Inland Revenue outlines GST plan

Inland Revenue wants to introduce special rules for determining the GST treatment of fund manager and investment manager services.

Tuesday, February 25th 2020, 6:41AM

It has released an issues paper, on which it seeks feedback until April 9.

It said the current treatment of different types of management services was complex and inconsistent.

Some managers applied 15% GST to all their services, while others applied GST to 10%.

There is a specific exception for management of a retirement scheme. But it does not apply when a retirement scheme invests in a general wholesale fund.

Inland Revenue said that, in its earlier consultation, it had concluded that unit trust manager fees were exempt from GST when the manager was considered to be arranging financial services. Investment manager fees were subject to 15% GST when the manager was not required to accept decisions made by an investment manager and the investment manager did not have authority to give instructions to the trustee.

Other outsourced services would typically be subject to 15% GST, it said.

“Because different types of manager and investment manager services can have complex and differing GST treatments, the current GST rules can distort competition by favouring certain types of managed funds, business structures, or judgments for how the supplier may choose to interpret the GST rules (for example, where one interpretation or position may provide them more favourable outcome than an alternative position).

“The current GST rules can also add costs to managed funds products. These costs include compliance costs of identifying and working out the GST treatment of different types of management services and unrecoverable GST costs to the extent to which a provider of exempt financial services is charged GST on their inputs of non-financial services.

“For these reasons, officials propose developing some special rules for determining the GST treatment of manager and investment manager services. The appropriate GST treatment of these services is not obvious as it depends on the policy objectives of the reform.”

A GST exemption led to undertaxing of the financial services, Inland Revenue said, and the financial services definition should be as limited as necessary.

Officials propose amending the GST Act definition of “financial services” to provide a more certain and consistent GST treatment for manager and investment manager services supplied to managed funds.

Inland Revenue exempting all management services supplied by investment managers and other fund managers would create a bias because an individual investor seeking financial advice would be charged GST for that advice but a managed fund purchasing investment management services would not.

A certain portion made taxable would be inconsistent with the GST Act and it would not be obvious what the right proportion was, Inland Revenue said.

Zero-rating would mean managers and management services would be substantially undertaxed.

It is proposed that the potential law change could apply prospectively but with grandparenting of existing contracts for a period.

John Berry, co-founder of Pathfinder Asset Management, said the GST debate had been a long one.

But he said it was pleasing to see that Inland Revenue had recognised things such as the way tax implications could affect a business's structure.

As it was, there was an incentive to bring things such as registry in-house, he said. "What the regulator wants may be at odds with what the tax incentives are."

Tags: funds management GST investment investment manager IRD tax