Inland Revenue Proposes GST Exemption for Fund Management Fees

Highlights:

• Proposed GST Exemption: Inland Revenue (IRD) proposes to exempt fund management fees from GST, aiming to create consistency across the financial sector.
• Impact on Revenue: The proposal could result in an estimated $22 million in lost tax revenue annually, compared to the $225 million that would have been generated under a previously withdrawn 2022 bill.
• Industry Reactions: While some fund managers may welcome the GST exemption, others could face higher costs, potentially leading to a shift towards insourcing services to avoid irrecoverable GST.

WELLINGTON, New Zealand – Inland Revenue (IRD) has announced a proposal to exempt fees charged for fund management from Goods and Services Tax (GST), a move that could have significant implications for the financial sector. The proposal, detailed in a draft exposure released on September 3, 2024, seeks to bring consistency to the way GST is applied across various fund management services.

Current GST Practices Under Scrutiny

At present, most fund managers in New Zealand are required to pay GST on 10% of the fees they charge, reflecting the portion of services deemed to constitute "investment advice." However, KiwiSaver managers are generally exempt from GST on their fees due to the nature of retirement savings vehicles. In contrast, some other fund managers apply GST to 100% of their fees, leading to a lack of uniformity in the industry.

Clarifying the Grey Areas

The IRD’s proposal attempts to address the complexities and grey areas surrounding GST application. According to the draft, the application of GST will depend on the nature of the services provided. For example, if a third-party investment manager has the authority to make and implement investment decisions, the services they provide may be exempt from GST. However, if the investment recommendations are heavily scrutinized and the third-party manager lacks decision-making authority, the fees charged could be subject to GST.

Industry Reactions and Implications

The proposal has sparked reactions across the industry. MinterEllisonRuddWatts, a leading law firm, notes that this proposal is a significant departure from the previous Labour government's 2022 attempt to apply a full 15% GST rate on all fund management fees, a bill that was withdrawn within 24 hours.

Deloitte’s indirect tax national leader, Allan Bullot, highlighted that while the 2022 proposal would have generated substantial tax revenue—an estimated $225 million annually—the new proposal might cost the government approximately $22 million in lost revenue. However, the Financial Markets Authority had previously estimated that applying GST to all investment management fees could have cost KiwiSavers around $103 billion by 2017.

Law firm DLA Piper added that while some fund managers might benefit from the exemption, others could face increased costs. The proposal may push managers towards insourcing functions to avoid the irrecoverable GST charged by outsourced providers.

Public Submissions and Future Outlook

The IRD is currently seeking public submissions on the proposal, with a deadline set for October 25, 2024. Given the complexity and long history of this issue, it is expected that the debate will continue as stakeholders weigh in on the potential impacts before IRD finalizes its position.

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