The Inland Revenue Department (IRD) is rustling up industry feedback on a new mission to bring GST on fund fees back inside the perimeter.
In a recent consultation document, the IRD highlights the need to settle “the correct GST treatment” for both fund manager fees and third-party expenses – issues that have evaded regulatory capture for at least a decade.
Among the “issues to be considered” are how the sales tax applies to manager fees “including, if applicable, for any particular fund or funds under the scheme”, the consultation says.
The IRD ambit also extends to fees “paid by the manager or supervisor to third party service providers” such as “registry, custodial, accounting and investment management or investment advisory services”, again to be weighed both at entity and fund levels.
As well, the discussion document singles out ‘retirement’ scheme fees, which would include KiwiSaver, for special attention regarding GST treatment.
Earlier this year the IRD rebooted the GST debate following an ill-fated attempt by the former Labour Revenue Minister, David Parker, to apply the tax to retail fund fees including KiwiSaver, sparking a furious public backlash.
However, many managers, especially boutique firms, would welcome a full GST on fund fees as a way to claw back currently unclaimable sales tax imposts on expenses such as outsourced administration.
The IRD and industry have been grappling with the GST impasse since a formal consultation in 2014. But after a fruitless five-year to-and-fro, the tax department parked discussions in 2019, opting to retain the status quo at the time.
Under the current ad hoc arrangements, fund managers can apply GST to 10 per cent of fees – harking back to a turn-of-the-century industry/IRD compromise – or elect to charge a different proportion if justifiable.
“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 noted in 2019. “Taxpayers should ensure they are able to explain the technical basis for adopting their treatment.”
It is understood the latest round of GST-on-fee talks include a novel plan to channel the tax via individual funds instead of, or as well as, at the corporate entity level.
More to come…
Elsewhere, the revenue authority has also flagged direct-to-consumer share-trading platforms and Australian unit trusts for further investigation this financial year on their respective tax consequences with preliminary work already underway on both counts.
The IRD says a review will “address the income tax treatment of gains and losses arising from investing in shares through an online trading platform”.
“It is important investors understand the correct tax treatment of those gains and losses, and when their activities will amount to trading in shares.
“The popularity of investing in shares through an online trading platform means that many more customers are investing in shares and deriving gains and losses.”
NZ investors may be subject to taxes on capital gains (or offsets on losses) on direct share-holdings if classified as professional traders.
Similarly, the IRD plans to deliver a “series of public rulings” on the income tax status of Australia-domiciled funds in the 2023/24 period.
“This project will address the income tax consequences for New Zealand resident investors of investing in Australian unit trusts,” the IRD says.
Many NZ investors continue to access various asset classes through Australian unit trusts, which have different, and more complicated, tax consequences compared to locally based portfolio investment entities.
Other items on the IRD agenda this financial year include another GST clarification where intermediaries “broker or promote financial products offered by different parties to their customers”.
“With more regulation and evolving technologies, intermediaries are using different arrangements and providing varying levels of services when offering financial products to customers,” the IRD annual work program notes. “Guidance and examples will be helpful when considering the GST treatment of these various brokering, promotional or partnering arrangements.”