Investors exiting the portfolio investment entity (PIE)

Portfolio investment exit period

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

An investor in a quarterly zero PTRE has a portfolio investor exit period if the amount of the portfolio entity 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 portfolio investor interest, in all classes of the entity, at the end of the exit period.

An investor in an annual exitor PTRE has a portfolio investor exit period if the amount of the portfolio entity tax liability for the investor (reduced by any tax credits allocated to the investor) is more than the value of the investor's portfolio investor interest on any day in the tax year.

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

Quarterly zero PTREs

For a quarterly zero PTRE, a portfolio investor exit period is:

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

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

If the PTRE does not tax the allocated income at a zero rate for the exiting investors, these investors will not need to include the allocated income in their tax returns. If a voluntary payment is made by the PTRE 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 a portfolio investor exit period has been triggered and the PTRE has zero-rated the investor's income in the period of withdrawal, a residual interest in the PTRE may accrue to the investor due to subsequent income allocation in the period. This residual portfolio 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 portfolio investor allocated income/loss from the PTRE in relation to the portfolio investor 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 PTRE 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 PTRE voluntary payment must represent an amount of its portfolio entity tax liability for the investor and the investor's portfolio investor interest for the tax year.

Zero rating investors who exit a PIE

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

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

PTREs that elect to pay provisional tax would not be able to apply a zero rate to the income allocated 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.

Annual exitor PTREs

For an annual exitor PTRE, a portfolio investor 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 portfolio investor class' and
• ending on a day in the tax year on which the entity's portfolio entity tax liability for the investor after allowing credits, for the portfolio investor class and any other portfolio investor classes for the period equals or exceeds the value of the investor's portfolio investor interest in the PTRE.

An exit period triggers a requirement for annual exitor PTREs to file a tax return showing the amount of the portfolio 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 zero PTRE part-way through a portfolio calculation period would have tax calculated at 0% by the PTRE on the exiting investor's share of the income earned during the period. However the PTRE may make voluntary payments of tax when an investor fully (or partially) exits a portfolio investor class.

PTREs that elect to pay tax provisional tax would not be able to apply a zero rate to the income allocated 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 zero or annual exitor PTREs may make voluntary payments of tax when an investor fully or partially exits a portfolio investor class or when an investor switches from one investor class to another within the same entity.

Switches between portfolio investor classes or partial withdrawals from a portfolio investor class may not trigger a portfolio investor 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 a portfolio investor exit period. Nevertheless, the PTRE may choose to make an optional payment of tax upon a switch between classes or upon partial withdrawal.

If an investor in a portfolio investor class of a quarterly zero PTRE 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 PTRE does so, then a portfolio investor 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 annual exitor PTREs, tax must be calculated where an investor 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 a portfolio entity tax liability of the entity, an adjustment to reflect the liability is required.

What is the difference between zero-rated portfolio 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. 19.5% or 30%) but has had their income allocated from a quarterly zero PTRE taxed at a zero rate at the time of withdrawal from the PTRE. For example, natural person investors must have a PIR greater than 0% so they could never be a "zero-rated portfolio investor". However, the PTRE could tax that investor's income at a zero rate on exiting the PTRE.

A zero-rated portfolio investor is a defined term and refers to investors in a PTRE that qualify for a PIR of 0%. For example, companies or trusts where the trustee does not elect a PIR of 30%. Note that where a company has not supplied a PIR to the PTRE and has had the default PIR of 30% applied, it is still a zero-rated portfolio investor.

Date published: 29 Jul 2008

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