Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

INDEX

1. What is PIE and PIR?

2. Family Homes owned by LAQCs

3. New PAYE Rates

4. The Employment Relations (Flexible Working Arrangements) Amendment Act 2007

WHAT IS PIE?

What is PIE?

If a managed fund meets certain criteria outlined in the new legislation, it can elect to be classed as a Portfolio Investment Entity (PIE) and qualify for a range of benefits.

The benefits include:

• Tax-free capital gains on NZ and most major Australian-listed shares.

• The use of an elected Prescribed Investor Rate (PIR) of 19.5% or 30% for individual investors (no 39% rate).

• An investor’s PIR may be lower than their marginal tax rate.

• Investors with non-PIE income under $38,000 and whose combined PIE and non-PIE income was under$60,000 in either of the previous two tax years may elect a 19.5% tax rate for their entire income for the nextyear. The effective tax saving will be quite significant as the marginal rate of tax on non-PIE income between$38,000 and $60,000 is 33%.

• The tax is paid at year end which gives the investor the advantage of gross compounding on their returnthroughout the year.

• Investors are not required to include PIE income within their tax return given they choose the correct PIR asthe tax paid by the fund is final in most circumstances, so PIE income will not push investors into the next taxbracket.

• Income from these vehicles will not be income-tested for Family Assistance or Childcare benefits providedunder current social policy.

What is a PIR?

The investor rate of tax on PIE is known as the Prescribed Investor Rate (PIR). An investor’s PIR is based on either of the previous two years income.

Investor type/ PIR per annum:

• Individual Either 19.5% or 30%

• Trust Choose either 0% or 30%

• Charitable trust 0%

• Non-resident 30%

• Company 0%

If the PIR selected is too high, no tax credits are given for the additional tax payment so any over-payment of tax will not be refunded. If the PIR selected is too low, then the PIE taxable income needs to be included in the end of year tax return. In some situations this can lead to the need to pay provisional tax payments in the following year. Any short-fall in tax must be paid at the investor’s marginal rate of tax, rather than at their PIR.

If a PIR of 0% has been selected, an investor is required to complete a return and pay tax on all their allocated

PIE income:

An investor’s PIR only applies to their PIE income. Non-PIE income (wages, New Zealand Superannuation – allother income) is taxed at an investor’s marginal tax rate.

Joint investors into a single investment, with different PIRs, will usually have to pay tax at the higher PIR.

What happens at tax year end?

At the end of each tax year, the fund manager will typically sell investments to raise cash to pay for the tax liability of each investor at their PIR.   The Fund Manager pays the tax to the IRD.

Where a PIE generates tax credits that exceed taxable income, the PIE will claim a tax rebate for 19.5% and 30% investors then pass those on to investors by issuing them extra units, thus most investors will have all PIR tax paid directly by the Fund Manager. Investors on a 0% PIr have to file a Tax Return to claim PIr benefits.

PIE income is referred to by the IRD as excluded income. This means that PIE income does not need to be included in the individual's Tax Return if the income has been taxed at the correct PIE rate.  In the case of trusts (non individuals ) electing the zero PIR option, the PIE incom,e will be assessed for tax at the trust's rate of 33% or at the marginal tax rate of trust beneficiaries, up to 39% if the beneficiar's income exceeds $60000.We are not a

Trusts elect a PIR of 30%, then the PIE income is excluded income and does not have to be included in theTrust's Tax Return.

The PIE will issue a tax summary to each client that outlines total income, expenses, PIE income, tax credits and PIR tax paid.  Expenses, such as management, administration and trustee fees are attributed to each PIE as part of the process of calculating the taxable income of that PIE.

PIE benefits for various Asset Classes

• Investment

• PIE tax

• Cash Taxed on all income at PIR.

• Bonds Taxed on capital gains and all income at PIR.

• NZ & Australian shares Taxed on dividends less investment manager costs at PIR.

• No tax on capital gains.

• International shares Taxed on 5% of daily portfolio opening value less investment manager costs at PIR

• an advantage of PIEs is that PIE tax is capped at 30%, whereas direct investors holding cash, bonds and NZ and

• Australian shares will pay tax on income and dividends at their marginal tax rate, which may be as high as 39%.

• Also, individual investors can earn up to $60,000 taxed at 19.5% as a mix of PIE and non PIE income (where non PIE income does not exceed $38000)

• Australian shares are only exempt from capital gains within the PIE regime if they are taxed in Australia as Australian reside companies and included on an approved ASX index.

PIE funds reduce tax

Due to a combination of the delayed timing of tax paid (PIEs pay tax at year end) and in some cases a lower rateof tax paid (PIE tax is capped at 30%), the after-tax return for a PIE investor compared to a non-PIE investor isoften higher. This higher net return effectively lifts the equivalent gross return that an investor must obtain fromnon-PIE investments in order for them to be a better choice than PIE investments. Investors who are subject tothe low-income rebate, which gives them an effective tax rate of less than 19.5%, need to be aware that PIEinvestments do not offer the low-income rebate.