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Industry guidelines Ngā aratohu ahumahi

What is a portfolio investment entity (PIE)?

A PIE is an entity that came into existence from 1 October 2007 under legislation in Part HM of the Income Tax Act 2007.

Eligible entities that elect to become a PIE will generally pay tax on investment income based on the prescribed investor rate (PIR) of their investors, rather than at the entity's tax rate.

PIEs invest contributions from investors into different types of investment.

Income earned through a PIE will generally not affect individual investors' entitlements to working for families tax credits or their student loan or child support obligations.

For a full explanation of the new PIE rules please read:

Why have PIEs been established?

The PIE tax rules:

  • remove a number of tax disincentives to saving via managed funds, which is important for encouraging investment through KiwiSaver, and
  • address a number of long-standing problems with the taxation of collective investment vehicles (CIVs).

These tax disincentives and long-standing problems include:

  • The difference in tax treatment when people invest directly in New Zealand shares and when they invest in shares via a New Zealand CIV.
  • Low income earning investors in CIVs having their investment taxed at a higher rate than their marginal tax rate.

Superannuation funds have historically been taxed at 33% on their income, although a substantial number of investors in such funds may have a lower marginal tax rate, for example, 10.5%. This has created a significant tax disincentive for lower income savers to use managed funds.

Why have foreign investment PIEs been established?

The current PIE tax rules over-tax non-resident investment in PIEs.

How non-resident investors in PIEs are currently taxed

Non-resident investors in PIEs are taxed at 28% on their PIE income, irrespective of whether the income was earned from foreign or New Zealand assets. This means they are over-taxed in comparison with the tax rates they would face if they invested directly in those assets. In particular, income is not subject to New Zealand tax when a non-resident invests directly into foreign-sourced assets. This is because of the general principle underlying the tax system that non-residents should only be subject to tax on their New Zealand-sourced income.

How the changes will affect non-resident investors in PIEs

The changes are intended to ensure that non-resident investors in PIEs are taxed on their foreign-sourced and New Zealand-sourced income in roughly the same way that they would be taxed if they invested directly. This will significantly reduce the tax that applies to non-residents investing into PIEs, thereby making investment in PIEs more attractive to non-residents. In turn, this could facilitate the establishment of an international investment funds domicile in New Zealand.

Two new categories of PIEs

The changes effectively introduce two new categories of PIE that entities can elect to become (and which both residents and non-residents can invest in). They are:

  • a foreign investment zero-rate PIE that invests the vast majority of its funds offshore. Foreign investors in this category of PIE face a 0% tax rate on all of their attributed income.
  • foreign investment variable-rate PIE that invests its funds both in New Zealand and offshore. Foreign investors in this category of PIE face various tax rates, depending on the source and type of the income.

The rationale for having two categories is that it:

  • provides flexibility to both PIEs and non-residents in deciding whether to invest into foreign or New Zealand assets, and
  • accommodates the wide range of systems that PIEs use to administer their investments.

Who can be a PIE?

Being a PIE is optional. Any entity that satisfies the eligibility criteria can become a PIE.

The entity types currently able to elect to become a PIE under the PIE rules that commenced 1 October 2007 are New Zealand residents that are:

  • managed funds such as a unit trust or superannuation fund, or
  • companies, or
  • group investment funds, or
  • life funds.

PIE tax and income tax

PIE tax is a different means of paying income tax. Entities that pay tax calculated at their investors' PIRs are called multi-rate PIEs (MRP). Some PIEs continue to file income tax returns and pay income tax.

Benefits of being a PIE

The tax rules put investment in New Zealand (and certain Australian) shares through CIVs that elect to become PIEs on a similar tax footing to individuals investing directly in Australasian shares.

Similarly, the new offshore tax rules for investment (with less than 10% interests) in offshore companies will result in greater consistency of treatment between investments in such companies through CIVs and directly.