I am not doubting that over time AI will have a positive impact on the efficiency, and hence profitability, of many companies. But whether the increase in productivity is going to be as rapid as the recent price increases imply is another question.
Sometimes it is the least understood and more mundane matters that get overlooked. The way tax is calculated and paid on the assets held in a diversified portfolio is a good example.
It might not make for scintillating conversation at your next dinner party, but it is likely to be more impactful and enduring than the latest investment fad.
The portfolio investment entity (PIE) tax regime was introduced in 2007. Although the tax concessions offered by the PIE legislation were originally conceived to support the success of KiwiSaver, the specific tax benefits can be accessed by any pooled investment scheme that meets the PIE requirements.
The simplicity of the system also means the average person gains the tax benefits without having to file a tax return. It is these features that have caused one of my colleagues to describe the PIE tax regime as "the most underrated tax break for the average New Zealander".
It is hard to make tax understandable, much less interesting, but let’s try.
There are four specific and significant tax advantages available to pooled investment offerings that operate as PIEs.
These advantages are not only available to diversified multi-sector funds, like most KiwiSaver funds, but are also available to PIEs that invest in one sector alone (e.g. New Zealand and Australian shares).
Many pay less tax if they invest via a PIE
Income earned through investing in a PIE is taxed at what is called your Prescribed Investor Rate (PIR) which, like your marginal tax rate, is based on your income. However, the maximum PIR is 28%.
This means that, for investors who are earning more than $48,000 per year (who are on the 30% or higher marginal tax rate), investing in a PIE can result in significant tax savings. For an investor with a 39% marginal tax rate the tax savings can equate to a 28% reduction in tax payable on your investments.
Some capital gains are received tax free
The second tax concession offered by PIEs is that they pay tax only on the dividends received from New Zealand and most Australian shares. They do not pay tax on any capital gains they make.
In the case of most New Zealand companies, as imputation credits are attached to the dividends they pay, there is often no additional tax to pay for investors earning over $48,000 (who are on the higher marginal tax rates), as these tax credits cover the tax payable on this income.
Earn more investment income without moving up a tax band
While your other income is taken into account in determining your PIR, the reverse is not true — PIE income is not taken into account in determining your marginal tax rate. This is an important consideration for those on a 17.5% marginal tax rate, as it means that they can earn up to $22,000 of PIE income before they start to pay a higher level of tax.
Easier compliance
Investment tax rules are complex. For example, shares are taxed differently if they are in New Zealand or Australian listed companies compared to those held in companies in other countries; debt instruments have their own tax rules; and, if you are investing offshore, there is foreign exchange to deal with.
By investing in a PIE, the complexity is taken care of and, if you have chosen the correct PIR, then you don’t even need to include the PIE income in your tax return.
There is a reason for tackling a technical topic like tax currently.
We have an election in two months’ time and for the first time in a while, tax and tax policy looks like a major election issue.
Since its introduction in 2007, the PIE regime has been recognised by all political parties for what it is — a tax regime which helped ensure KiwiSaver was a success for so many New Zealanders.
Let’s hope that this cross-party recognition continues as we move towards October 14 and beyond.
- Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.
