The tax calculation

• The PIE tax calculation
• The foreign investment PIE tax calculation
• Attributed losses

The PIE tax calculation

PIE tax is calculated in the following three stages.

Stage 1: Class net income/loss

For a MRP the class net income or loss for an attribution period is calculated using the formula:

class assessable income - class deductions

where:

• class assessable income is the total entity's assessable income attributed to an investor class and the attribution period
• class deductions are the total amount of the entity's allowable expenditure or loss incurred by the entity in deriving assessable income attributed to the investor class and to the attribution period.

An investor class has class net income in an attribution period if the entity's assessable income that is attributed to the class and the attribution period exceeds the deductible expenditure that the entity attributes to the class and the attribution period.

An investor class has a class net loss in an attribution period if the deductible expenditure that the entity attributes to the class and the attribution period exceeds the entity's assessable income that is attributed to the class and the attribution period.

This calculation would be done at the end of a calculation period for each attribution period that falls within that calculation period.

Stage 2: Class taxable income/loss

Once the class net income or loss for an attribution period has been determined, the entity will establish its class taxable income or loss for an attribution period. This is arrived at using the formula:

class net income - class net loss - other loss used

"Other loss used" for the investor class is the lesser of:

• the total of:
  • entity formation losses attributed to the attribution period and the class, and/or
  • any class land loss that is available but has not been used in any previous attribution period to reduce class net income, and/or
• the class net income.

The amount of entity formation loss and class land loss which can be used in an attribution period is limited to the amount of class net income calculated for the class and the period.

For any investor class on a day, there cannot be both a class net income and a class net loss.

Stage 3: Tax liability

The calculating of tax for a MRP for a calculation period is carried out on a daily basis.
The formula for calculating the tax is:

percentage x (income - loss)  days in attribution period

- (expenses - credits)

x rate

"Percentage" is the percentage of the investor's entitlement to a distribution by the PIE to the investor class on the day.

"Income" is the class taxable income for the investor's investor class and the attribution period.

"Loss" is the class taxable loss for the investor's investor class and the attribution period.

"Rate" is:

• the notified investor rate or the default rate for the investor for the attribution period, (if the second bullet point does not apply), or
• 28% (reduced from 30% on 1 October 2010) if the entity is treated as the sole investor, where no investor holds an investor interest in the income.

"Days in attribution period" is the number of days in the attribution period.

"Expenses" are the total amount for the day in the attribution period of :

• fees for ongoing management and administration services paid from or charged to the account of the investor as a member of the investor class, and/or
• expenditure of the investor that is specifically allowed to be transferred to the entity (cannot exceed the income).

For the first bullet point above, in calculating the entity tax liability for the investor, a deduction is allowed for fees charged to an investor's account. The deductible fees are those that are charged to the investor for ongoing management and ongoing administration services, including switching fees, in relation to their investor interest. These fees should be spread over each attribution period the investor is present in an investor class.

Fees such as break fees for an investor exiting the PIE do not fall within this requirement and cannot be taken into account by the PIE in the tax calculation for the investor. Where expenditure is incurred after the income earning process has ended a deduction is not able to be claimed by the investor in their own income tax return.

The allowance of investor's expenses in the calculation of their attributed income prevents investors from having to file a tax return to get a deduction separately. This also applies in the situation where a master and member superannuation fund situation exits with the PIE being the master superannuation fund may claim specified member fund expenses up to the level of taxable income of the investor.

"Credits" are the amount of credits for fees paid or credited by the entity to the account of the investor as a member of the investor class on the day in the attribution period. The credit for fees are treated as excluded income to the investor.

The formula must be applied for:

• the calculation period
• each investor class
• each investor in the investor class
• each day, and
• each attribution period.

The foreign investment PIE tax calculation

The tax calculations for foreign investment PIEs has been changed to account for variable-rate PIE's use of the various prescribed investor rates (PIR) that apply to the different income sources and types. For a notified foreign investor the amount of the PIE tax is the sum of the calculations for each PIR.

The tax calculation for a zero-rate PIE is simply a matter of using the zero rate for attributed PIE income of notified foreign investors'. The calculation under the variable-rate PIE type can require the use of various PIRs.

The zero-rate PIE will use the 0% PIR for notified foreign investors and the notified investor rate for all other investors.

The variable-rate PIE must identify each source and type of New Zealand-sourced income, but only need identify the source of offshore income for the purpose of applying a tax rate.

A notified foreign investor can have up to four rates applied during one tax calculation:

• 0% for offshore income
• 0% for non-interest income from financial arrangements and fully imputed New Zealand dividends:
• 1.44% on New Zealand-sourced interest
• 15% or 30% for the unimputed portion of New Zealand-sourced dividends, and
• 28% for other New Zealand-sourced income.

If the result of a tax calculation is negative no tax credit arises from the loss for notified foreign investors in a foreign investment PIE. The loss is treated as zero.

Determining or calculating taxable amounts for notified foreign investors

The amount of taxable income of a notified foreign investor is equal to the assessable income attributed to the investor. The items credit for fees and expenses are treated as zero for the purposes of the calculation of attributed amounts.

Expenses and tax credits are still attributed across all investors in the class including notified foreign investors. For the purposes of the tax calculation the notified foreign investors are treated as if they were a separate class.

The taxable income of the notified foreign investor class is equal to the assessable income attributed to each notified foreign investor.

The legislation sets out how and at what stage of the calculation process expenses/losses are denied. However it is recognised that PIEs operate differing systems so provided the tax calculation is correct then the timing of the denial of the deductions may alter.

The following examples demonstrate this:

Description	Standard	Alternative
Gross income attributed	$1,000	$1,000
Expenses attributed	$50	$50
Expenses claimed	$0	$50
Assessable income	$1,000	$950
Expenses added back	$0	$50
Taxable income	$1,000	$1,000

The legislation is not intended to prescribe how a foreign investment PIE calculates the correct result, provided the end result is same result that would be achieved by applying the notified foreign investor tax calculation provisions.

The foreign investment PIE may have specific classes that only hold notified foreign investors, in which case the normal class requirements must be meet. Where the notified foreign investors are merely treated as if they are a separate class they do not need to meet the normal class requirements, e.g. minimum 20 members.

Attributed losses

Where an investor, other than a notified foreign investor taxed at a positive rate 10.5%, 17.5% or 28% in a quarterly or exit MRP has an investor attributed loss, the MRP has a tax credit. The MRP then attributes the credit to the investor by adjusting the investor's interest, or making a distribution.

The investor attributed income or loss for an investor taxed at a zero rate in a quarterly or exit MRP is included in the investor's tax return and tax is calculated at their marginal rate, in the income year that includes the end of the MRP's income year.

 

Date published: 30 Aug 2011

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