An almost five-year tax saga ground to an indefinite halt last week as the Inland Revenue Department (IRD) backed down on controversial plans to remove GST from fund manager fees.
In a victory for the status quo, the IRD ruled that fund managers can maintain the current practice of charging GST on 10 per cent of unit trust fees – or set their own rate.
Following a drawn-out consultation process launched in 2014, the IRD originally settled on dropping GST from all unit trust fees, as explained in two ‘questions we’ve been asked’ (QWBAs) published in 2016.
However, the proposals sparked “very different views” on the appropriate GST applicable to unit trusts “and therefore the extent to which input tax credits could be claimed”, the IRD told the industry in a note last week.
“Having considered these submissions, the Commissioner [Naomi Ferguson] accepts that different interpretations can be argued for and that the current law is unclear,” the note says. “It is also not clear that the conclusions expressed in the QWBAs reflect the desired outcome from a policy perspective. Given this, and the lack of clarity, further policy work is planned on this issue…”
The IRD note says until “possible legislative change”, the funds industry can carry on as before under the 90/10 approach or set a “different percentage of the manager fees they charge as being taxable supplies”.
“The Commissioner’s position is that taxpayers can [choose their own GST-liable fee percentage] pending the outcome of the policy review as long as both output tax and input tax are treated consistently,” the IRD says. “Taxpayers should ensure they are able to explain the technical basis for adopting their treatment.”
But with a major technology upgrade underway, staff cutbacks and a likely flood of policy work in the wake of the government’s capital gains tax (CGT) report, the IRD is hardly primed to devote much further attention to fund fee GST issues.
As the IRD note says, “… the timing of this [GST] policy review will be subject to other priorities”.
The IRD decision will be a relief to many NZ fund managers, particularly boutique operations that stood to face a profit-squeeze without the ability to claim back GST on cost inputs.
Under the IRD’s zero-GST proposal, stand-alone fund managers would have had to wear the tax-inclusive cost of certain outsourced services – such as administration. Conversely, investment operations housed in financial conglomerates would be able to more easily shift GST costs elsewhere.
While the IRD has shelved the vexed fund fee debate, the recent Tax Working Group (TWG) report recommends all financial services should be GST-exclusive – a finding that ultimately circles back to the IRD’s 2014 problem of defining exactly what counts as a ‘financial service’.