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Fund managers and IRD in Mexican Stand Off

IRD threatens to charge GST on management fees and back date charges for four years.

Wednesday, April 4th 2001, 7:53AM

by Philip Macalister

Fund managers and investors are facing a new threat on the tax front - this time it's the imposition of GST on management fees.

KPMG Legal tax partner Tony Lines says the industry has never charged GST on management fees in the past, however the Inland Revenue Department (IRD) has said that they should be.

"Since 1986 most management fees and trustee fees for collective investment vehicles have not been charged with GST," he told a BIIA Funds Management conference in Auckland last week. "Similarly it would be rare for a domestic investment manager to charge GST on investment management fees."

Lines says that managers have assumed these activities constitute the bulk of administration and investment management activity, therefore making them fully exempt from GST.

IRD has decided that a portion of management and trustee fees should be subject to GST.

Lines says there is currently a Mexican stand-off" between the industry and IRD on the issue.

IRD has said it will develop a policy paper on the issue, but it's opening position is that is that it can charge GST for at least the past four years, and develop a policy going forward.

Lines says this situation is an ideal candidate for a "policy solution". That is one where fund managers and IRD sit down together and negotiate a suitable arrangement to cover the past and a workable policy going forward.

His view is that if they argue over what parts of the fees should be taxable and which are exempt the debate would go on forever.

Another crucial issue for managers is how to apportion past GST costs.

"Some managers and trustees will be in a position to pass on these costs to unit trusts and group investment funds; others may be obliged to absorb the liability themselves," he says. "The critical question is whether there is a liability in fact and if so whether or not the IRD's claims for apportioned GST are excessive."

Lines says two of the other concerns with charging GST on management fees is that they are another disincentive to savers, plus the rules are being applied unevenly as superannuation schemes are specifically exempted from the impost.

"Investors' confidence in savings products could be dented if the liability for past GST not charged is material and is borne by savings vehicles themselves," he says.

Going forward the problem is less significant as managers will be able to claim a portion of input credits to partially offset the liability.

When GST was introduced super schemes were the main form of investing, and unit trusts and gifs hardly existed.

"The legislation has failed to keep up with developments over the past decade and beyond so once again a lack of level playing field has developed."

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