Is the debate over? GST and fund manager fees

By Allan Bullot and Amy Sexton
 

On the very last day of the 2024 income tax year (31 March 2025, the busiest day of the year for tax advisors and accountants alike) the Inland Revenue published an interpretation statement considering the GST treatment of fund manager fees. This looks to end (at least for now…) the long running debate as to whether GST should be charged by fund managers of managed funds, but as always with tax, the devil is in the detail, and it will mean different things to different people. We discussed the draft guidance when it was a the consultation stage in our September 2024 Tax Alert article.

Those with long tax memories will remember Inland Revenue issued draft guidance back in 2017 (which then was never finalised). Then as a bolt from the blue, in 2022 the Government unexpectedly announced a policy change to charge GST at 15% on all management fees charged to managed funds ( including KiwiSaver funds). Government modelling advised that it would raise $225 million a year in new GST tax revenue from 2026, and the Financial Markets Authority modelling suggested that it would wipe $103 billion from KiwiSaver funds by 2070. Understandably the public backlash was fast, loud and fierce, resulting in the unpopular policy change being dropped as quickly as it had been announced. That still left the position in the real world as being somewhat uncertain, with different GST treatments having been adopted by different organisations.

How have managed funds been dealing with GST? 

Non-KiwiSaver funds have generally been taking one of two positions (that were not specifically legislated for) which had become accepted in practice by Inland Revenue for managed funds providers:

• Larger fund and investment managers typically treated 10% of their services as subject to 15% GST and the remaining 90% as GST-exempt under the existing financial services exemption. The exemption applied due to these managers “arranging” the buying and selling of investments.
• Other fund and investment managers applied the 15% GST rate to all of their services, the rationale being that they provide investment advice and services that are typically subject to 15% GST.

What does the new Inland Revenue guidance say?

The new guidance is quite detailed (30 pages), gets a little complex, and in summary states:  

Fees payable to the manager of a manged fund

• In Inland Revenue’s view fees payable for services supplied to the fund are a supply of financial services, where the fund manager is contractually providing all the fund management services (directly or indirectly), the fund manager is providing a 100% financial service, so GST will never apply at 15%. This is different to the current positions where GST at 15% will either often be applying at 10% or 100% of the fund managers fee to the fund.  

GST treatment of outsourced services that are provided to a fund manager by third parties.

• Investment management services provided by a third party are either a supply of financial services or a standard rated taxable supply of advice, depending on the terms of the terms of appointment and manner the appointment is exercised and supervised. Broadly the greater the degree of authority the third party has to invest (without having to seek any confirmation etc from the fund manager etc), the greater the odds that that investment management services will be considered to be a financial service. Likewise if the third party has no authority to actually make investments and is simply providing advice on what to invest in, the Inland Revenue consider that the third party is providing GST taxable advice services, which will not be a financial service. 
• Separately sourced outsourced administration services provided by a third party under contract to the managed fund manager will be a GST taxable supply.

How does this affect the current industry practice?

It really rests on what the fund managers have been doing to date, as depending on how fund managers are structured, the changes will affect each fund manager differently. Some will be moving from having GST applying to 10% of supplies (an effective rate of 1.5%) to not having GST applying at all. Others may be moving from having GST applying to 100% of supplies (an effective rate of 15%) to also not having GST applying at all.

The Commissioner of Inland Revenue also published an Operational Position on the same day as the interpretation statement. An Operational Position sets out the approach the Commissioner will be taking to applying a new position in practice. In this instance the Commissioner has stated that immediate implementation may be difficult for some managed funds, therefore the Commissioner is giving managed funds to 1 April 2026 to implement these changes. This does also allow for early adoption.

Deloitte’s view 

For most people in their role as investors and savers, they are likely to not notice too much change immediately. For fund managers this will probably have been a subject that they have already been thinking about for some time, and they will need to use the next 12 months to ensure that they are in compliance with the finalised view from Inland Revenue. This may involve some complex system and contractual changes.

The interpretation statement is very similar, in some ways, to the Inland Revenue’s draft position in 2017. There has been substantive time and effort spent on this by a lot of people since then. Maybe we would have been better to just accept that sometimes GST can be complicated and can’t always be “pure” and we should have legislated for what was actually happening in practice back in 2022. Deloitte is not aware of too many in the industry that thought the system was broken by allowing the two treatments that had arisen. Ensuring that New Zealanders have confidence in the stability of the wider systems (particular tax settings) around their retirement savings is going to be a critical part of the long term success of New Zealand, and we need to be very careful before we make any changes to these settings.

If you have any questions around GST, please contact your usual Deloitte advisor.