GST on managed fund guidance is out

By Viola Trnski, Allan Bullot & James Arbuthnott

Inland Revenue has released draft guidance on how the GST rules ought to apply to fund management fees. If this sounds familiar, that’s because it is. The issue of how GST should apply to managed investment funds has been subject to numerous rules and scrutiny. So where has Inland Revenue landed and what does it mean for you? We outline the draft statement – and a brief history – below.

Back to the future?

Most recently (and perhaps most memorably) in 2022, the then Government quietly proposed charging GST on all management fees charged to managed funds, including KiwiSaver, which would have raised $225m a year in revenue – but modelling from the Financial Markets Authority suggested the plan could have slashed $103 billion from KiwiSaver funds by 2070. Following fast and fierce backlash, the policy was scrapped within twenty-four hours.

Before that – and what is still currently being practised – is non-KiwiSaver funds generally taking one of two positions, neither of which are legislated but which reflect industry agreement with Inland Revenue on how the GST rules should apply:

• Many 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 investment products.

• Other fund and investment managers applied the 15% GST rate to all of their services. The rationale for this approach was that they provide investment advice and services that are typically subject to 15% GST.
  

In 2017 Inland Revenue released two draft QWBA’s on GST and unit trusts and proposed that fund management fees are exempt supplies as they are financial services, unless those services are outsourced, in which case the outsourced provider was considered to be making GST taxable supplies to the underlying manager. This is a very similar position to where Inland Revenue has landed again in the current consultation draft.

While public consultation continued after the 2017 draft QWBAs, no legislative amendments were proposed by Parliament until the previously mentioned 2022 U-turn. Inland Revenue has now released draft guidance on how the Commissioner interprets the current legislation to apply.

Where the final guidance lands will depend on the submissions received.

What has Inland Revenue proposed?

Inland Revenue’s draft statement addresses the GST treatment of fees that relate to managed funds. Essentially, all fees charged in relation to managed funds will either be financial services (normally a GST-exempt supply) or taxable supplies.

Inland Revenue has landed on management fees charged by a manager generally being GST-exempt supplies.

An area of focus for the Inland Revenue’s draft guidance is the degree of authority that the manager has to make and implement investment decisions. Broadly, if a manager has full investment authority, Inland Revenue considers the management fees will be an exempt supply of ‘arranging’ a specified financial services activity.

Whereas, if a manager does not have this full authority, then the management fees are not considered to be arranging financial services and therefore will be subject to GST at the 15% rate.

Following this analysis, Inland Revenue considers that most outsourced services provided by a 3rd party to the underlying manager will be subject to GST at 15%.

The above contrasts to the 2022 legislative proposal, which brought all fees charged by a manager into the GST net, as Inland Revenue is now proposing to exempt most fees charged in relation to managed funds.

So... back to the future?

Whether the final interpretation will take us ‘back to the future’ to the proposed 2017 approach remains to be seen. Consultation on the draft guidance is open until 25 October 2024. Following consultation with submitters and officials, Inland Revenue will finalise their position.

Once adopted, Inland Revenue’s position will become the binding interpretation of their view of the law and all managed investment funds (and outsourced investment management and other service providers) will be expected to apply the guidance in practice. Interpretive issues may still need to be worked out, and the outcome for each fund and different fees will depend on the specific facts at hand.

Now would be a good time for managers to begin considering what impact this interpretation may have on fees charged and the ability to claim back GST on costs.

Our Deloitte indirect tax team and financial services team have specialist knowledge and expertise to help you navigate the new interpretation and understand what it means for your business.

If you have any questions, please get in touch with your usual Deloitte advisor.