On 13 January 2012 Treasury released an exposure draft of regulations which will impact on the manner in which managed funds calculate their GST liabilities. The managed funds industry will be particularly concerned with changes which specifically target situations where a trustee/responsible entity charges a single, "bundled" fee to a managed fund. If adopted, the regulations would limit the reduced input tax credit (RITC) the fund can claim for GST paid on this fee to 55% of GST paid. This compares to the current situation where a managed fund can generally claim an RITC equal to 75% of the GST paid.
The current proposal improves on previous reform suggestions as it will be relatively simple to implement. However the changes may increase certain funds' GST liabilities. They are also likely to necessitate reviews of organisations' GST systems.
The exposure draft regulations stem from a review of the GST financial supply provisions which was conducted by Treasury in 2009. Following the review Treasury expressed a concern that certain managed funds obtained a GST advantage where they were charged a bundled fee by their trustee/responsible entity. In these circumstances the fund would normally be able to claim a RITC equal to 75% of the GST it has paid. By contrast if the trustee/responsible entity separately on-charged each cost/fee it incurred in managing the fund, the fund may not be able to claim an RITC for certain fees. The following examples illustrate the issue.
RE Ltd is the responsible entity of The More Property Fund, a registered managed investment scheme. During the year, RE Ltd incurred costs of $5,500 (GST inclusive) in managing the More Property Fund. The costs comprise share brokerage of $2,200 and accounting fees of $3,300. Rather than on-charge these to the Fund, it charges a single $11,000 (GST inclusive) trustee fee. The More Property Fund can claim an RITC of $750 (being 75% of the $1,000 GST paid).
Now suppose that RE Ltd doesn't charge a bundled fee, but instead charges a $5,500 (GST inclusive) trustee fee and on-charges its costs to the Fund. The More Property Fund can still claim an RITC on the trustee fee (75% x $500 = $375) and on the share brokerage (75% x $200 = $150). However it cannot claim an RITC for the $300 in GST paid on the accounting fees. Consequently it is $225 (75% x $300) worse off than if it was charged a bundled trustee fee as in Example A.
Treasury released a discussion paper in June 2010 in which it proposed a number of options for removing this perceived GST advantage. However the current exposure draft regulations are quite different from the options proposed, and appear to represent a softening in the Government's position.
The current proposal
The exposure draft proposes to change the current rules where managed investment schemes, superannuation funds or certain other entities acquire services from their trustee. The RITC entitlement for GST paid on the fee for these services will be limited to 55% of the GST paid rather than the existing 75%. However certain fees currently eligible for the 75% are carved out so they remain eligible for the 75% RITC. Examples of such carve outs include:
- Asset management / allocation fees;
- Fees for performing administrative services (e.g. processing applications, handling inquiries).
Fund managers may need to ensure their agreements separately itemise services covered by these carve outs (so that these items do not form part of the bundled fee charged for RE services) to ensure that they continue to qualify for the 75% RITC.
The below example illustrates how the proposed regulations will apply in practice.
Assume the same facts as Example A. As The More Property Fund is charged a single $11,000 trustee fee it can now only claim an RITC of 55%. Thus its entitlement is $550 (55% x $1,000).
However if the agreement excluded brokerage fees from the bundled services provided by the RE and hence the RE is simply oncharging the brokerage fees, the More Property Fund can continue to claim a 75% for GST on the brokerage costs. However, it can only claim a 55% RITC for the GST paid on the trustee fee. Thus its RITC entitlement is (75% x 200) + (55% x 800) = $590.
Should you require further information on the above topic please contact the authors or your Moore Stephens Relationship Partner.
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