Transitional impacts on becoming a portfolio investment entity (PIE)

There may be a number of impacts on an entity when they choose to become a PIE. They include:

• deemed disposal and reacquisition of shares at market value and optional spread of any increased tax liability
• balance date changes
• imputation adjustments.

Deemed disposal and reacquisition of shares

An entity that elects to be a PIE is deemed to dispose of and reacquire at market value any shares held in New Zealand and certain Australian-resident listed companies.

The deemed disposal and reacquisition for transitional purposes, occurs as at the day before the election to become a PIE. A PIE may as a result, incur an increased tax liability, payment of which can be spread over the three years beginning with the year in which the entity becomes a PIE.

Although payment of the increased liability can be spread, the residual income tax (RIT) in the year of the deemed disposal will include the full amount of the additional liability, affecting the use-of-money interest (UOMI) calculations as at each provisional tax instalment date.

If an increased amount of tax needs to be paid as a result of the transition, you will need to advise us of the details separately so that the appropriate due date changes can be made. Please send these details with your income tax return to:

Team Leader, Assistance
Inland Revenue Department
PO Box 2198
Wellington.

Use-of-money interest and late payment penalties on increased liability for provisional tax

When an entity becomes a PIE and has an increased liability for provisional tax for the income year, it is not subject to penalties and interest arising from an inaccuracy in an estimate of provisional tax made before electing to become a PIE or its payment of provisional tax due within two months from the date of becoming a PIE, if the inaccuracy arises from the deemed disposal and reacquisition.

Due date for tax

An entity that becomes a PIE and is liable to pay an amount of income tax because of the deemed disposal and reacquisition of shares may satisfy the liability by making payments of at least:

• one third of the tax amount, in the tax year in which the entity becomes a PIE, and
• one half of the balance of the tax amount remaining owing after the payment made as above, in the tax year following the tax year in which the entity becomes a PIE, and
• the balance of the tax amount remaining owing after the payments made as above, in the second tax year following the tax year in which the entity becomes a PIE.

As the payments are required in the tax year the due dates for each payment will be 31 March of each tax year.

The number of payments is not fixed. A PIE may choose to satisfy the liability by paying the full amount by the end of the first tax year. Alternatively, a PIE may make more than three payments to satisfy the liability in full providing the minimum requirements are met.

Examples of PIEs with standard and non-standard balance dates

When ...	then the...
the entity becomes a PIE on 1 October 2007 (commencement of the PIE rules) and has a standard balance date	deemed disposal and reacquisition date is 30 September 2007, and resultant increased tax liability is $210,000 in the 2008 tax year (the year of disposal) spread in payments of:   $70,000 due 31 March 2008 $70,000 due 31 March 2009 $70,000 due 31 March 2010.
the entity becomes a PIE on 1 January 2009 and has a non-standard balance date of December	deemed disposal and reacquisition date is 31 December 2008, and resultant increased tax liability is $210,000 in the 2009 tax year (the year of disposal) spread in payments of:   $70,000 due 31 March 2009 $70,000 due 31 March 2010 $70,000 due 31 March 2011.

 

 

Balance date changes required on becoming a PIE

If you become a quarterly or exit MRP you must have a 31 March balance date. If before the PIE commencement date you already operated a 31 March balance date, you don't have to make any changes. You can file your final income tax return under the current rules to the PIE commencement date. That is the final tax return will still cover the 12 months from 1 April to 31 March, but it will only include income derived to the PIE commencement date.

Based on the example, if you elected to become a provisional tax payer, your provisional tax payments could be based on estimated income, taking into account the:

 

• standard income returned to 30 September 2007
• transitional process, and
• change in tax calculation that applies from 1 October 2007.

If you have a non-standard balance date and you are a quarterly or exit MRP, then:

• the day before your election to become a PIE is deemed to be your balance date, and
• the following 31 March after your commencement as a PIE is your new balance date.

Based on a 1 October 2007 commencement date, your final pre-PIE income tax return period will end on 30 September 2007. Unless your balance date is 30 September you will be filing the final income tax return for a period other than 12 months.

Impacts on imputation accounts

A MRP is not required to maintain an imputation credit account (ICA). Credits in the ICA on the date a company becomes a MRP are lost. Where there is a debit in the ICA on the date a company becomes a MRP the company has until the end of the imputation year to clear the debt. This is designed to allow the MRP to attach imputation credits to dividends made just prior to becoming a PIE in relation to the deferral tax that is to be paid by the end of that tax year.

Listed PIEs will continue to pay tax and file income tax returns as a company, and must maintain an ICA. Any distributions made by these entities must carry imputation credits to the extent permitted by imputation credits available as determined by the directors of the entity.

 

Date published: 26 Feb 2010

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