Chapter 16 – PIE and Offshore Investments
16.1 Overview
Being a small country, much of our investment is off shore. Although this accounts for a relatively small portion of New Zealand’s tax revenue, overseas investment is governed by quite a complex regime and affects a large percentage of the population either directly or indirectly.
This chapter focuses on two key areas relating to:
Portfolio investment entities (PIEs) and
Offshore portfolio investments in shares.
For the purposes of these reforms, investments in New Zealand entities and Australian listed companies are taxed differently from other overseas investments.
16.2 Application
16.2.1 Portfolio Investment Entities (PIEs) (ITA Subpart HM)
Managed funds are able to register as portfolio investment entities (PIEs). The following is a summary of benefits:
Investors are taxed according to their personal income level at a “prescribed investment rate” (PIR) on any income from the fund (see below).
PIEs that invest in New Zealand and most Australian listed companies are not taxed on any capital gains when they sell shares. This is similar to the tax treatment of individuals who invest directly in those New Zealand and Australian shares.
The tax on your income from PIE funds is paid from your investment in the relevant PIE fund on your behalf by the fund manager.
There is no need for individuals to complete a tax return for PIE income, where the tax paid directly by the fund manager has been based on the correct PIR (see exceptions below).
PIE income is considered separate from other taxable income for the purposes of your tax return.
PIE income will generally not affect your entitlement to Working for Families Tax Credits (WfFTC), student loan or child support obligations. You do not need to make an income adjustment if your PIE is locked into a retirement savings scheme or superannuation fund (eg KiwiSaver). Your PIE provider can tell you if this applies.
An income adjustment is required, however, if your PIE income is from a fund that allows you ready access to your investment (such as a cash PIE, on-call PIE, or a PIE term deposit) or if you receive dividends from a listed PIE that have not been declared your tax return or personal tax summary.
16.2.1.1 Prescribed Investor Rate PIR
The PIR (Prescribed Investor Rate) for individual investors is based on each investor’s level of income. ASB Bank has provided an online calculator to help you work out your PIR. See: www.asb.co.nz or navigate to it from calculators on our website: www.businessadvisor.co.nz
Meanwhile, the rates are summarised below for taxpayers who have provided their IRD number to the PIE:
Your PIR is 28% if, in both of the previous two income years, your
taxable income was more than $48,000; OR your
total income including your PIE investment income was over $70,000
Note: If for the two previous income years you qualify for two rates, your PIR is the lower rate. For example: If, based on last year your rate is 17.5%, and based on the previous year your rate is 10.5%, then your PIR is 10.5%.
New residents need to include your worldwide income when determining your PIR. However, you may choose not to do so if you reasonably expect that your taxable income in either of your first two years as a resident will be significantly lower than your total income from all sources for the previous income years.
Transitional residents qualify for the 0% PIR if you invest in a zero-rate PIE. If you have correctly notified the 0% to the PIE the income does not go into your tax return.
Non-residents: Special rules apply. Depending on the PIE and the source and type of the income you may qualify for a rate lower than 28% provided that you are a notified foreign investor.
Other investors: The following investors have a PIR of 0%:
Company (includes a unit trust)
Incorporated society
Registered charitable trust
PIE or PIE investor proxy (PIP)
Superannuation fund
For trusts, see the next section.
For joint investments, partnerships and unincorporated societies, the investment should be split and each partner/holder should give the PIE their correct PIR and IRD number.
Once you have calculated your PIR, you must notify your PIE of your PIR and your IRD number.
If you are unsure of which rate applies to you, consult your tax advisor.
16.2.1.2 Investing through a trust
Trusts, (excluding charitable trusts) and Super funds, have the following options:
28% is the recommended option where income is to remain in the trust. PIE tax will be deducted and the PIE income need not be declared in the trust’s tax return resulting in a lower tax rate than the standard trust rate of 33%.
Choose a rate of 0%, 10.5%, 17.5% or 28% to best suit the beneficiaries. Only testamentary trusts can choose a PIR 10.5%.
Trustees should download a copy of IR856.pdf from the IRD website for a full understanding of the options.
16.2.1.3 Payment of PIE tax
Your PIE fund managers will pay your tax on fund income directly to the IRD on your behalf. They will send you a tax certificate with details of your PIE income, tax paid and any tax credits that may apply. You need not declare the PIE income in your tax return and at the end of the financial year with two exceptions as shown in the table below.
16.2.1.4 Practical Hints
If you are currently invested in a managed fund:
Check to make sure it is PIE compliant so you can take advantage of these tax rules. (If not, consider your options to make sure you are in the most appropriate investment for your needs)
Make sure that your fund manager has your correct PIR
Update your PIR if your circumstances change
16.2.2 Overseas Investments
For all overseas investments other than those in New Zealand entities and Australian listed companies, income must be returned on an “unrealised” basis. This means that you are taxed whether you have received a dividend or not, generally using the “fair dividend rate method”, as described below.
This applies to investors including companies, pooled investment vehicles, individuals and family trusts. However, there is an exemption for individuals, and a very limited number of trusts, who hold investments costing NZ$50,000 or less. These individual investors will continue to pay tax only on dividends if they hold the shares on capital account.
Note that a couple may qualify for a $100,000 threshold in respect of “jointly” held investments. To assist investors who have no record of the cost of investments they purchased before 1 January 2000, the cost may be taken as half the market value of those shares as at 1 April 2007.
16.2.2.1 Fair Dividend Rate (FDR)
This is how to calculate taxable income on overseas investments. It applies to investors who own overseas shares, if their holding is less than 10 per cent of the company, and those who invest indirectly through a foreign investment fund (FIF).
FIFs include: a share in a foreign company; units in foreign unit trusts or mutual funds; an interest in a foreign superannuation scheme or retirement plan; and an entitlement to benefit from a non-resident life insurance policy with a savings component.
Under the FDR method, tax is paid on 5% of a share portfolio’s opening market value each year. If the investor is an individual or family trust and the total return (dividends and capital gains) on the portfolio is less than 5% then tax is paid on the lower amount. There is no tax payable or deduction allowed if the shares make a loss. If you have bought and then sold shares in the same company during the income year you may have further tax to pay.
This method does not apply to fixed rate shares and other investments that are similar to debt.
16.2.2.2 Alternative Method
Where it is not possible or practical to establish a market value of the investment, other options are available to calculate your tax on foreign investments. Seek professional advice to find the best alternative that applies to you.
16.2.2.3 Foreign Exchange Conversion
Exchange rates may be converted using the exchange rate:
On the day for which market value is determined or
On the day on which each amount is derived or incurred, or
That is the average of the close of trading spot exchange rates for the fifteenth day of each month that falls in the year.
Once you have chosen a currency conversion method for any share in a foreign investment fund, you must use the same method for that investment in subsequent income years. i.e. It will no longer be possible to change currency conversion methods from year to year for the same investment.