Portfolio Investment Entities - PIE's

The rules around investing in shares have recently been shaken up to resolve some long standing issues. The changes are intended to remove disincentives to save and also go hand in hand with the introduction of KiwiSaver.

Under the old rules, if a person invested in a managed fund comprising multiple investors, in most cases any gain derived on the sale of the shares would be taxable, but the same gain would not be taxable if the person had purchased the shares directly (unless the person was either in the business of trading in shares or acquired the shares for the purpose of resale). This distinction arose because a fund actively buys and sells shares and therefore the shares become akin to trading stock in the fund. In comparison, most shares held personally are held on capital account. Disadvantages could also arise using managed funds as they were taxed on income at 33%, compared with income being taxed at personal marginal tax rates (as low as 19.5%) if the investments were held personally. 

If a managed fund elects to be governed by the new rules the issues outlined above can be eliminated, since the tax treatment of the fund is broadly meant to be the same as if the shares were held personally. Under the new rules, profits derived by the fund from the sale of New Zealand and some Australian listed shares will not be taxable. In addition, investors can elect for the fund to pay tax on their behalf at either 33% (30% from the start of the 2009 income year) or 19.5% (whichever is applicable) on income attributed to them by the managed fund. Since the fund has paid the tax on the individual’s behalf, the investor will not have to include the income in their tax return. Since the income is taxed under the fund, and does not need to be included in a person’s tax return, it is not taken into account for family assistance, student loan or child support purposes. An investor may request to have no tax deducted, with the gross amount received. This would be applicable to tax exempt investors such as charities.

Potential investors should carefully consider their own circumstances before choosing to invest under the new rules to make sure there are no unintended results. For example, if a family trust were to invest in a complying managed fund or “portfolio investment entity” (PIE) as they are known, choosing how the investment should be taxed will have implications. If the trust elects for its income to be taxed in the fund, the rate of 33% (or 30% from the 2009 income year) must be used. However, because the income is not treated as trust income for tax purposes, the income cannot be included in the beneficiaries’ tax returns and the ability to take advantage of a beneficiary’s lower marginal rate will not be available. However, if the trust elected a rate of 0%, effectively choosing for the income to be taxed in the trust, the income will have to be included in either the trust’s or its beneficiaries’ tax returns.  This could result in either the beneficiaries or the trust itself being subject to the provisional tax regime, which could result in interest and penalties, if no provisional tax has been paid.

The new legislation was amended once prior to enactment to iron out some kinks and it would not be surprising if further “tweaks” are made as practical issues are encountered on implementation. However, the new PIE rules are generally taxpayer friendly.

If any of your investments are converting to PIE's your fund manager will be contacting you to elect a PIR tax rate. If you are unsure which tax rate to elect follow the link below to the IRD website or contact us..

What is a PIE?
What is a PIR? (Prescribed Investor Rate)
Work out your PIR Tax Rate

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