Inland Revenue released a draft statement outlining its position on how GST applies to managed funds - a topic that has puzzled fund managers and investors alike. Here’s what you need to know about managed funds, their fees, and the potential implications of the draft statement.

What are fund management fees?

A managed fund is an investment product, usually run by a bank, large insurer or investment company.  Investors buy units in the fund and the fund manager uses the money it receives from the sale of the units to purchase investments such as shares or bonds.  It then distributes any profits back to the unit holders.

The idea is that managed funds can provide more efficient investing than individuals handling their own investments. For their role in administering the fund and often making the investments, fund managers charge a fee, typically based on a percentage of the investment value.

GST treatment of management fees

The GST treatment of fund management fees has long been a grey area, largely due to the complexity of fund management services.

1. Financial services or administrative services?

• Fees for financial services are exempt from GST.
• Fees for administrative services attract GST.
• Fund management services often include both, making it difficult to determine which portion is exempt or taxable.

2. Varied structures among funds

Every fund and every fund manager work differently.  Even if it is determined that the fees are subject to GST in one situation, it is likely that the underlying arrangements could be different for other providers.

One exception is superannuation scheme management fees, which are fully exempt from GST. This long-standing distinction is often viewed as inconsistent but remains in the GST Act.

A look back at previous GST approaches

Historically, many fund managers have charged GST on 10% of their fund management fees.  Inland Revenue generally agreed that, in the absence of a detailed time-and-cost study, it is likely that approximately 10% of the services supplied were administrative; with the other 90% being financial services.

However, other fund managers applied the 15% GST rate to all their services, on the basis that they were administration services, or investment advice, both of which are subject to GST.

In 2022, the government proposed legislation that would make all fund management fees fully subject to GST.  The proposal was short-lived and was withdrawn the following day.

So where does that leave us?

Inland Revenue’s draft

The most recent draft statement is Inland Revenue’s interpretation of the current law. It states that management services are financial services and that the fees are fully exempt from GST.

Inland Revenue’s reasoning is that if the manager has full authority to make and switch investments, the services being provided are financial services on the basis that they are arranging other financial services (generally speaking, the investments into debt or equity securities).

While this is probably correct, the question of the GST treatment when the fees are not as described in the draft interpretation statement remains open.  

For example, if the fund manager does not have the authority to make and switch investments, the fund is invested partly into a property fund (which would generally involve taxable supplies) or the fund management services are outsourced to a third party.

However, the draft statement offers some clarity by concluding that outsourced management services are likely to be administrative in nature and therefore will be subject to 15% GST.  This is a cost that the fund would not have to pay if they used an in-house manager or a related party.

Next steps

The draft statement is not yet final, so the specifics could still change. Even if finalised, the GST treatment will likely vary depending on the fund structure and fee arrangements. Fund managers and investors will need to review their specific circumstances to determine how these interpretations might apply.