Wait long enough and most things come back in fashion, even tax moves.
And last week the Inland Revenue Department (IRD) put a new twist on an old classic in a policy paper addressing the still unresolved issue of how to treat GST in fund manager fees.
In the bureaucratic dance first set in motion during informal discussions in 2013, the IRD quickly fell out-of-step with industry before calling time early last year.
EY partner, Paul Smith, said the earlier GST probe opened a “can of worms” that the IRD has been kicking down the road ever since.
Smith said the new IRD policy paper marks a higher-level attempt to close the lid on the slithery GST fund fee worm-can.
“[The IRD] has passed the issue on to its policy division to solve through legislation,” he said.
Essentially, the IRD has binned its earlier hard-line operational recommendation to treat all fund fees as GST-free that would’ve removed the option for managers to claim back tax on input expenses.
Instead, the new IRD proposals include a bundle of options under an overarching goal of redefining the meaning of “financial services” across the industry.
According to the IRD paper, the government has five possibilities to consider, namely:
- _broadening the GST exemption to all fund management services;
- _narrowing the GST exemption to make their fees fully subject to GST;
- _deeming a percentage of their services to be exempt;
- _to zero-rate for all GST to be claimed back (without requiring GST on services); or,
- _allow a reduced GST credits mechanism.
“No option is preferred over the others currently, so this consultation is exploratory in nature at this stage,” the IRD paper says.
Smith said ideally the government would choose to zero-rate fund fees while still allowing managers to claim back GST on input costs.
“Bearing in mind that the government is trying to encourage saving this would be good for the country as well as for the industry,” he said.
But whatever reforms ultimately emerge, the IRD admits “some managers will face compliance costs from changing how they [currently] apply GST”.
Regardless of where these costs fall, the IRD remains keen to impose some GST consistency in an industry where current practice appears chaotic.
“Within the fund manager and investment management industry, both financial services and other services (such as investment advice) can be supplied as a single service, meaning there can be differing treatment for GST claimed back, resulting in inconsistency, complexity and compliance costs,” the IRD paper says.
“Some fund managers apply GST to all their fees (therefore claim back all GST paid on their business expenses), some do not apply GST (therefore cannot claim back any GST on their business expenses), and some have a mix. This situation is occurring to the extent that it is creating competitive distortions in the marketplace.”
Curiously, the IRD is unable to attach a cost-to-taxpayer figure on any of the proposed GST reforms.
“At this stage, it is difficult to accurately determine what the fiscal impact may be under any of the policy options,” the IRD says.
Smith said the IRD has expended a lot of energy examining an issue that “it doesn’t know is worth looking at” from a tax revenue point of view.
Nonetheless, he said many fund managers would likely be dusting off previous GST submissions in spite of a “frustrating” seven-year process.
The regulatory music might sound dated but NZ fund managers still need tickets to the dance.
Submissions close on April 3 on the fund fee proposals, which are included in an omnibus GST policy review covering – among other items – the tax treatment of cryptocurrencies.
