Moving to GST-free funds would create an expensive problem for the local industry, according to Rebecca Thomas, head of Mint Asset Management.
Thomas said Inland Revenue Department (IRD) proposals to slash GST on fees to zero from the current rate – where the sales impost is levied on 10 per cent of fund fees – would lead to “less than optimal” business practices.
As reported by Investment News NZ (IN NZ) earlier this month, the IRD surprised the industry by pushing for a zero-rated GST on managed fund fees in a recent discussion document. If adopted, the policy change would prevent managers claiming back GST on input costs, which Thomas said would favour larger institutions – that can internalise functions and spread costs – over boutique managers who use more outsourced services.
“That would create a non-level playing field,” she said.
Thomas said as the GST rules apply only to unit trusts, managers could seek to minimise the effect by shifting wholesale clients to segregated mandates rather than via pooled portfolio investment entity (PIE) vehicles.
“But that goes counter to the whole purpose of introducing the PIE regime,” she said. “The beauty of PIEs is that investors on different tax rates can be managed efficiently in the same pool.”
Thomas said Mint would lobby against the IRD proposal based on its potential to create inequities and undermine the effectiveness of the PIE regime.
But she said the IRD should also consider recent changes to the Australian fund GST model, which upheld – and even extended – the ability of unit trusts to levy the tax and claim back input costs.
While the Australian GST rules were complex and apply to the unit trust itself (as opposed to NZ where the manager is the tax entity), Thomas said the principles were applicable here.
As Australian investment admin firm Unity Fund Services explained in 2012, while the Australian government reduced the GST claim-back rate from 75 per cent to 55 per cent for some functions, it also expanded the range of claimable services
However, legal firm DLA Piper Australia also noted at the time: “Under the new rules, affected trusts will be subject to two RITC rates (55% and 75%), which is likely to increase the net cost of GST for most affected trusts, as well as substantially increasing GST complexity and administration.”
The subject is a vexed issue in other jurisdictions, too, with Singapore last year updating fund rules to allow certain entities to continue to claim back 90 per cent of GST on allowable costs.
New Zealand, however, could be an outlier if it does opt for the zero-GST approach. Indeed, some industry players told IN NZ they were expecting the IRD to increase the proportion of fund fees liable for GST.
“The mystery question is who is pushing for the change,” Thomas said.