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McLEAN AND CO.
New PAYE Rates
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%
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
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
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.
The letter highlights the issue that such arragements (renting one's own residential home from an LAQC and seeking to claim a tax deduction for resulting losses) is in the IRD's view potentially tax avoidance and even tax evasion.
We are not aware that any of our clients with LAQC companies fall into this category. Please do not hesitate to contact ourselves if you have a query that you are concerned that you may.
Employers- don't forget to use the new applicable PAYE rates applicable from 1 October , 2008 from that date. You should have received the updated booklet from IRD relating to these by now.
Many employers already offer their staff flexible work. But for some employees and managers the prospect of discussing flexible work without a clear process can be daunting.
The Employment Relations (Flexible Working Arrangements) Amendment Act 2007 gives employees with caring responsibilities a statutory right to request flexible work. The Act will change the way some employees and employers make and respond to requests for flexible working arrangements.
The new law comes into effect on 1 July 2008. However, many employers already offer their staff flexible working arrangements and the Act should not affect such good practice.
The Act provides certain employees with the right to request a variation to their hours of work, days of work, or place of work.
To be eligible for the ‘right to request’ an employee must have the care of any person and have been employed by their employer for 6 months prior to making the request. When making the request, the employee must explain how the variation will help the employee provide better care for the person concerned.
The Act requires employers to consider the request for flexible working arrangements and provides the only grounds upon which they can refuse a request. The Act provides a process for how requests are to be made and responded to and also provides a process for resolving disagreements relating to a request for flexible working arrangements which may arise from time to time.
A review of the Act will be completed in 2010 and will consider whether the statutory right to request flexible work should be extended to all employees.
Detailed guidelines on how the Act works can be downloaded here [pdf 25 pages, 985KB]. These guidelines are designed for both employees and employers and explain the process of requesting flexible working arrangements under the Act from start to finish.
If you have a question about the Act you can contact the Department of Labour.
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