Govt dumps plan to extend GST to funds management fees after criticism & National leader Luxon saying he would unwind it

Revenue Minister David Parker says the Government won't proceed with a proposal to standardise the application of GST to the fees and services of managed fund providers.

This announcement came via a press release just after lunchtime Wednesday, following criticism of the proposal, including from the opposition, after it emerged on Tuesday.

"Inland Revenue and Treasury advised this change be made to remove a loophole used by large financial companies, so they would have to align with how others in New Zealand pay GST," Parker said.

He said the move would've brought NZ fund managers more into line with Australia's approach.

“Smaller fund management providers who were doing the right thing were at a competitive disadvantage compared to others, mostly larger providers, who were using the loophole,” Parker said.

“Generally it’s bad to have these sorts of distortions in the tax system as bigger players can exploit them, but if the sector as a whole is happy to operate with the status quo then we will leave them in place."

He said during consultation views were mixed on the merits of the "technical" change.

"The large companies profiting from the current set-up were opposed to the change, while smaller providers were more supportive of the change. This was because these providers who did charge the full GST on their service fees faced unfair competition from the bigger players. However since the announcement it has become clear that smaller providers now oppose it too," Parker said.

National's unwind promise

Earlier National vowed to unwind the Labour Government’s plan revealed on Tuesday to extend GST to funds management fees.

Late Tuesday, the Labour Government quietly introduced an extension to the GST net to include funds management fees, Airbnb rooms and Uber fares. Combined, the change was expected to drag in an extra $272 million a year in tax revenues from 2026. That, in turn, would reduce future Budget deficits and therefore Crown debt by same amount per year, all other things being equal.

But it was also expected to reduce the amount of KiwiSaver funds under management by $103 billion by 2070 to $2.1969 trillion and cut non-KiwiSaver managed funds by $83 billion to $1.75705 trillion by 2070. 

It was done in a body of an omnibus of tax changes and without mention by a minister. Tax advisors and fund managers were given a heads up.

The change was included in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill introduced into Parliament Tuesday afternoon. 

The detail about the GST extension for KiwiSaver was not included in the ministerial press release, but was included in the detail of the bill and its hundreds of pages of commentary and regulatory impact statements.

The changes included:

♦ Extending GST to funds management fees, which is expected to increase tax revenues by $225m from April 1, 2026 onwards and is estimated by the Financial Markets Authority to reduce KiwiSaver funds under management by $103b by 2070 to $2.1969t and cut non-KiwiSaver managed funds by $83b to $1.75705t by 2070;

♦ The extension of GST to online accommodation and transportation services such as Uber and Airbnb, which is expected to raise $47m a year in extra tax revenue; and,

♦ The exemption of public transport from fringe benefit tax, although the exemption for car parks provided by an employer also remains.

The news release focused on the Airbnb and Uber changes, along with the public transport exemption, which has been called for by the Greens for years. 

The GST extension to KiwiSaver and other managed funds snuck up on a few people because the 2018/19 Tax Working Group recommended not extending GST to financial services, in part because it risks opening up a very nasty can of worms that would lead to questions about why mortgage services and bank fees are not charged GST.

This Labour Government’s Tax Working Group recommended no change to GST on financial services in this 2019 paper on the grounds it would be too difficult to disentangle the tax on the service provided by the bank or the fund manager, from the return on the investment.

Parker and the IRD argue in the commentary on the bill that an anomaly has developed where some boutique fund managers taking a cautious approach on the ‘service provided’ aspect of their fees are charging GST, while others taking the ‘financial services are exempt’ approach are not.

This removes any doubt, but it’s not filling a hole in the GST net that is significant. New Zealand has the second most comprehensive GST net in the world. Only Luxembourg’s is wider, and that’s specifically because it does charge GST (Value Added Tax) on financial services provided to non-residents. This Tax Working Group chart from OECD data tells the story.

National and fund managers opposed

National Leader Christopher Luxon vowed in media interviews on RNZ and Newshub Wednesday morning to repeal the change once he was in government.

“They're addicted to spending and need to dream up whole new tax grabs and that's what this is,” Luxon said on RNZ.

"It doesn't make any sense and really what it is is again a government that has to dream up new taxes because it's got its spending out of control and it's delivering poor outcomes,” he said.

"We want people to stay really invested in KiwiSaver but this doesn't help. We need to stop this right now and not actually let the government even implement this."

Luxon later told Newshub: “This is now a retirement tax on top of all the other taxes that we've had."

“We're going to stop it. I actually think the team of five million people needs to stand up this week and actually say to the Government, 'Enough, stop' and actually get the Government to withdraw it,” Luxon said.

"This is such a bad idea - a retirement tax when we're trying to encourage people into KiwiSaver, it makes no sense."

Financial Services Council CEO Richard Kilpin said the council was disappointed with the bill that was over-reaching.

"In the middle of a cost of living crisis, increasing taxes that are then likely to increase the fees that consumers pay to invest in KiwiSaver and managed funds, and potentially decrease returns, is a suboptimal outcome,” Kilpin said.

Deloitte tax specialist Allan Bullot told Newshub the move was a sledgehammer.

“Everybody that I've talked to that's got a KiwiSaver fund and is talking and looking at this have told me that they consider it to be a brand new tax," Bullot said.

"Technically, is there a new tax that someone's invented? No. Are we coming and looking at something that hasn't been subjected to tax since 1986 and saying, 'We're going to change the legislation'... [it] sounds like a new tax."

Luxon said he had received messages in the early hours of this morning outraged about the plan.

"People are just so angry about it - how can the Government pile another tax in the middle of a cost of living crisis where everyone's doing it tough, just trying to get through it?,” he said.

"It's the cumulative effect of just all those costs adding up and it takes value off your KiwiSaver."

*Parker's release in full is below.

 GST proposal for KiwiSaver fees will not go ahead

The Government will not proceed with a proposal to standardise the application of GST to fees and services of managed fund providers.

Inland Revenue and Treasury advised this change be made to remove a loophole used by large financial companies, so they would have to align with how others in New Zealand pay GST.

The move would also have brought New Zealand fund managers more into line with the approach in Australia.

“Smaller fund management providers who were doing the right thing were at a competitive disadvantage compared to others, mostly larger providers, who were using the loophole,” David Parker said.

“Generally it’s bad to have these sorts of distortions in the tax system as bigger players can exploit them, but if the sector as a whole is happy to operate with the status quo then we will leave them in place.

“During extensive consultation views were mixed on the merits of the technical change. The large companies profiting from the current set-up were opposed to the change, while smaller providers were more supportive of the change. This was because these providers who did charge the full GST on their service fees faced unfair competition from the bigger players.

“However since the announcement it has become clear that smaller providers now oppose it too.

“It’s important to clear up some inaccurate representation of the proposal. New Zealanders’ KiwiSaver contributions and balances were not going to be taxed under this legislation. However it is clear from the reaction to this proposal that it has caused concern for Kiwis,” David Parker said.

“I am proud of Labour’s role in introducing KiwiSaver and its role in securing the future of New Zealanders. We will never do anything to undermine it.

“By contrast, National will not commit to keeping KiwiSaver in its current form, and cannot be trusted to support this important scheme. When last in Government National ditched the Kick-Start payment and introduced a tax on employer contributions,” David Parker said.

“Because of the importance of public confidence in KiwiSaver and the need to ensure nothing unduly affects New Zealanders’ willingness to save, the Government will not to go ahead with the proposal contained in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill.”