Latest move in GST on fund manager fees saga

The current change proposal

The draft Interpretation Statement (IS) now on the table considers the GST treatment of fees received by a manager of a managed fund and fees received by third-party suppliers for supplies made to the manager. It reaches the following conclusions.

Fees payable to the manager of a managed fund

Fees payable to the manager are not subject to GST as they are consideration for exempt supplies of financial services. This is on the basis that the activities the manager carries on are of a type listed in the definition of financial services in the GST Act or are reasonably incidental and necessary to the financial services the manager is supplying.

The above relates to funds that are not retirement schemes (so also does not relate to KiwiSaver funds, being retirement schemes). The manager fees for Kiwisaver funds and other retirement schemes remain exempt and not subject to GST, but that results from the existing specific exemption applicable.

GST treatment of outsourced services

Where a fund manager outsources the supply of services to a third party, the position is not as clear and depends on the nature of services provided.

• Administrative services: if the services supplied are administrative services (e.g., registry services, fund accounting and unit pricing), those services are not exempt supplies of financial services and are fully subject to GST. 
• Investment management services: the supply of investment management services carried out by a third-party investment manager is either:
  • an exempt supply (not subject to GST) where the investment manager has authority to make and implement investment decisions; or
  • a taxable supply (subject to GST) where the investment manager does not have authority to implement the recommendations. This would generally be the case where the investment manager’s investment recommendations are subject to a high level of oversight and scrutiny and a manager can veto the recommendations on the merits. However, a manager’s right to veto might be disregarded in this context if the manager’s discretion to veto is limited to checking that investment decisions made by the investment manager comply with the fund’s investment mandate.

It is important to note that the conclusions reached in relation to outsourced services do apply to KiwiSaver funds and other retirement schemes, so could result in a change for them.

The draft IS notes that any finalised view will be applied by the Commissioner on a prospective basis.

What does this mean for fund managers?

We expect that the conclusions reached in the draft IS will not reflect current practice for a number of fund managers.

For those treating supplies as taxable (either in whole or in part), consideration will need to be given to matters such as:

• The impact of a GST change on the fee charged. For example, are manager fees specified to be on a “plus GST” or “inclusive of GST” basis? If the latter, and particularly when moving from fully taxable treatment, is it appropriate for the fund manager to continue to charge the same level of fees while not having to account to Inland Revenue for GST on the fee?
• The impact of non-recovery of GST incurred on expenses. If the manager is no longer making taxable supplies, there will not be an entitlement to claim GST input credits on expenses incurred by the manager.

All fund managers, including those of KiwiSaver funds and other retirement schemes, will need to consider the treatment of outsourced arrangements. For example:

• Does the conclusion reached in the draft IS change the existing GST treatment of services supplied by outsourced service providers? If so, who bears the cost of any increased GST (i.e., are contractual terms “plus GST” or “inclusive of GST”)? 
• Does “reverse charge” GST apply to services outsourced to providers outside New Zealand?
• If the fund manager faces increased costs through a change in GST treatment of outsourced services, must the manager bear the cost, or can it recover some or all of the increased cost from the fund?
• Are there outsourced service arrangements within the fund manager’s same corporate group? If so, what does that mean for the GST treatment of the group as a whole and can steps be taken to minimise increased GST costs?

Chapman Tripp comments

We expect there will be strong interest from the industry in submitting on the draft IS ahead of the deadline for comment on 25 October 2024.

We also expect a continuation of contrary views across the industry over what is the “right” outcome. To a large extent, this will be a factor of current treatment and commercial preferences of different fund managers.

It is a shame that an acceptable policy outcome could not be found. The draft IS is likely to have some unfortunate consequences, including:

• Inconsistency in GST treatment may remain given outsourced investment manager services may be treated differently depending on the particular contractual terms and practice, and
• The possibility of tax distorting commercial decision-making. For example, there will be an incentive to move to an in-source model to prevent GST leakage on outsourced services. There may also be an incentive to offshore services.

Perhaps someone might be brave enough to suggest an appropriate, politically acceptable policy change with good customer outcomes front and centre needs to be put back on the work agenda.