PIEs enhancing portfolios

May 1, 2024

When we build portfolios, among the aspects we look at carefully are the implications of an investment on the tax position of our clients. Although not the sole aim, we look to minimise tax as that cuts into the return earned.

Papava Somniferum, Paper, Wire & Paint, from MINORES 2021 Anna Miles Gallery. Artist: Karin Montgomery. Photograph: Samuel Hartnett

One ingredient found in most of our portfolios are PIEs – no, not the edible variety – Portfolio Investment Entities. They are investment fund structures which allow the fund manager to deal with the tax on behalf of the investor. The investor simply provides a Prescribed Investor Rate (PIR) to the fund, so that the tax is deducted and paid over to the Inland Revenue.

The PIR rates for individuals are currently 10.5%, 17.5% and 28%, and your rate is determined by the level of income you have in total. The tax rate is capped at 28%. Obviously if your marginal tax rate is higher than 28%, for example 33% or 39%, investing in PIEs presents a significant tax saving.

To date most of the PIEs we have used, invest in NZ and Australian shares which are simply taxed based on the dividends received by the fund. There have been plenty of options to choose from, but until recently not so in the global shares sector. Any fund investing in overseas shares is subject to a different tax regime that is not wholly based on dividend receipts, whether you use a PIE or not. The likely introduction of the Trustee rate increasing to 39% from 33% from 1 April, has prompted the arrival of more options for all asset categories.

The most significant feature of PIEs is that the income earned is tax paid and does not become included in the taxable income filed with IRD. This makes life a lot simpler for many of our clients where they land up only having taxable income with Resident Withholding Tax deducted from interest and their NZ Super – so if there is no other income (like rental), filing a tax return is easier.

At present, the options for family trusts include:

Elect a PIR of 28%, where tax will be deducted at this rate and the PIE income will not be required to be included in either the trust’s tax return or in beneficiaries’ tax returns.

Elect a lower PIR to distribute taxable PIE income to beneficiaries. This is a great option for family trusts that wish to distribute PIE income to a beneficiary on a lower tax rate, along with PIE tax credits to minimise their exposure to provisional tax.

Elect a PIR of 0% if appropriate i.e. losses to claim in the Trust.

PIEs are not for everybody. The design and benefits of a PIE are engineered around the simplicity of managed investments. For most people that’s quite okay, but your circumstances may dictate a portfolio of quite a different shape.

Key takeaways

PIE funds are tax paid.  Your annual tax return ritual is made a lot easier.

PIEs can be particularly useful if your income has recently lifted, and you’ve been consequently elevated to a higher personal income tax bracket.  

And if you have a family trust, you can use PIEs to, at least, cap the rate at 28%, or use one of the lower PIR options to distribute to beneficiaries on lower tax rates.

Your adviser has PIEs on their radar, and in your portfolio reviews, you will see recommended changes to introduce more PIEs where appropriate for your circumstances.  In the matters of tax, you can also talk to your accountant, who will have an overall view of your tax position.

The beautiful botanicals you see have been crafted from paper by artist, Karin Montgomery, a long-time client of Stuart Carlyon. A commission by Te Papa Museum in Wellington, titled “A Garden for an Immigrant” is due to launch later this year. It consists of 8 specimens, including one native plant. The introduced specimens were planted by early European immigrants to NZ when making their first, very humble settler gardens. Karin’s inspiration is from her great-great-grandfather, Nicola Azzariti, who arrived in Port Chalmers, from Puglia, in the 1870s. Italian, Catholic, illiterate, no English and poor. This is Karin’s gift to him.