IRD Proposes GST Exemption for Fund Management Fees

GST Exemption Proposal: Inland Revenue (IRD) has proposed making fund management fees exempt from GST, aiming to create consistency across the industry.

• Potential Impact on Fund Managers: The proposal could lead to reduced GST recovery for fund managers, potentially encouraging insourcing over outsourcing to avoid irrecoverable GST costs.
• Industry Reactions: While some fund managers may welcome the change, others are concerned about the financial impact, with debates expected before IRD finalizes its position.

Inland Revenue Proposes GST Exemption

Inland Revenue (IRD) has put forward a proposal to make fund management fees exempt from Goods and Services Tax (GST). Currently, most fund managers pay GST on 10% of the fees they charge, which is considered the portion related to “investment advice.” However, KiwiSaver managers are generally exempt from GST due to the nature of retirement savings vehicles, leading to inconsistencies in how fees are taxed across the industry.

Impact on Fund Managers

The proposal could create significant changes for fund managers. Under the current rules, if a fund manager outsources investment management services to a third party, whether GST is applied depends on the level of control the third-party manager has. If the third-party manager can make and implement investment decisions independently, their service is exempt from GST. However, if their decisions are heavily overseen, the fees are considered investment advice and are therefore subject to GST.

Industry Reactions and Potential Costs

Law firms like MinterEllisonRuddWatts have noted that IRD's proposal contrasts sharply with a previous 2022 Labour government bill, which sought to apply a 15% GST on all fund management fees. That bill was withdrawn, and IRD's current proposal aims to standardize the treatment of GST across the industry. However, Deloitte's Allan Bullot points out that this exemption could cost the government approximately $22 million annually in lost tax revenue.

Some fund managers may welcome this change, but others could face challenges, particularly with insourcing costs. DLA Piper suggests that while the proposal may simplify tax structures, it could reduce the ability of fund managers to recover GST on their expenses.

IRD is accepting submissions on this proposal until October 25, with further debates expected before a final decision is made.

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