Understanding Portfolio Investment Entities In New Zealand

A Portfolio Investment Entity (PIE) is a type of investment entity that offers tax advantages to investors. PIEs have been available in New Zealand since 1 October 2007, with the aim of encouraging savings by lower and middle-income earners who have been reluctant to save through collective investment vehicles. When investing through a PIE, returns are taxed at the investor's Prescribed Investor Rate (PIR), which is capped at 28%. This can result in a lower tax rate compared to a regular savings account or term deposit. PIEs can invest in various types of passive investments, and there are several types of PIEs, each with different abilities and tax requirements. The most common type is the multi-rate PIE (MRP), where investors notify the entity of their PIR, and the entity calculates and pays tax on their behalf.

Types of portfolio investment entities (PIEs)

A portfolio investment entity (PIE) is a type of investment entity that has special tax rules, which may be beneficial to investors. PIEs invest contributions from their investors in different types of passive investments.

There are several types of PIEs, each with different abilities and tax requirements. The most common type is the multi-rate PIE (MRP). Investors in these PIEs notify the MRP of their prescribed investor rate (PIR), which is based on their total income over the last two income years. The MRP attributes income to the investor and calculates its PIE tax using the investor’s PIR. The MRP then adjusts the investor's account by that amount of tax.

Investing in a PIE can be beneficial because you will pay tax on any investment income based on your PIR, instead of your personal income tax rate. For example, if you pay income tax at a rate of 30%, 33%, or 39%, the highest PIR of 28% will be more advantageous. Additionally, PIEs that invest in New Zealand and certain Australian shares are not taxed on any capital gains or losses from those investments.

Some PIEs offered by banks in New Zealand include the BNZ Term PIE, YouWealth, and the BNZ KiwiSaver Scheme.

Tax advantages of PIEs

A portfolio investment entity (PIE) is a type of investment entity that offers tax advantages to investors. PIEs were introduced in 2007 following the launch of Kiwisaver, addressing the issue of higher tax rates for investors in managed funds compared to direct share investors.

Lower Tax Rates: Investors in a PIE pay tax based on their Prescribed Investor Rate (PIR), which is usually lower than their personal income tax rate. The PIR is determined by an individual's taxable income over the last two income years and can be 10.5%, 17.5%, or 28%. If an individual's PIR is lower than their income tax rate, they will pay less tax on their savings in a PIE compared to a regular savings account.

Tax Benefits for Higher Income Taxpayers: PIEs are particularly advantageous for individuals paying income tax at a rate of 30%, 33%, or 39%. Since the highest PIR is 28%, investing in a PIE can result in significant tax savings for higher-income taxpayers.

No Tax on Capital Gains: A PIE that invests in New Zealand shares and certain Australian shares is not taxed on any capital gains from those investments. This removes the inconsistency where previously, managed funds paid tax on capital gains, while direct investors typically paid tax only on dividends.

Final Tax: PIE tax is generally considered a 'final' tax. This means that as long as the correct PIR has been provided, investors do not need to include their PIE taxable income in their income tax return. The PIE tax liability, whether at the end of the year or during a taxable event like a withdrawal, will be taken care of.

Tax Credits: PIE funds receive tax credits on some of their investment income, including foreign tax credits and imputation credits. These tax credits can result in a tax refund for investors, particularly those with a PIR lower than 28%.

Who can benefit from PIEs

A portfolio investment entity (PIE) is a type of investment entity that has special tax rules, which may have tax advantages for investors. PIEs are often used by companies, trusts, or superannuation schemes.

So, who can benefit from investing in a PIE? Well, if you pay income tax at a rate of 30%, 33%, or 39%, you may benefit from a PIE as the highest prescribed investor rate (PIR) is 28%pay less tax on your savings than in a regular savings account or term deposit. For example, if you've recently returned to work after a period of unemployment, you may be able to elect a lower PIR temporarily, as your PIR is based on your taxable income in the last two income years.

You may also benefit from a PIE if you've had a salary increase, resulting in a higher rate of income tax. In this case, your PIR will be based on your taxable income in either of the last two income years, so you may qualify for a lower PIR for another two years.

Additionally, if you're a trust with a trustee tax rate of 33% or 39%, or a trust beneficiary on a 30%, 33%, or 39% income tax rate, you may benefit from the PIE rules, which can provide advantages to some trustee investors.

It's important to note that when you invest in a PIE, it'll pay tax on your behalf using the PIR you've provided. This is generally considered a 'final' tax, so you don't need to include your PIE taxable income in your income tax return, as long as you've provided the correct PIR.

How to calculate your Prescribed Investor Rate (PIR)

A portfolio investment entity (PIE) is a type of investment entity that has special tax rules and may offer tax advantages. When you invest in a PIE, you pay tax on any investment income based on your Prescribed Investor Rate (PIR), which is usually capped at 28%. Your PIR is based on your total income over the last two income years.

• Determine your tax residency status. If you are not a New Zealand tax resident, your PIR is 28%.
• Check your taxable income over the last two income years. This includes income from PIE investments. If your taxable income (excluding PIE income) was $14,000 or less, and your taxable income (including PIE income) was $48,000 or less, your PIR is 10.5%.
• If your taxable income from the previous step was higher, check if your taxable income (excluding PIE income) was $48,000 or less, and your taxable income (including PIE income) was $70,000 or less. If yes, your PIR is 17.5%.
• If your taxable income is above the limits in the previous step, your PIR is 28%.

It is important to note that special tax rules apply to trusts, which can select a PIR of 0%, 17.5%, or 28% that suits their beneficiaries. If you choose a PIR lower than 28%, you must include PIE income in the trust's tax return and can claim a tax credit for any PIE tax paid.

Additionally, if you are a new resident, you must treat gross income earned from foreign sources while you were a non-resident as taxable income when determining your PIR. However, if you expect your taxable income as a new resident to be significantly lower than your income before becoming a New Zealand resident, you can choose to be taxed at your marginal tax rate on your returns from a fund, with a tax credit available for any PIE tax paid.

PIEs and KiwiSaver

A portfolio investment entity (PIE) is a type of investment entity that has special tax rules. PIEs are entities that invest contributions from their investors in different types of passive investments. PIEs can be companies, trusts, or superannuation schemes.

There are several types of PIEs, each with different abilities and tax requirements. The most common type is the multi-rate PIE (MRP), where investors notify the entity of their prescribed investor rate (PIR), which is based on their total taxable income in the last two income years. The PIR can be either 28%, 17.5%, or 10.5%. The MRP attributes income to the investor and calculates its PIE tax using this rate.

When you invest in a PIE, you pay tax on any investment income based on your PIR instead of your personal income tax rate, which can be beneficial if your PIR is lower than your income tax rate. PIEs that invest in New Zealand and certain Australian shares are also not taxed on capital gains or losses.

All KiwiSaver default schemes are PIEs. When you invest in a KiwiSaver PIE, you pay tax on the money your investment earns, but not on any money you withdraw. KiwiSaver schemes that are PIEs invest in different types of funds, and your scheme provider taxes your investment earnings using the PIR you choose.

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