By Henry Ford

For experienced financial advisers and investors, achieving tax efficiency is essential for effective investment management. One of the most effective strategies available in New Zealand is the use of Portfolio Investment Entities (PIE funds or PIEs), which have become a powerful tool for maximising after-tax returns for investors.

At Rutherford Rede, an independent advice firm with extensive investment experience, we frequently leverage PIE funds to enhance after-tax returns for clients. However, as PIE funds are not advantageous for all investors, it is crucial to identify when a PIE fund will (and will not) reduce an investor’s tax obligation and in turn, impact returns.

Before delving into the specifics of PIE funds and their potential value for investors, let’s first examine their purpose and application in today’s investment world.

What are PIE funds?

Portfolio Investment Entities (PIE funds) are funds that allow investors to pool funds and invest in an often-diversified portfolio of assets. Typically, PIE funds are managed funds, which are managed by a portfolio manager for a small fee and can be unlisted or listed (publicly traded on the NZX).

PIE funds were first established in 2007, alongside the KiwiSaver retirement savings scheme. PIE funds emerged as a cost-effective and efficient option for investors as they carried a unique tax rule whereby the maximum tax payable on investment returns was capped at 28%, considerably lower than the maximum individual or trust tax rate.

The rules around the taxation of PIE funds were also designed to separate the way investment income was taxed from each investor’s personal tax situation. Rather than applying an individual’s marginal tax rate, PIEs calculate and pay tax at an entity level. This streamlined and transparent process aimed to simplify taxation and motivate more people to invest by removing complexities around their personal income tax obligations.

What are the tax advantages of investing through a PIE fund?

The most significant tax advantage of investing through a PIE fund is the capped tax rate, based on either the individual investors’ prescribed investor tax rate (PIR) for an unlisted PIE, or the company rate for a listed PIE. However, both tax rates are capped at 28%, regardless of the investor’s marginal tax rate, thus benefiting those who might otherwise be subject to higher marginal tax rate.

Similarly, investors with lower marginal tax and PIR rates can still experience tax benefits when investing in a PIE fund. For instance, if taxable income is under $48,000 (excluding PIE income) and total income is less than $70,000 in the past two years, a PIR of 17.5% would apply. This is particularly advantageous since income between $53,500 and $78,100 (from 31 July 2024) would otherwise be taxed at 30%. Such tax savings demonstrate that investing in PIE funds can be significantly beneficial, particularly for those whose income would otherwise place them in a higher tax bracket.

In addition to favourable tax treatment, investing through a PIE fund simplifies tax reporting and compliance as the PIE fund manages the tax calculations and filings on behalf of investors. This feature is valuable for investors who find tax rules complex and challenging to navigate, or those wishing to reduce administrative burden.

What is a Prescribed Investor Rate (PIR)?

The Prescribed Investor Rate (PIR) is the tax rate applied to the income earned within an unlisted PIE fund and is as low as 10.5% with a cap of 28%. This can result in a lower effective tax rate for those investors in the higher tax brackets.

There are varying PIR rates depending upon an individual, company, or trust marginal tax rate. The current PIR rates are:

• 10.5%: where taxable income is $14,000 or less and combined taxable and PIE income is $48,000 or less.
• 17.5%: where taxable income is $48,000 or less and combined taxable and PIE income is $70,000 or less.
• 28%: for all other cases.

Providing the correct PIR to a PIE fund provider is imperative for ensuring that taxes are not overpaid or underpaid. If the wrong PIR is applied, investors could face additional tax liabilities or miss out on potential tax savings. The IRD provides a useful PIR guide to help investors determine their applicable PIR rate based on income over the last two years.

By comparison, a listed PIE is taxed at a fixed rate, currently 28% regardless of the individual investors’ PIR. Furthermore, any dividend distributions made by a listed PIE fund to its investors are not subject to additional income tax.  

When is it not advantageous to invest in a PIE?

While both unlisted and listed PIE funds offer several tax advantages, there are certain scenarios where they may not be the most advantageous investment option. For example:

• Investors with lower marginal tax rates (e.g. those under 30%) may find investing in alternate financial products or only unlisted PIE funds results in a lower overall tax obligation.
• Investors who can claim significant tax deductions, particularly those in property investments, might find direct investments more beneficial as they can offset their income with these deductions.
• Tax-exempt entities, such as charities and non-profits, gain no additional benefit from the tax efficiencies of PIE funds, whether unlisted or listed.

Additionally, PIE funds may not be suitable for investors with specific goals that require a flexible investment with limited restrictions on withdrawals, which not all managed PIE funds can provide. For some, higher management fees associated with some PIE funds can also offset tax advantages, making direct or low-cost investment alternatives more appealing.

Given the above scenarios, investment advisers must evaluate each client’s circumstances carefully and ensure they are recommending the most suitable strategy. Tax efficiency is crucial, but so too is overall investment suitability and portfolio composition. By expertly leveraging the advantages of PIE funds and thoroughly understanding the regulatory framework, Rutherford Rede empowers clients to maximise their returns whilst upholding strict standards of compliance and transparency.

Rutherford Rede’s Approach to PIE Tax Optimisation Strategies

At Rutherford Rede, we understand that tax optimisation is not a one-size-fits-all approach. Each investor’s circumstances are unique, and as such, we take a holistic approach, considering each client’s entire financial picture – not just isolated elements.

Our team of financial experts and associated professionals have an in-depth understanding of the PIE environment, enabling us to structure our client’s investments for maximum tax efficiency. We also stay active in monitoring regulatory changes and industry developments, ensuring that our client’s investments remain compliant and optimally positioned.

Our approach is built on independent thinking, thorough analysis, and a relentless commitment to our clients’ best interests.

If you want to discover how Rutherford Rede’s tailored strategies can guide you to tax-efficient wealth management, contact us today. With our expertise, you won’t have to settle for crumbs—you can have the whole PIE.