In a draft ruling set to disappoint boutique investment managers the Inland Revenue Department (IRD) has deemed fund fees as GST-exempt while outsourced services remain subject to the sales tax.
The just-released IRD ‘interpretation statement’ attempts to resolve an issue that has dogged the industry for more than a decade by essentially restating its previous hard-line policy position defining funds management as a financial service while other third-party functions remain as ‘taxable supplies’.
According to the draft statement, “fees payable to the manager of a managed fund for services supplied to the investors (or the supervisor on the investors’ behalf) are not subject to GST as they are consideration for exempt supplies of financial services”.
But the IRD paper notes that “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”.
If formally adopted, the tax ruling would see fund managers using outsourced services lumped with higher input costs and no ability to offset via GST on management fees.
Currently, the industry-brokered détente position is to apply GST to 10 per cent of fund fees – although the IRD previously stated managers could levy the tax on any portion of fees as long as there was a sound legal justification.
And the new tax department position paper also reaffirms an earlier view that fund managers won’t be required to pay GST on in-house administration services.
The IRD statement says “the supply of administrative services is an exempt supply” if the manager provides those services that are also “reasonably incidental and necessary to the supply of financial services by the manager”.
Internal fund accounting, unit-pricing and registry, for example, would not be subject to GST, the statement says.
Furthermore, the IRD paper seeks to clarify when outsourced investment management services would, or would not, require a sales tax tacked on.
“The supply of investment management services carried out by a third-party investment manager is either an exempt supply of financial services or a taxable supply of advice, depending on the terms of the investment manager’s appointment and the manner in which this appointment is exercised and supervised,” the statement says.
However, the line between GST-liable and -exempt for using external fund managers remains open to interpretation with lawyers likely to welcome the opportunities.
The draft statement also confirms that retirement schemes such as KiwiSaver must also treat third-party admin services as taxable supplies.
In 2022, the previous Labour-led government caused an uproar after introducing a bill that would’ve seen GST applied to 100 per cent of managed fund fees including KiwiSaver products.
The Labour proposed law followed an earlier 2017 IRD consultation on the issue.
“However, due to the response to the legislative proposals the proposed legislation was withdrawn,” the most recent IRD statement says. “It is important that the issues be resolved, so this draft interpretation statement sets out the Commissioner’s view on the correct application of GST in the managed funds context.”
Among other legal precedents, the IRD paper cites Doom v Commissioners of Customs & Excise [1973] to support its case.
Submissions on the new fund fees and GST policy position are due by October 25.