Inland Revenue has released guidance on how fund managers, including KiwiSaver providers, should interpret GST rules. Photo: RNZ
A long-running debate over how fund managers, including KiwiSaver providers, should deal with GST appears to have reached a conclusion with the release of an interpretation statement by Inland Revenue.
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, the Government proposed to make everything subject to GST, including KiwiSaver, but a backlash put a stop to it.
A regulatory impact statement from Inland Revenue at the time indicated the proposed change could add about $225 million a year to government coffers from 2026, a cost that would likely flow through to retail investors in the form of higher fees.
Financial Markets Authority modelling showed it could also shave an estimated $103 billion from KiwiSaver funds by 2070.
But now IRD appears to have returned to something like its position in 2017, when it proposed that fund management fees were exempt because they were 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.
The statement from IR on Monday said fees payable to the manager of a managed fund for services provided to investors were not subject to GST. But the outsourced supply of administrative services was taxable.
The supply of investment management services carried out by a third-party investment manager was either exempt or taxable, depending on the terms of the investment manager's appointment and the manner in which this appointment is exercised and supervised.
Deloitte GST expert Allan Bullot said fund managers effectively had a year to apply the rules.
"It will have differing effect for different fund managers depending on the way they are structured.
"The basic approach is if you are having full authority [over decisions] you'll be moving from having GST applying at 10 percent of your supplies, so an effective rate of 1.5 percent, being 10 percent of 15, to not applying.
"But potentially that may make it more difficult for the fund manager to recover GST [on expenses]. It will be complicated for people that are outsourcing a potion of the fund management resources rather than doing all of that themselves."
He said it was very similar to a draft that had been released.
"What it will mean is investors are not facing the prospect we were looking at in 2022, when law changes were going to bring in an extra $225m of GST a year. It does draw a line."
He said it was not necessarily the best outcome that could have been achieved.
"The matter became somewhat political and sometimes you have to deal with what you've got."
He said it had taken a considerable amount of time to get to this position.
"One hopes this is a very considered approach. It's very similar in some ways to the draft position that came out in 2017. There has been a substantive amount of effort and time by a lot of people with twists and turn that have happened through this. Maybe we would have been better to just accept that sometimes GST is complicated, it may not be pure, and legislate for what was actually happening … I wasn't aware of too many people who thought the system was broken."
He said fund managers would need to work through the decision carefully to consider the consequences that could come from it.
"We do have a firm view from the department of what their position will be and what they'll be expecting, at least from April 1, 2026."
IR said it recognised that immediate implementation of the position could be difficult for some taxpayers, due to required changes to, for example, computer systems or contractual arrangements.
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