On 30 August 2024 Inland Revenue released a draft interpretation statement entitled “GST treatment of fees paid in relation to managed funds”. A key conclusion in that guidance is that fees payable to the manager of a managed fund for services supplied to investors are not subject to GST as they are consideration for exempt supplies of financial services.
This is the opposite position to a legislative proposal in 2022 that would have made all fund manager services subject to GST at 15%. That was introduced to Parliament and then withdrawn in the space of 24 hours.
The interpretation statement is intended to encourage consistency. Currently some managers apply 15% GST to all services, while others treat ten percent of their services as subject to 15% GST and the remainder as exempt (applying an industry practice endorsed by Inland Revenue in 2001 – that endorsement expired in 2014, without being replaced).
A link to the draft interpretation statement is available here.
Who should read this? Why?
The interpretation statement applies to “managed investment schemes” (defined in s 9 of the Financial Markets Conduct Act 2013), as such all fund managers, supervisors, trustees, custodians, investment managers and fund administrators who provide services to both retail and wholesale managed investment schemes should read this interpretation statement and consider how it will apply to the fees they charge.
GST treatment of fees paid in relation to managed funds
The interpretation statement concludes that:
There is no GST chargeable on fees payable to:
- the manager of a managed fund for services supplied to the investors (or the supervisor on the investors’ behalf); and
- a third-party investment manager who has authority to make and implement investment decisions under a contract with the manager of a managed fund (unless the manager has the right of veto).
GST is chargeable at 15% on fees payable to:
- third party suppliers of outsourced administrative services (including registry services, fund accounting, management of transactions and PIE obligations, and unit pricing) under a contract with the manager of a managed fund; and
- a third-party investment manager who makes investment recommendations and does not have authority to implement those recommendations (so just provides investment advice).
Our view
Investors and fund managers should be pleased with this outcome, particularly given the Government’s previous proposal to impose GST at 15% on all manager and investment manager services (including for KiwiSaver schemes). However, managers and administrators of both retail and wholesale managed investment schemes will need to consider how this draft interpretation statement impacts their structure, as outsourcing to third-party investment managers and administrators could carry GST costs that will not be recoverable.
Entities providing investment management services to managed funds will need to consider whether their services are subject to GST.
What next?
The draft interpretation statement focuses on retail and wholesale schemes established as unit trusts but may have wider application to different forms of managed investment schemes. Managers of all funds should consider this carefully and may wish to make a submission to Inland Revenue.
Consultation on the draft interpretation statement closes on 25 October 2024. After that deadline, the Commissioner of Inland Revenue will consider submissions before finalising his view.
Please contact our tax experts if you have any questions or would like assistance in making a submission.
This article was co-authored by Liam Sutherland a Solicitor in our Tax team.
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