A fund manager fee conundrum

While this article is on manager fees, the focus is narrow - GST charged on manager fees.  Believe it or not is very important for investors, advisers and fund managers.

What is the issue?
Inland Revenue is considering how much GST should apply to fund manager fees.  Essentially part of a fund manager’s activity is a financial service and therefore potentially GST exempt.  The question is how much.  Manager’s seem to do many things that aren’t financial services (here’s a light hearted example – why don’t fund managers ever look out the window in the morning? Because if they did they’d have nothing new to do all afternoon…..!).  Here’s the issue – should GST apply on fund manager fees?

No GST – a good thing?
If there’s no GST on manager fees then investors appear to save 15%.  Yet the fund manager still pays GST on its business inputs.  So in simple terms if the investor pays no GST the fund manager still has to pay it – the fund manager is effectively subsidising the investor.

So how does a rational fund manager react?  They set their fee higher to account for the fact they pay GST but cannot recover it.  It looks like the investor has made a 15% saving, but the reality is the investor is paying a higher management fee than they otherwise would.