You may have seen the term Portfolio Investment Entity or PIE used in the local newspapers and wondered what it was all about. In this article we explain the reason for the provisions, and what they to do.
The Before-PIE Problem
New Zealand’s PIE rules attempt to make the tax system more neutral. In the before-PIE world a tax disadvantage existed between investing in shares directly and investing through managed funds.
Before the PIE rules, if a person invested directly in domestic shares, and held their shares on capital account, those persons would only be taxed on the dividend income generated by the investment. [Note, for the purposes of this article we assume all investment is in domestic equities.]
By contrast, if a person invested in domestic equities through a managed fund they were often taxed on both the dividend income and the gain in the value of the shares. This is because managed funds are usually in the business of trading in shares in order to generate returns. However, in doing so the managed funds will almost always hold their shares on revenue account. The managed fund will therefore be taxed on the dividend income, as well as the gain on the value of the shares.
The New Zealand Government considered that this created adverse incentives for investors, and attempted to remove the perceived unfairness.
The solution to the above problem is to introduce a special type of “tax advantaged entity”. This entity is known as the Portfolio Investment Entity or PIE. The main aim of this entity is to put investors through a managed fund on the same footing from a tax perspective as those investors intending to go it alone.
Investing through a PIE has the following advantages:
- Gains on trading in New Zealand shares and listed Australian shares are not taxed;
- A final withholding tax applies based on the investors’ Prescribed Investor Rate (this could be 19.5% or 30% and means that the income does not have to be included in the investor’s tax return if all conditions are satisfied).
How does it affect me?
Investing through a PIE can result in a very tax efficient investment. In addition, major trading banks have now established cash-PIE funds. These funds attempt to mirror current accounts, and they give investors with a marginal tax rate of 38% access to the 30% tax rate. This represents yet another way to get around the 38% rate. Cash-PIEs can be very useful to reduce tax on interest where deposits are held on current account. However, clients should consider carefully which cash-PIE they choose, as all cash-PIEs are not equal.
Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. For further assistance please contact Grant Adams (348 8480).
Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide. Reliance should not be placed on this article where any specific issues are concerned.