GST on brokerage fees

Brokers and other financial advisers looks set to feel the pinch of the taxman.

Wednesday, October 23rd 2002, 12:00AM

by Rob Hosking

Brokers and other financial advisers looks set to feel the pinch of the taxman. From 2004, GST will be applied to brokerage fees. The recommendation is part of a discussion document released by the Inland Revenue Department last week. Unlike GST on other services, however, it appears that applying the sales tax to brokerage is already decided.

“That’s the one surprise in the document,” PriceWaterhouseCoopers tax partner John Shewan says.

There is concern that this change will catch some financial advisers by surprise. Financial services were exempt from GST when the sales tax was introduced in October 1986, but it was always envisaged that they would be brought within the ambit of the tax as soon as the Inland Revenue Department worked out a way of doing this without causing other distortions.

Some financial services will remain exempt under the proposals, but the document essentially puts forward the policy of narrowing the definition of “financial services” and thus putting a whole raft of activities, previously exempt from GST, under the ambit of the tax.

The definition will be narrowed to exclude services provided by third parties (such as brokers); and clarify the definition of “participatory security” and the extent to which such transactions should be treated as financial services.

The discussion document says that “any credit management by a third party, such as checking creditworthiness, making decisions about whether to offer credit, monitoring creditor payments or managing overdue payments, will be outside the scope of the definition and will, therefore, be subject to tax.”

Services relating to the provision of advice are already subject to GST.

There is a note of caution in the IRD’s advice on the proposals. “The activities of brokers and other intermediaries, except underwriters and sub-underwriters, will be affected by the proposal. As it is uncertain what the impact of the proposal will be for these businesses, the government does not propose that it be introduced until full consultation has been undertaken.”

The treatment of management fees for long-term investment vehicles, particularly group investment funds and unit trusts, is also to be reviewed. The paper describes putting a GST impost on management services for other investment vehicles, such as unit trusts and group investment funds, as “problematic”.

“The government considers that there are good arguments for treating management fees for unit trusts and group investment funds as taxable. This is on the basis that, as with other third party supplies, these fees are not inherently for financial services and do not suffer significantly from valuation difficulties.”

The Investment Savings and Insurance Association has vehemently criticised the proposals as providing another disincentive for New Zealanders to save at a time the government is promising to do the opposite.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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