1 Sep 2024

Inland Revenue proposes $22 million tax win for managed funds

1:08 pm on 1 September 2024
Generic money.

Photo: RNZ / Rebekah Parsons-King

Inland Revenue is proposing simplification of the way GST is applied to managed funds, which will result in a drop in tax take of $22 million a year.

It issued an exposure draft on Friday, outlining how it believes GST should be applied to managed funds' fees.

At the moment, management of retirement schemes is exempt from GST, but fund managers have different approaches to the way they apply GST to non-KiwiSaver funds.

Some charge GST on 10 percent of fees, because they calculated that the split of their work between GST-exempt arranging of financial services and financial advice, which incurs GST, was about that level.

But some managers have shifted to applying GST to 100 percent of fees - this allows them to claim GST on 100 percent of their costs, too.

In 2022, it was suggested that a way to streamline the process was to make everything subject to GST and remove the retirement scheme exemption.

That would have meant applying GST to KiwiSaver funds' fees but the government quickly stepped back from that.

Now, IR says the solution is to treat all management fees as GST-exempt.

Deloitte partner Allan Bullot said that had been estimated to cost the government $22m in tax a year.

In comparison, if it had decided everything was fully taxable, it would have pulled in an extra $225m a year and increasing.

Bullot said that would have been a cost to investors.

"At the end of the day we're trying to just get some certainty so GST doesn't end up getting in the way of people making investment decisions."

He said some parts of the funds management industry might not like it, but it was likely there would be significant lead time for changes.

Such changes tended to turn out to be more complex than expected, but were unlikely to be "fatal" for anyone, he said.

"It's taken us two years to get to here from the last time we had a bit of a shock with legislation coming out. We need to allow some time for this to be done in a measured and mature way."

He said there had been some concern that because IR was looking at this area, it could propose more changes for KiwiSaver.

As it was, there were only a couple of references to KiwiSaver in Friday's document, and Bullot said it should not make any difference to the vast majority of KiwiSaver members.

"They've given no indication that if you've got a normal management scheme where the manager is incurring all the costs and charging through to KiwiSaver scheme that it will make any change.

"There may be some noise around the edges if people aren't doing full management of KiwiSaver but charging the scheme directly, you might end up with some more stuff being taxable that will come through but it will be small, around the edges, compared to the majority of the costs."

He said people had been concerned about the proposal to tax KiwiSaver fees because of the compounding effect on members' balances over time. Any small reduction in returns can make a big difference when amplified over many years of investing.

For an investor with $100,000 and a 1 percent annual fee, it was calculated to mean a $20,000 balance reduction.

Bullot said the outlined approach from IR was positive for New Zealand.

"In terms of the investor point of view this is a massively better outcome than the proposed legislation in 2022."

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