PIE tax at your PIR, capped at 28%.
PIE tax
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Net PIE income
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Your breakdown
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What a prescribed investor rate is
A portfolio investment entity, or PIE, is a special type of investment fund that taxes the income it earns on your behalf at your prescribed investor rate, the PIR, rather than at your full income tax rate. Most KiwiSaver funds, many managed funds and a lot of cash funds are PIEs. There are only three PIRs to choose from: 10.5 percent, 17.5 percent and 28 percent. Your correct rate depends on your income in the prior two years, and the crucial feature is that the top PIR is 28 percent even when your personal income tax rate is 30, 33 or 39 percent. This tool applies your chosen PIR to a year of PIE income and shows the tax and the net.
That 28 percent ceiling is the whole appeal. It is why a higher earner can hold investments inside a PIE and pay less tax on the returns than they would holding the very same assets directly in their own name.
$5,000 of PIE income at the 28 percent cap
Suppose a PIE fund attributes $5,000 of income to you for the year and your PIR is 28 percent. The tax is $1,400, leaving $3,600 net. Now picture the same $5,000 earned directly by someone in the 39 percent band: their tax would be $1,950, leaving only $3,050. The PIE structure hands that investor $550 more, every year, on this slice of income alone.
The chart sets the $1,400 PIE tax against the $1,950 a 39 percent taxpayer would pay on the same income held outside a PIE.
The wrong PIR is a bill waiting to happen
Getting your PIR right is the single most important thing you can do here, and people get it wrong in both directions. Set it too high and you have overpaid, though since the 2019-20 year IRD reconciles PIE income at year end and can refund tax paid at an over-stated rate. Set it too low and IRD will issue a bill for the shortfall after the tax year, because your PIE income gets squared up against the correct rate. The classic error is leaving a default 28 percent rate in place when a lower income actually entitles you to 10.5 or 17.5 percent, or failing to move up to 28 percent after a pay rise. Check your PIR whenever your income changes, and tell your fund provider, because they cannot read your mind.
Two New Zealand features make PIEs especially worth understanding. First, there is no general capital gains tax here, and New Zealand PIEs that invest in Australasian shares generally do not pay tax on gains from selling those shares, so the PIE income you are taxed on is mostly dividends and interest rather than capital growth. Second, for funds holding offshore shares the foreign investment fund, or FIF, rules apply, typically taxing 5 percent of the opening market value under the fair dividend rate method, and a PIE handles that calculation inside the fund at your PIR rather than leaving you to do it. If you held those same foreign shares directly above the $50,000 cost threshold, you would face the FIF rules yourself at your marginal rate. The PIE wrapper does the heavy lifting and caps the rate at 28 percent.
Is PIE income added to my other income for tax?
No, and that is part of the benefit. When taxed at your correct PIR, PIE income is generally a final tax and is not added to your other income, so it does not push your salary into a higher bracket and you usually do not declare it again. This is different from bank interest, where resident withholding tax is deducted but the interest still forms part of your taxable income.
Does the 28 percent cap help someone on a low income?
Not in the same way. The cap only benefits people whose personal tax rate exceeds 28 percent, meaning the 30, 33 and 39 percent earners. If your income puts you on a 10.5 or 17.5 percent PIR, you simply pay that lower rate on PIE income, and the cap is irrelevant to you. The mistake to avoid at the lower end is overpaying by leaving your PIR set too high.