Have we been here before?
The previous government introduced the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill (the Bill) which proposed that services supplied by a manager or investment manager to a managed fund would not be in scope of the financial services exemption. This proposal would have treated all fees received in connection with such management services supplied to a managed fund as being subject to GST. The Regulatory Impact Statement prepared at the time the Bill was released forecast the proposal to raise approximately NZ$225 million of GST per annum.
However, within a day of the Bill having been released, the previous government announced that it would not proceed with the proposal following significant public opposition. As such it is a contentious area of significant public interest which may have longer term financial ramifications for the industry and investors.
Current practice
The GST treatment of fees received for management services supplied to managed funds has been an area of complexity and uncertainty for some time. Inconsistent treatment among industry participants has had the potential to distort competition and uncertainty as to the GST treatment of supplies will likely have increased compliance costs.
Current practice among industry participants involves two different interpretations:
- The largest fund managers and investment managers treat 10 per cent of their services as being subject to GST and the other 90 per cent of their services as being exempt from GST on the basis that those services involve “arranging” financial services. This is based on an expired 2001 operational agreement reached between Inland Revenue and equivalent unit trust managers.
- A group of boutique fund managers and some investment managers apply GST to all of their services based on the view that their services involve “advising” on financial services and are therefore not exempt from GST.
In each case, the adopted GST treatment would also have a bearing on the entitlement to claim GST on related costs as well as other matters such as the potential for a reverse charge paid on imported services. All of these may flow through to affect the ultimate charges that are passed onto investors.
The draft interpretation statement
The draft interpretation statement broadly concludes that:
- Fees payable to the manager of a managed fund for services supplied to the investor are not subject to GST as they are consideration for exempt supplies of financial services.
- Fees payable to third-party investment managers for supplies of investment management services supplied to the managed fund:
- Are not subject to GST where the third-party investment manager has authority to make and implement investment decisions as they are “arranging” financial services; or
- Are subject to GST where the third-party investment manager’s investment recommendations are subject to a high level of oversight and scrutiny and can be vetoed by the manager. However, where the manager’s discretion to veto is limited to checking that investment decisions made by the investment manager comply with the mandate of the managed fund, such supplies may be exempt from GST.
- Fees payable to third-party suppliers for administrative services outsourced by the manager of a managed fund are subject to GST.
Implications
Given the divergence in views between the draft interpretation statement and current practice, managers should actively be considering how Inland Revenue’s draft interpretation statement impacts GST recoverability under their current structure and contractual arrangements.
Managers who currently take the view that they are making taxable supplies (whether that be 10 per cent of their services or all of their services) will have been recovering some or all of the GST component of the costs that they incur. However, if the draft interpretation statement is finalised in its current form, these managers would no longer charge GST but also would lose their entitlement to recover the GST component of their costs as they may no longer be making taxable supplies.
The inability to recover GST credits may also incentivise measures to minimise ‘GST leakage’ such as internalizing functions currently carried out by third-party investment managers and suppliers. Given the practices adopted to date, there may be a more noticeable change in potential fee pricing for the boutique firms that treat their fees as entirely subject to GST.
The adoption of this position may well have other implications such as pricing structures and potentially having to pay a reverse charge on imported services. Investors may be motivated to monitor the situation and assess whether this new position (if confirmed) flows through via reduced fees.
The statement notes that any finalised view will be applied by the Commissioner on a prospective basis such that historical positions would be preserved. Some managers that have returned GST in full might be motivated to investigate any opportunity to correct past positions for a refund of GST.
Submissions have been sought on the proposals and relevant stakeholders are encouraged to liaise with Inland Revenue or their advisers to do so.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.