IRD determines funds management is exempt GST

The Inland Revenue Department (IRD) has finally delivered a definitive statement of how it views goods and services tax (GST) in relation to funds management.

Friday, April 4th 2025, 8:02AM

by Jenny Ruth

The Inland Revenue Department (IRD) has finally delivered a definitive statement of how it views goods and services tax (GST) in relation to funds management.

This ends decades of confusion in which some managers have been allocating 10% of their earnings as liable for GST while others have decided 100% of their activities were liable.

Fund managers will have until April 1 next year to conform to IRD’s latest determination, called an “interpretation statement.”

Essentially, managing a fund is a financial service and financial services, including activities related to providing this service so long as they’re provided inhouse, and are therefore exempt from GST.

In general, despite the confusion within the funds management industry, financial services have always been exempt from GST.

However, if a manager outsources non-financial activities to a third party, such as administration, that activity will be liable for GST.

If a manager outsources some or all of its funds management to a third-party manager, such as a portfolio of offshore equities, then whether it is liable for GST depends on how much control over the third party manager the original manager has.

If the original manager’s control is limited to checking whether the third-party manager is complying with its mandate, that outsourced activity will be classed as a financial service and therefore exempt from GST.

However, if the original manager has the ability to veto the third-party manager’s investment decisions, effectively the third-party manager is an administrator and therefore that activity will be liable for GST.

KPMG partner Peter Scott is welcoming the interpretation statement as “fantastic” because it finally provides clarity to the industry.

The issue has dogged both the industry and fund managers going back decades and some managers have received IRD rulings that contradict rulings other managers have received and it’s been anything but a level playing field, Scott says.

“It’s been a long time coming. Congratulations both to the industry and IRD in reaching a view that reflects the current legislation and is clear,” he says.

“Everyone now clearly knows what the IRD position is and there will be more of a level playing field for the industry.”

The contradictory ways the GST regime has been applied became obvious in 2022 when the then Labour government proposed applying GST to financial services.

The ensuing uproar meant the proposed legislation was quickly withdrawn.

However, it became clear that while most managers had settled on applying GST to 10% of earnings, some boutique managers had taken the view 100% of their activities were liable for GST.

Now, managers won’t be able to offset any GST they pay against their earnings from funds management and will have to re-examine their fees and decide how they might need to be adjusted, Scott says.

Some managers will probably be in a worse position as a result of the interpretation, he says.

Financial advice providers remain liable for GST because advisory services are liable.

Scott doesn't think this will be the last word on the subject, particularly since the interpretation differs from the way funds management is taxed in Australia.

"I don't think it will be the end of the story," he says. "I suspect there will be more policy work done in the future."

GoodReturns understands in Australia funds management services generally are treated as liable for GST.

Tags: GST KPMG