Investor return adjustments
Tax adjustments for an investor's share of the tax liability
An entity that becomes a MRP, must make adjustments to reflect the effect of a notified rate of an investor, as a member of an investor class on:
- the amount of the entity's entity tax liability for the investor class, and
- the amount of a tax credit attributed to the investor as a member of the investor class.
MRPs (not being MRPs that pay provisional tax) can get tax credits in certain circumstances for investors with PIRs of 10.5%, 17.5% or 28% (reduced from 12.5%, 21% and 30% on 1 October 2010) who have not been zero-rated when they exited a quarterly MRP. Instead of these investors receiving a benefit for any losses or excess credits directly, it is the MRP that receives these tax credits.
The adjustments will differ from investor to investor due to the different PIRs and levels of expenses applied to each investor.
To satisfy the PIE's tax liability the adjustment must be made to either:
- the investor interest of each investor, or
- the amount of each distribution to each investor, or
- the amount of the payment required from the investor.
The adjustments are required to be made:
- before the end of two months after the end of the quarter for PIEs that calculate tax quarterly.
- within 3 months of the end of the year for MRPs that elect to be provisional taxpayers
- within 2 months of the end of the tax year for PIEs that calculate tax daily
- by applying to us for another time.
An " investor interest" is an interest in a PIE that gives the holder an entitlement to a distribution of proceeds from an entity investment.
The investor return adjustment requirement does not apply if an entity elects to become a:
- listed PIE that is not a MRP
- benefit fund PIE, or
- life fund PIE.
This is because, unlike multi-rate PIEs (MRP), these entities do not calculate their tax liability based on the tax rates of investors.
If an investor withdraws from an investor class (either completely or partially) and reinvests the funds in another investor class of the same entity, then the entity can elect to pay the tax on the withdrawal. As this payment gives rise to a tax liability of the entity, an adjustment to reflect the liability is required. The entity can adjust the investor's investor interest in the relevant class, or their interest in another class to reflect the tax paid.
Adjustment methods
A MRP can choose between three methods for making the adjustment.
Units increased/reduced
Where a MRP has an entity tax liability, the MRP can reduce the investor interest (cancel units) in an investor class or another investor class.
Example 1
Investor A has a 28% PIR and holds 10,000 $1 units in a MRP.
The MRP attributes $500 income to the investor. The MRP's entity tax liability on the income is $140.
If the MRP chooses to adjust investor A's investor interest, it would cancel 140 units, leaving investor A with 9,860 units.
It may also increase the number of unit to reflect the income attributed.
Example 2
Where the MRP has a tax credit it can increase the investor interest in an investor class or another investor class.
Investor B has a PIR of 10.5% and holds 10,000 $1 units in a MRP.
The MRP attributes $1,000 income to Investor B, with an imputation credit of $300 attached.
The MRP's entity tax liability on this income is $105 (10.5% x $1,000).
Because the investor has a greater New Zealand tax credit ($300) than its tax liability ($105), there will be a paid tax credit of $195 ($300 - $105), which Inland Revenue credits to the MRP.
If the MRP chooses to adjust Investor B's investor interest, it would issue 195 additional units to Investor B, leaving Investor B with 10,195 units.
Distributions
The MRP can adjust any distributions made to the investor as a member of an investor class or another investor class.
Example
Investor A has a 28% PIR and holds 10,000 $1 units in a MRP.
The MRP attributes $500 income to Investor A.
The MRP's entity tax liability on this income is $140.
If the MRP chooses to distribute the income, the tax at 28% will be deducted and only the net amount of $360 ($500 - $140) will be given to Investor A.
Payment
The MRP can require the investor to make a payment to satisfy the entity's entity tax liability.
Timeframes for investor return adjustments
The investor return adjustments are required to be made before the end of the:
- second month after the end of the quarter for quarterly MRPs
- third month after the end of the income year for MRPs that elect to become provisional tax payers. (For tax to pay only)
- second month after the end of the tax year for exit MRPs
- by applying to us for another time.
Failure to make the adjustments within the timeframes would be a permanent breach of the eligibility requirements
Responsibility of PIE investor proxies (PIP)
For amounts attributed to it from a PIE, a PIE investor proxy (such as a custodian or nominee) has the same responsibilities that it would have if it were a PIE to make an investor return adjustment.
The PIP may make the required adjustment by:
- either adjusting the investor interest of the investors it represents, or
- adjusting the distributions to the investors, or
- requiring the investors to make a payment to reflect the effect of the investors' notified rate on the amount of distributions and credits and payments of income tax on investor attributed income for the attribution period.
However some PIE investor proxies may choose to pay the entity tax liability on behalf of investors by directly accessing the cash accounts that investors hold with the PIE investor proxy.
Date published: 29 Sep 2010
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