well as upholding its view on the deductibility of outsourced administration services, the IRD also clarifies that where a manager advises on portfolio holdings but does not have “full authority both to make and carry out investment decisions”, then the ‘financial services’ GST exemption would not apply.

In the exposure draft, the IRD cites two offshore cases – in Canada and Europe – to back up its position.

“There are no New Zealand cases that consider the nature of the services provided by a person who has discretion to make and implement investment decisions,” the IRD paper says.

However, the IRD says the offshore cases indicate that “research and market analysis” would generally be considered essential in supplying financial services, and therefore exempt from GST.

In a note to clients, one consulting firm says the IRD has likely adopted a “correct interpretation of the current law”.

“[However], we question whether there is merit in pursuing a change in this position from a policy perspective given outsourcing is best practice,” the note says.

Submissions on the GST papers close on March 23.

The IRD is also trialing “a short online form as a new way for you to give us feedback”.

“This does not replace the submissions we currently receive from you – we highly appreciate your analysis of issues covered by Public Rulings,” the IRD says. “Its intention is to give you a quick option for telling us your initial impressions of an item, which you may (or may not) wish to follow up with a full submission.”

 

 

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