'Questions we've been asked' (QWBA) are statements issued by the Office of the Chief Tax Counsel of the New Zealand Inland Revenue Department (IRD) in response to queries received on specific tax issues which are likely to be of interest to a wider group of taxpayers.
The IRD has recently released two draft QWBAs that will be of specific interest to fund managers. These relate to the GST treatment of unit trust managers' fees and of certain outsourced services acquired by unit trust managers.
GST treatment of fees payable to a manager of a unit trust
Consistent with IRD's present approach, some managers have been treating 10% of their fees as being attributable to a taxable supply and the balance as being attributable to an exempt supply. Some managers have queried whether this is legally correct, so the IRD has been considering whether the practice is consistent with the Goods and Services Tax Act 1985 (GST Act).
This draft QWBA considers the nature of the supplies made by the unit trust manager to the investor, and concludes that fees payable to the manager of a unit trust are not subject to GST as they are consideration for an exempt supply.
This conclusion is arrived at because each of the services supplied by the manager is a financial service (being the manager's investment activities) or is reasonably incidental and necessary to the supply of those financial services (being the manager's administrative functions). The draft QWBA also considers that a manager's activities are not a single supply of the service of managing a unit trust – rather it is a supply of a series of exempt financial services.
GST treatment of outsourced services in relation to a unit trust
There has been uncertainty about the GST treatment of services provided by a third party to the manager of a unit trust.
This draft QWBA considers whether the supply of these services is an exempt supply or a taxable supply, and concludes:
- The supply of administrative services (such as registry, fund accounting and unit pricing) by a third party under a contract with the manager is a taxable supply. The reason being that these administrative functions are not in the list of 'financial services' set out in Section 3(1) of the GST Act and are outside the scope of exempt supplies.
- The supply of investment management services by a third party to the manager is an exempt supply where the third party has full authority to make and carry out investment decisions. If the third party does not have full authority then there is a taxable supply. The distinction here is that 'advising' on investment management is a taxable supply, whereas 'arranging' for investment management is exempt.
IRD has framed the draft QWBAs as being specific to 'unit trust' managers but the analysis adopted in these is likely to be of relevance to a wider group. Having said that, taxpayers should not rely on draft QWBAs - only finalised items can be considered as being authoritative statements of the IRD's views on the matter.
Consultation on these two draft QWBAs is open until 23 March 2017 and can be emailed to IRD at [email protected]. If you would like our assistance in formulating your submissions to IRD, please contact one of our experts.