The Inland Revenue Department (IRD) is in no hurry to resolve the question of how GST applies to funds management fees with the consultation process expected to drag on for months.
According to an IRD spokesperson, the tax department would probably issue its final determination “sometime this year” following a public consultation.
“Exactly when is unclear,” the spokesperson said. “There’s a lot of initial policy feedback to go through before we put out a public consultation document.”
The IRD surprised the industry last October with a discussion document favouring the complete removal of GST on funds management fees. Under an arrangement negotiated between the investment industry and the IRD more than 15 years ago, GST is payable on only 10 per cent of unit trust funds management fees.
However, many industry players were expecting the IRD to increase the GST component on funds fees with some tipping it would rise to 100 per cent.
Instead the IRD offered the opinion in its October 2015 paper that “the supplies made by the manager of a unit trust are exempt supplies under… the GST Act or the supply of services that are reasonably incidental and necessary to the supply of financial services by the manager”.
“Therefore, the fees payable to the manager are not subject to GST,” the IRD paper says.
While the issue is technical, removing the sales tax impost from fund fees could force some managers – especially boutique operations – to increase investor charges to defray the non-deductible GST on business input costs.
Funds management units encased in larger financial conglomerates, though, can more easily shift the GST burden through associated entities.
The IRD spokesperson declined to reveal the extent of industry feedback on its October 2015 discussion paper.
He said the IRD would publish submissions – unless requested not to by authors – following the final public consultation process later this year.
Graham Gruschow, IRD senior investigator, is leading the fund fees GST project.