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Tax changes to benefit investors in New Zealand based managed funds apply from 1 October 2007 under the new Portfolio Investment Entity (“PIE”) tax regime. The main purpose of the new rules is to create greater consistency in the tax treatment of iindividuals who invest directly in shares and those who invest through managed funds.
The reduced tax impost for clients investing in PIE compliant managed funds as against traditional managed funds can potentially be significant. However, income tax depends on individual circumstances and it is appropriate that professional advice should be sought.
Questions & Answers
Q. What is a Portfolio Investment Entity?
A Portfolio Investment Entity (‘PIE’) is a new form of tax investment entity which a managed fund, such as a superannuation scheme or unit trust, can apply to become. Investors in a PIE have their share of the PIE’s taxable investment income taxed at their Prescribed Investor Rate (“PIR”).
Q. What is a Prescribed Investor Rate (‘PIR’)?
A PIR is the tax rate that a PIE is able to use to calculate the tax on the income it allocates to you based on your unit holding in the PIE. The PIR is based on your taxable income, e.g. income from salary, wages and any other source of income that you would include in your tax return.
Q. Why do I need a PIR?
Currently, managed funds pay tax at 33%.The changes to the taxation of managed funds that become PIE’s allows the fund to calculate tax on investment income based on each investor’s PIR.
In order to benefit from these changes, PIE investors will need to supply their PIR and IRD number to the manager of their PIE.
Q. What is my PIR?
To find out your PIR, you need to check which of the following categories applies to you.
Your PIR is 0% if you are a NZ resident and one of the following:
Charity
PIE
Superannuation fund
Trustee who doesn't choose a 33% rate
Portfolio Investor Proxy (PIP)
Your PIR is 19.5% if you are a NZ resident and in either of the two income years immediately prior to this tax year you:
earned $38,000 or less in taxable income, and
earned a total of $60,000 or less in taxable and PIE income
Your PIR is 33% (reducing to 30% from 1 April 2008) if none of the above apply or you are a resident trustee who chooses this tax rate.
Q. When do I need to provide my PIR?
When the manager of your PIE requests it from you or when you become aware that your previous PIR may no longer be applicable. You should review your rate each year to ensure it is correct and notify your PIE of any changes. Asteron will write to its customers each year asking for confirmation of their PIR and will continue to use the last recorded PIR until such time as a change is notified.
Q. What happens if I don’t provide my PIR?
We will have to use the default rate of 33% (reducing to 30% from 1 April 2008) if we don't receive a PIR. This rate could be higher than your underlying PIR.
Q. What PIR is used for a joint holding?
We are required to record the single highest PIR against the investment for the purposes of the PIE regime. For example, if an investment is jointly owned by a husband and wife, and one person has a PIR of 19.5% and the other 33%, we will only record the 33% rate. This is for tax purposes only and does not affect the ownership of the investment.
Q. What PIR is used for a trustee holding?
Where a trustee is the owner of your investment, you should provide the IRD number for the trust and may elect either a 0% PIR if you as beneficiary wish to pay tax through the trust or a 33% PIR to have tax paid by the trust. If the trust does not have an IRD number, we are required to record the single highest PIR of the trustees for the purposes of the PIE regime. This is for tax purposes only and does not affect the ownership of the investment.
Q. What PIR should be used if the Member is different from the Plan Owner?
In some instances the owner of a superannuation plan may be a different person to the scheme member, for example where the ownership of the plan has been assigned to a bank as security. The PIR required in these cases is for the member as this is the person to whom investment income from a PIE fund will be allocated. As with joint holdings a plan may have only one owner.
Q. Do you really need my IRD number?
You don't need to provide us with your IRD number if the default rate of 33% applies to you. This will be the case if you are on a marginal tax rate of 39% or 33%, or if you are a non-resident. If you elect a PIR of 0% or 19.5%, it is a requirement under the legislation to provide the PIE with an IRD number. We will have to use the default rate if we don't receive an IRD number with a 19.5% PIR election.
Q. What if my PIR changes?
You can notify us when your PIR changes, for example, if you have just filed your tax return for the previous year and found out that you were not on a 33% rate anymore. We will apply the new PIR from the date of the last taxable event applicable to your PIE holding, such as a quarter-end, redemption or switch.
Q. When do all these changes come into effect?
The earliest date a fund can become a PIE was 1 October 2007. Four of the current Asteron Unit Trusts elected to become PIEs effective from this date. These are:
Asteron Corporate Bond Trust
Asteron Socially Responsible Investment Trust
Asteron New Zealand Fixed Interest Trust
Asteron Asian Sharemarket Growth Trust
Asteron KiwiSaver funds also elected to become PIE’s effective 1 October 2007.
Q. Why not all of the Asteron Unit Trusts?
The other five funds are quite small and it is not viable to make the changes required for them to become PIEs.
