17 Dec 2024
Tax Talk: Are you subject to FIF rules? If so, changes are coming…
New Zealand’s foreign investment fund (FIF) rules have created much angst for Kiwis over the decades...
Yes, you can have your PIE and eat it too
Do you have spare cash that you’re contemplating locking into a term investment to generate some interest income? You should consider the benefits of a PIE Fund, says Baker Tilly Staples Rodway Auckland Business Advisory Services senior manager Sonia Gaskin.
Time to read: 4 mins
What is a PIE?
A Portfolio Investment Entity (PIE) allows investors to pool their funds and invest in a diversified portfolio of assets. What makes investing in a PIE particularly attractive are the tax advantages that come with this.
Why invest in a PIE Fund?
1. Lower Tax Rates
One of the most significant advantages of investing in a PIE is the lower tax rate it attracts. You’ll pay tax on the investment income you receive at your prescribed investor rate (PIR), which is determined by reference to your taxable income and ranges from 10.5% to 28%. This is significantly lower than the top marginal tax rate of 39% that an individual may otherwise pay on their investment income.
This can be illustrated for an individual investor who earns taxable income of greater than $48,000 per year:
| Taxable Income | Personal Income Tax Rate |
Prescribed Investor Rate (PIR) |
Tax Benefit on PIE Returns |
|
Less than $14,000 |
10.5% |
10.5% |
0% |
|
$14,001 - $48,000 |
17.5% |
17.5% |
0% |
|
$48,001 - $70,000 |
30% |
28% |
2% |
|
$70,001 - $180,000 |
33% |
28% |
5% |
|
Over $180,001 |
39% |
28% |
11% |
A Trust can also benefit from investment through a PIE, as the PIR rate on investment income will be limited to 28% (compared to the usual Trust tax rate of 33% at the time of writing, to be increased to 39% for the 2024–25 and later income years).
|
Taxable Income |
Income Tax Rate |
Prescribed Investor Rate (PIR) |
Tax Benefit on PIE Returns |
|
All income levels |
33% |
28%* |
5% |
*In certain circumstances the Trust can elect to choose a lower PIR.
2. Simplified Tax Reporting
The PIE itself is responsible for filing income tax returns and paying tax on behalf of its investors. This means you do not need to file a tax return simply due to your investment in a PIE (unless you have other income to declare).
Provided you give the PIE fund your correct PIR rate, you should not pay any additional income tax on investment income derived from the fund.
3. Flexibility in Choosing Investment Options
PIEs offer a wide range of investment options, from conservative to high-risk. Investors can choose the option that best suits their risk appetite and investment goals. PIEs allow investment in a diversified portfolio of assets, which can help to reduce the overall risk.
Some examples
1. Tax benefit of PIR vs personal income tax rate
An individual with a 39% personal tax rate invests $250,000 into a PIE Fund for a year, with an investment return of 10%.
|
Saving |
|
$2,750 |
|
|
PIE Fund |
Other Investment (39% tax) |
|
Investment income |
$25,000 |
$25,000 |
|
Tax |
$7,000 |
$9,750 |
*The amount saved is available to be reinvested.
2. Two-year tax benefit if your taxable income is due to increase
Your prescribed investor rate (PIR) is based on your taxable income for the previous two income years. As a result, there may be benefits of investing through a PIE if your income has recently increased and put you on a higher PIR. This should provide a two-year tax benefit.
|
Recent return to work after two-year paternity leave |
|
Let’s say you recently returned to full-time employment after being on parental leave for two years. While on parental leave you ran a small at-home business where you earned less than $14,000 taxable income per year, with a PIR of 10.5%. However, your salary is now $50,000 annually. |
|
What is the benefit of investment through PIE? In earning $50,000 per year, your personal tax rate is now 30%, so by investing through a PIE, you can apply a PIR of 10.5%, resulting in a tax saving on investment income of 19.5% for a two-year period. Following the two-year period ending you will still be better off as your PIR will be 28%, which is less than the tax rate of 30% for other investments. |
|
Recent promotion and pay rise |
|
You have recently been promoted at work and your total taxable income is due to increase to $75,000, after earning less than $48,000 each of the previous two income years. |
|
What is the benefit of investment through PIE? Your personal tax rate on income earned from investment has risen to 33%, so investing through a PIE can result in a tax saving on investment income of 15.5% for a two-year period, as you can apply a PIR of 17.5%. Following the two-year period ending you will still be better off as your PIR will be 28%, which is less than the tax rate of 33% for other investments. |
Conclusion
Investing in a PIE can provide significant tax advantages for New Zealand resident investors. With lower tax rates, simplified tax reporting and flexibility in choosing investment options, investing in a PIE can be a smart choice for those wanting to maximise their return.
For more assistance on how tax applies to PIE funds or any other taxable activity, contact one of our business advisors or tax specialists.
- For more assistance on how tax applies to PIE funds or any other taxable activity, contact one of our business advisors or tax specialists.
EDIT: This article has been updated to reflect the recent changes to the trust tax rate.
DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.