A portfolio investment entity (PIE) is a type of investment structure in New Zealand that provides tax benefits for investors. PIEs allow investors to pool their funds and have them managed by professional fund managers. The key features of PIEs are tax transparency, capped tax rates based on the investor’s prescribed investor rate, and tax paid by the PIE directly rather than the investor. This introductory article will outline what PIEs are, their key features, and the tax implications for investors.
PIEs enable transparent tax treatment for investors
One of the main benefits of PIEs is that they provide transparency of tax treatment for investors. When investors earn income through a PIE, the PIE itself pays tax directly to Inland Revenue at the investor’s prescribed investor rate (PIR). This means investors do not have to calculate and pay further tax on the income they receive from the PIE. The income has already had tax deducted at the correct rate.
Investors pay capped tax rates based on their PIR
Instead of paying tax at their marginal tax rate, PIE investors pay tax based on their PIR which is capped at 28%. An individual investor’s PIR is based on their income from the previous two tax years, and there are three rates – 10.5%, 17.5% and 28%. The lower two rates enable most investors to have their investment income taxed below their marginal rate. This tax advantage of PIEs provides an incentive for New Zealanders to invest in managed funds rather than investing directly.
Many investment structures can register as PIEs
Various collective investment vehicles can register as a PIE with Inland Revenue provided they meet certain criteria. Common examples of PIEs include managed funds that pool investors’ money to purchase assets like shares, bonds and real estate. The fund manager makes the investment decisions on behalf of PIE members. Both local and international investments can be held within PIE structures to enable tax efficient investing.
PIEs have eligibility criteria for investors and investments
For an entity to qualify as a PIE, it must be a company, unit trust or superannuation fund that has over 20 members. There are also restrictions on the types of investments PIEs can hold – at least 90% must be financial arrangements or shares in businesses they have a voting interest of less than 20% in. These rules ensure PIEs are genuine investment structures rather than vehicles for tax avoidance.
In summary, a portfolio investment entity is a tax-efficient fund structure for pooled investments available in the New Zealand market. PIEs provide tax transparency and typically lower capped tax rates for investors based on their prescribed investor rate.