Investors exiting the portfolio investment entity (PIE)

Exit period

Investors may fully or partially sell or withdraw their investments in a PIE, or change investment classes. If this happens, an exit period may arise.

An investor in a quarterly MRP has an exit period if the amount of the tax liability for the investor (calculated as if the investor did not have an exit period) would equal or exceed the value of the investor's investor interest, in all classes of the entity, at the end of the exit period.

An investor in an exit MRP has an exit period if the amount of the tax liability for the investor (reduced by any tax credits attributed to the investor) is more than the value of the investor's investor interest on any day in the tax year.

If an investor partially exits or withdraws their investment, but an exit period does not arise, the MRP may calculate tax on the investor's attributed income.

Quarterly MRPs

For a quarterly MRP, an exit period is:

• a period that starts at the beginning of a calculation period (quarter) and ends with the fifth working day after the end of the calculation period, and
• a period for which the amount of: the entity's tax liability for the investor, and the investor class, and any other investor classes would, if the period were not an exit period for the investor, equal or exceed the value of the investor's investor interest for the investor class and any other investor classes at the end of the period, and
• the amount of the entity tax liability is not met by an optional payment of tax by the MRP.

The five-day grace period after the end of a calculation period is to accommodate investors who leave a quarterly MRP just after the end of a calculation period, but before the entity has calculated the entity tax liability for the calculation period.

If the MRP does not tax the attributed income at a zero rate for the exiting investors, the investor will not need to include the attributed income in their tax return. If a voluntary payment is made by the MRP an exit period does not arise and the income is treated as excluded income of the investor.

PIE responsibilities where the investor's residual interest exceeds the tax liability on their income

Where an exit period has been triggered and the MRP has zero-rated the investor's income in the period of withdrawal, a residual interest in the MRP may accrue to the investor due to subsequent income attribution in the period. This residual investor interest in the entity must be cancelled and paid to Inland Revenue by the payment due date for the calculation period. This payment gives rise to a tax credit which the investor can use to satisfy some of the investor's tax liability.

Although the investor will be required to include the amount of attributed income/loss from the MRP in relation to the exit period in their tax return, the residual interest paid to the Commissioner will be treated as a refundable credit against any income tax liability.

The payment of the residual value of the investor's interest, must be made by the MRP within one month of the end of the quarter in which the exit period falls.

Where a voluntary payment covering the tax liability is made there is no exit period. The amount of the MRP voluntary payment must represent an amount of its entity tax liability for the investor and the investor's investor interest for the tax year.

Zero rating investors who exit a PIE

Only quarterly MRPs that are unable to calculate tax on the investor's attributed income in an exit period may zero rate the income.

Unlike a quarterly MRP, investors who exit an exit MRP will not be zero-rated. Instead, the entity would need to pay the investor's share of the entity tax liability relating to an exit period.

MRPs that elect to pay provisional tax would not be able to apply a zero rate to the income attributed to investors that exit the fund during the year. They would pay tax on all the income the entity earned during the year. These entities will deduct the correct amount of tax from investors when they exit, although as provisional tax payers, payment to Inland Revenue will be made at the normal income tax due dates. However they may pay out a flat interest rate for investors that exit.

Exit MRPs

For an exit MRP, an exit period is a period:

• beginning with the later of:
  • the beginning of the tax year and
  • the day on which the investor last became an investor in the investor class and
• ending on a day in the tax year on which the entity's entity tax liability for the investor after allowing credits, for the investor class and any other investor classes for the period equals or exceeds the value of the investor's investor interest in the MRP.

An exit period triggers a requirement for exit MRPs to file a tax return showing the amount of the entity tax liability for the exit period. The return is due by the end of the month following the period in which an investor exits, unless the exit period ends in November, in which case the return is due by the following 15 January.

PIE responsibilities when an investor withdraws all of their investment

Investors who exit a quarterly MRP part-way through a calculation period would have tax calculated at 0% by the MRP on the exiting investor's share of the income earned during the period. However the MRP may make voluntary payments of tax when an investor fully (or partially) exits an investor class.

MRPs that elect to pay tax provisional tax would not be able to apply a zero rate to the income attributed to investors that exit the fund during the year. It would pay tax on all the income it earned during the year. It would deduct tax based on the investor's PIR from investors when they exit, although as provisional tax payers, payment will be made at the normal income tax due dates.

PIE responsibilities when an investor withdraws part of their investment or switches investment classes

Quarterly or exit MRPs may make voluntary payments of tax when an investor fully or partially exits an investor class or when an investor switches from one investor class to another within the same entity.

Switches between investor classes or partial withdrawals from an investor class may not trigger an exit period as a reduction in an investor's interest in the entity may not result. That is, a reduction of the interest relating to one class may be offset by an increase in the interest relating to another class or a partial withdrawn may not be significant enough to give rise to an exit period. Nevertheless, the MRP may choose to make an optional payment of tax upon a switch between classes or upon partial withdrawal.

If an investor in an investor class of a quarterly MRP withdraws their interest in the class or the entity in a quarter, the entity has the option of paying the tax relating to the quarter in which the exit occurs, rather than zero-rating the withdrawal. If the MRP does so, then an exit period does not arise and the income relating to the period of the withdrawal remains excluded income of the investor. That is, the investor does not need to include any income relating to the quarter in which the withdrawal was made in their tax return.

The entity would still have the option to zero-rate the investor, in which case it would be the responsibility of the investor to pay the resulting tax liability.

For exit MRPs, tax must be calculated where an exit period is triggered. The voluntary payment may be made in the case of partial withdrawals or switches.

As the optional payment gives rise to an entity tax liability of the entity, an adjustment to reflect the liability is required.

What is the difference between zero-rated investors and investors taxed at zero rate?

An investor taxed at a zero rate is an investor who has a PIR greater than zero (i.e. 10.5%, 17.5% or 28% reduced from 12.5%, 21% or 30% on 1 October 2010) but has had their income attributed from a quarterly MRP taxed at a zero rate at the time of withdrawal from the MRP.

A zero-rated investor is a defined term and refers to investors in a MRP that qualify for a PIR of 0%. For example, companies or trusts where the trustee does not elect a PIR of 28%. Note that where a company has not supplied a PIR to the MRP and has had the default rate of 28% applied, it is still a zero-rated investor.

 

 

Date published: 29 Sep 2010

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