The introduction of the PIE regime was a response to the over-taxation of managed funds, which was a major barrier for investors, when considering the whole range of investment options. In the past, funds would pay tax at the company rate (it was then 33 cents in the dollar) and those on a lower rate (say 19.5 per cent) could not claim back the difference. In effect, investors were taxed 33 per cent regardless of what other income they had.
So, the PIE regime was born – and a good thing for investors too. The playing field was tilted away from managed-funds investors but now it has been levelled (in fact, tilted in favour of managed funds in many cases).
Managed funds may now apply to become PIEs (nearly all have) and when they have been registered as PIEs they will deduct tax from each investor’s returns and distribute the income with no more tax for the investor to pay. However, the investor has to tell the managed fund what his or her tax rate is for PIE purposes. This is called the Prescribed Investor Rate (PIR) and it is different from your ordinary tax rate. PIRs are calculated by adding together the ordinary taxable income that some has (e.g. from wages, salary, NZ Super etc.) to the income that they derive from PIEs. This table shows you what your PIR will be at various income levels.
Note from the table that you cannot pay more than 28 per cent tax if you invest in a managed fund which is PIE. This is especially useful for high-income earners who are on the top rate of tax (33 per cent). If these same people made investments in something that was not a PIE (e.g. if they were direct investors in shares, bonds, bank deposits or property syndicates) their investment income would be added to the income they earn from their salaries and this would be taxed at 33 per cen. By investing in a managed fund is a PIE, their investment is taxed at no more than 28 per cent.
No investment should ever be made solely for tax purposes. However, once a particular type of investment is chosen, you should certainly look for the most tax-efficient means of making the investment and PIEs often fit that bill. For example, if you decide to invest in commercial property; you could choose to invest in a small property syndicate in which case income from the syndicate would be taxed at your own rate. However, if you decide to invest via a managed fund that was a PIE(e.g. Kiwi Income Property Trust o MAP NZ Office Trust) you could be taxed at your PIR which could be lower.
One area where this can be important is for those making term deposits and holding cash with their banks. Banks have established ‘cash PIEs’ – managed funds that invest in term deposits and the like and these have been able to get PIE status. These ‘cash PIEs’ are more tax efficient than ordinary term deposits and savings accounts with much the same risk – except that some of these PIEs may not carry the government guarantee. You should check before investing.