Q. What about funds under other Asteron investment products?
A schedule of all Asteron funds and their PIE status will be published in due course. Not all of our funds are eligible to become PIE’s, and we are currently finalising whether and when the various products can be changed. However, it is intended that all funds under the following products will become PIE's:
• Superplan range
• Retirement Savings Plan
• Personal Superannuation (Pension Yield/Super Yield)
• Retirement Plus Personal Superannuation Plan (“PSP”)
The effective date for the change to PIE for these and possibly other products will be during the first quarter of 2008 and no later than 1 April 2008. The actual dates are still to be confirmed but will be communicated as soon as possible. We are writing to customers in November to collect PIR and tax details.
Q. What about Asteron life insurance products?
There are two main kinds of life insurance products – those which are purely for risk, such as Smartplan and Smart Life, and those which combine risk cover with an investment / savings component. A separate tax regime exists for life insurance business and hence investment funds held in respect of life insurance products are not eligible to become PIE’s. This means it is not possible to flow through investment income to investors to be taxed at their PIR.
However, in some instances, principally when the investment component of the product is denominated in units for which the price is determined by market movements, it is possible for our investment managers to invest into PIE funds. The investors in those funds may thereby obtain some of the benefits of being an investor in a PIE, such as not paying tax on capital gains on investments in most Australasian shares. Examples of these products are Lifeplan and Life Yield.
We will publish further information on those products that will be eligible to invest into PIE funds in due course.
Q. Do I still need to file a tax return in respect of my PIE income?
No, provided we have your correct PIR, all of your income from our PIEs will be "excluded income" for tax purposes. This means that the PIE will pay the tax on your PIE income directly to the IRD. If your other income is from salary and wages, interest or dividends, and this income has been taxed correctly at source, you may not have to file a tax return depending on your individual circumstances.
Q. When will my tax be paid?
Asteron has elected for its PIE’s to pay tax to Inland Revenue on a quarterly basis.
Q. What happens if I exit a PIE fund?
We will still pay your tax up to the date of exit. If you are entitled to a rebate for the quarter in which you exited, we will send you a cheque or credit your account when we receive the rebate from the IRD.
All of our PIEs will also pay tax on partial redemptions and switches. The tax liability will be paid with the quarterly tax payment. This means you won't have to account for the tax liability, for the quarter in which these events occur, in your own tax returns. We will deal with that on your behalf.
Q. Is it true that the fund could unilaterally reduce my holding?
Yes, we may have to cancel some of your units to pay your tax liability. This will occur when there are no distributions or redemptions during a quarter or when your distributions and redemptions are not enough to cover your tax liability. However doing this means that you don't have to include the income from the PIE in your tax return. Also, when we receive rebates from the IRD for trading losses and excess tax credits, we will issue you with units for your share of the rebate.
Q. How will I know how much tax I have paid?
The letters we issue for confirmations of withdrawals, surrenders and switches will show the amount of tax that will be paid in respect of those transactions. All investors will also receive an end of year investor tax certificate after 31 March each year.
Q. I am a non-resident. Is it true that I'll have to pay 33% tax if I invest in a PIE?
Unfortunately yes, non-resident investors are subject to the default PIR of 33%. This will drop to 30% from 1 April 2008. However, depending on where you are tax resident, you may be able to claim a foreign tax credit in your tax return in your country of residence. We recommend you contact your local tax advisor regarding this entitlement.
Q. How does PIE fit in with the Fair Dividend Rate (‘FDR’) regime?
FDR is a new default method for calculating the tax payable on investment holdings in applicable foreign shares. FDR generally applies to an investment by a New Zealand resident in a foreign company when the investor, including a managed fund, owns less than 10 percent of the foreign company.
Q. How does FDR work?
In broad terms the FDR method taxes 5 percent of a portfolio's opening foreign investment value each year. If the total return on the foreign share portfolio is less than 5 percent then individuals and family trusts pay tax on the lower amount (they pay no tax if the shares make a loss).
Q. Does FDR apply to all foreign investments?
Under the new rules, investments in Australian-resident companies listed on an approved index of the Australian Stock Exchange, such as the All Ordinaries index (the 500 largest listed companies), should be exempt from FDR such that they are taxed the same as New Zealand investments, i.e. they are taxable on dividends if the investment is held on capital account or on dividends and realised gains if held on revenue account.
Q. What happens to investments in “grey list” countries?
FDR replaces the "grey list" exemption in the foreign investment fund rules. This means that shares in UK, US, German, Norwegian, Canadian, Japanese and Spanish companies may be subject to FDR by default.
Q. When does FDR come into effect?
The new tax rules for offshore portfolio investment in shares apply for income years beginning on or after 1 April 2007.
Q. Do my share investments through PIEs count towards my $50,000 exemption from the FDR rules?
No, so investing through PIEs is a good way to help you stay within the $50,000 de minimis exemption.
Q. Where can I go for more advice?
Asteron are not tax advisers and the information provided is based on our understanding of the tax rules and our response to them. We would recommend you speak to a tax adviser to determine how the changes to the tax rules will impact you and what action you should take.
If you have any other questions about your PIR or investing in a PIE, please call our Client Services team on 0800 TAXINFO (0800 824 463) or email tax@asteron.co.nz .
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