Surprise $22m tax cut: Government proposes making managed fund fees GST exempt

KiwiSaver fees are likely to be GST exempt. Photo / NZME

After years of uncertainty, IRD is now proposing to make fund management fees entirely GST exempt, simplifying a complicated rule and saving KiwiSavers from a potential tax hike.

Based on 2022 figures, the proposal will cost the Government $22m a year in lost revenue. Sadly, officials do not think this will be substantially passed on to savers, however it improves on a counter proposal that would have lumped KiwiSavers with higher costs.

IRD today published a consultation document based on how it thinks the existing regime should be interpreted. If adopted, it would become the binding interpretation of the existing rules and would not require new legislation.

The rule is intended to resolve longstanding inconsistencies around the application of GST to KiwiSaver and managed fund fees. Some time ago, management fees were 100% exempt. That rule was later changed to allow funds to make 10% of a management fee subject to GST, while 90% was treated as GST exempt.

This meant an effective GST rate of 1.5% on fees, instead of 15% which is the GST rate charged to most other goods and services. Currently, there is a GST exemption which applies when management services are provided directly to a retirement scheme like a KiwiSaver scheme, however complexities around fund management means some retirement funds are forced to charge GST under the current rules.

For example, the exemption does not apply where a retirement scheme invests into a variety of underlying wholesale funds as the managers and investment managers will be providing their services to the wholesale fund rather than to the retirement scheme. In these situations, the some of the largest fund managers and investment managers charge an effective GST rate of 1.5%, while others (often boutique firms) charge 15%.

The rule creates inconsistencies between larger providers and boutique firms. Most businesses can claim back GST on goods and services they purchase, but these funds could only claim back 10% of GST because they themselves only paid GST on 10% of their fees.

In 2022, Labour tried to fix this by simply charging GST on 100% of management fees including for KiwiSavers. The change would have earned the Crown $225m in additional tax each year. Modelling provided to the last Government by the Financial Markets Authority said the change would have led to higher fees which would dent KiwiSaver balances by $103 billion by 2070. Non-KiwiSaver managed fund fees would be hit by $83b over the same time.

The change was led to such a reaction that Labour u-turned on the proposal 24 hours after news of it first broke.

The last government was offered advice on the option of making fees 100% exempt from GST. Back then, officials said making fees 100% GST exempt would provide “certainty and consistency” but it would be unlikely to flow on to lower fees because funds would face higher costs.

“[A] GST exemption would reduce costs for funds but would increase costs for fund managers and investment managers as they would no longer be able to claim any GST input tax deductions in respect of their purchases of outsourced costs (such as commercial rent, ICT, legal and accounting services),” a 2022 regulatory impact statement said.

Funds that currently levied GST on just 10% of their fee would not be heavily impacted, however those that charged GST on 100% of their fee would be hit “significantly” because they would lose their ability to deduct GST on the services they buy to run their funds like commercial rent and services like accounting and legal advice.

“This option would therefore establish a strong bias towards in-sourcing costs. The impact of this option on a particular fund manager and investment manager depends on their current GST treatment of their manager fees charged to managed funds - fully exempt (not materially impacted), 90% exempt / 10% taxable (comparatively small impact) or 100% taxable (significantly impacted),” it said.

“Submitters expressed mixed views on whether an exemption would lead to lower fees for retail investors. It seems likely that any cost savings from an exemption would be relatively small and may not be passed through to retail investors,” officials said.

Deloitte Tax Partner Allan Bullot told the Herald the change would mean “an incentive for fund managers to insource how they do things” because buying outside services would attract un-deductible GST costs.

Bullot said the new guidance was “not a silver bullet”.

“There will still be aspects that need to be worked through,” Bullot said.

Revenue Minister Simon Watts said IRD had briefed him on the consultation and he looked forward to hearing from submitters.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.