Breaches
Breaching one or more of the eligibility criteria
A portfolio investment entity (PIE) must comply with certain eligibility criteria at all times during the year and if breached, will result in immediate loss of entitlement to be a PIE. However, there are also some breaches of the eligibility criteria that if corrected within set timeframes will not result in the loss of the entitlement to be a PIE.
New breach rules for foreign investment PIEs
There are new breach rules for foreign investment PIEs that operate in addition to the existing breach rules.
Zero-rate PIEs
Where a zero-rate PIE:
- breaches the income source or threshold rule on the last day of a quarter (first quarter), and
- fails to remedy the breach by the last day of the following quarter (second quarter)
they will become a variable-rate PIE from the first day of the third quarter.
A transitional rules applies for the first year which means that if the third quarter starts before the date a variable-rate PIE can become effective then the zero-rate PIE will become a multi-rate PIE that is not a foreign investment PIE from 1 January 2012.
Variable-rate PIEs
Where a variable-rate PIE:
- does not identify the income source and investment type for New Zealand-based income and apply the appropriate prescribed investor rate for each amount on the last day of a quarter (first quarter), and
- fails to remedy the breach by the last day of the following quarter (second quarter)
they will become a multi-rate PIE that is not a foreign investment PIE from the first day of the third quarter.
If either foreign investment PIE type owns New Zealand land or more than 20% of a land investment company they will cease to be a PIE immediately.
Permanent breaches
A PIE must comply with certain eligibility criteria at all times during the year. That is, breaches of certain eligibility requirements will result in automatic cessation of the PIE.
If a PIE breaches the following eligibility criteria, at any time during a year, it fails to be eligible to be a PIE:
- collective scheme requirement
- residence requirement
- re-entry after 5 years requirement
- same rights to income requirement
- investor return adjustment requirement (for MRPs only), or
- imputation credit distribution requirement (listed PIEs only).
If any of these breaches occur the PIE should complete the online cessation form under "Get it done online". The effective date of the PIE's cessation will be the first day after the end of the quarter in which the breach occurs, unless the permanent breach occurs in the first 12 months after what would have been the effective date of the PIE's election to become a PIE, then the PIE will be treated as if it never became a PIE.
Temporary breaches
Some temporary breaches of the eligibility criteria may not result in the cessation of the PIE, as long as the breaches are corrected within set timeframes.
If a breach occurs where an investor class within the PIE fails:
- a minimum number of investors requirement or
- a maximum investor interest requirement
where the entity fails:
- an investment type
- an income source
- an entity shareholding investment, or
- a class shareholding investment
requirement, then the entity will have until the end of the quarter (the second quarter) following the quarter in which the breach.
Where the breach is both significant and within the control of the PIE, the PIE will cease to be effective from the first day of the next (second) quarter. Otherwise the PIE will cease to be effective from the first day of the third quarter.
During the first six months from the effective date of the entity's election to become a PIE, it will not cease for a temporary breach, but if there is a temporary breach on the last day of quarter that begins after the end of the six months, the PIE will have until the last day of the next quarter to remedy the breach. If it fails to do so, the entity will cease to be a PIE on the first day of the next quarter unless the date of the failure to remedy the breach that causes the PIE to become ineligible to be a PIE occurs within 12 months of the PIE's commencement, then the entity will be treated as if it never became a PIE.
The PIE does not have to advise us of a temporary breach, provided the breach is corrected within the set timeframe.
Example 1
PIE A commences on 1 October 2007.
A temporary breach of an eligibility requirement occurs on 20 May 2008 (ie, the PIE has existed for more than 7 months but less than 12 months).
If the breach has not been corrected as at the end of the quarter (30 June 2008) and has still not been corrected by the end of the following quarter (30 September 2008), then the PIE will be treated as if it had never become a PIE).
In this case the PIE has 4 months and 11 days to correct the breach.
Example 2
PIE B commences on 1 October 2007.
A temporary breach of an eligibility requirement occurs on 1 October 2009 (ie, the PIE has existed for 2 years).
If the breach has still not been corrected as at the end of the quarter (31 December 2009) and has still not been corrected by the end of the following quarter (31 March 2010) then the PIE will cease as at 1 April 2010).
In this case the PIE has 6 months to correct the breach.
Example 3
PIE C commences on 1 October 2007.
A temporary breach of an eligibility requirement occurs on 20 March 2008. (ie, the PIE has existed for less than 6 months).
If the breach remains uncorrected as at 30 June 2008 (the last day of the quarter beginning 6 months after commencement) and has still not been corrected by the end of the following quarter (30 September 2008) then the PIE will be treated as if it never became a PIE.
In this case the PIE has 6 months and 11 days to correct the breach.
If a breach is either insignificant or occurred due to an event or circumstance outside the control of the PIE, the breach will not cause the PIE to cease to be eligible to be a PIE.
The PIE cessation notice can be completed online. Use the PIE cessation form at "Get it done online". We will acknowledge the cessation notice.
The cessation process may be complex and lengthy, particularly where the PIE has ceased within 12 months of commencement. A final letter confirming cessation of the PIE tax type will only be issued once all actions including return reviews or adjustments have been completed.
Date published: 30 Aug 2011
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