Insourced admin is out and outsourced admin is in, the Inland Revenue Department (IRD) has determined in a new GST ruling likely to disappoint the local boutique funds management community… again.
The IRD ‘interpretation statement’ handed down last week largely repeats the position laid down in a draft consultation paper published last August aimed at solving the ancient puzzle of how to treat fund management fees for GST purposes.
According to the final statement, all fund management fees should be zero-rated for GST as they fall under the definition of ‘financial services’.
But while self-supplied administration – including unit-pricing, fund accounting and registry – are deemed exempt from the sales tax, the same services outsourced to third-parties must include GST, according to the IRD ruling.
“The outsourced supply of administrative services (including registry services, fund accounting and unit pricing) by a third party under a contract with the manager of the managed fund is a taxable supply,” the paper says. “Administrative services are not exempt supplies of financial services because they are not one of the activities listed [in the law]… and, generally, are not reasonably incidental and necessary to a supply of financial services.”
Under a long-standing ad hoc industry agreement, local investment managers typically tack on GST to 10 per cent of fund fees, allowing some claw-back of input costs imposed by the tax.
However, the latest IRD decision will see managers bearing the full GST impact of outsourced admin with likely bottom-line consequences.
Most NZ boutique fund managers – as well as some larger institution-owned firms – use third-party administration services and have lobbied against the move since the IRD first proposed a rule re-think more than 10 years ago.
In the intervening years, the tax department has shifted position several times in a zig-zag that saw the-then Labour government look to impose GST on 100 per cent of managed fund fees, including KiwiSaver products, in 2022.
Labour quickly reversed the decision in the wake of a public outcry over possible KiwiSaver fee increases, handing the vexed issue back to the IRD.
As well as establishing the GST-exempt standing for fund fees and clarifying the admin question, the IRD paper also outlines when the sales tax applies to certain outsourced investment management services.
Legal firm MinterEllisonRuddWatts noted last year that “managers and administrators of both retail and wholesale managed investment schemes will need to consider how this draft interpretation statement impacts their structure, as outsourcing to third-party investment managers and administrators could carry GST costs that will not be recoverable”.
“Entities providing investment management services to managed funds will need to consider whether their services are subject to GST.”
Ultimately, investment managers may increase fees to cover the higher input costs once the updated GST rules come into play – probably in time for the next financial year.