Tax Resources

The PIE rules - overview
The Portfolio Investment Entities (PIE) regime took effect from 1 October 2007. This regime improves the tax effectiveness for investors of managed funds (that choose to become PIEs), by lowering a fund investors tax rate, by exempting realised gains from tax, and by excluding PIE income from personal income.

The recent reduction to personal tax rates has maintained the potential taxation benefits of PIEs. Tax on income from a PIE is calculated at rates derived from the investors personal tax rates and capped at the rate of 28%. This structure provides tax savings for investors on higher personal tax rate investors greater than 28% (i.e. 30% and 33%).

PIE income is also ‘excluded’ income. That is, natural person investors and investors who are trustees of a family trust do not need to include dividends from a PIE in their tax returns, although they can do so if they choose. Because of this, no further tax is payable on distributions from a PIE.

Types of PIEs
There are two ‘types’ of PIEs: listed PIEs and unlisted PIEs. Unlisted PIEs are referred to as ‘portfolio tax rate entities’. It is only these unlisted PIEs that collect and hold a tax rate for their investors.

• Listed PIEs - Listed PIEs, such as the Listed Property Vehicles, tax all investors at the same rate of 28%. Any imputation credits available are attached to dividends and investors with a lower personal tax rate can declare the dividend income and claim any excess imputation credits to reduce their income tax liability, if they have other taxable income in that income year.



The only impact of the cuts to personal tax rates for investors in listed PIEs is that given the thresholds and rates for personal taxes are both being reduced, the relative benefit of PIE income being taxed at 28% (for those on higher tax rates) is reduced to a maximum of 5%.

• Unlisted PIEs - Investors in unlisted PIEs can have a prescribed investor rate (PIR) applied against income generated within a PIE. Investors who have non-PIE taxable income of less than $14,000 and combined non-PIE and PIE income of less than $48,000 can use a 10.5% PIR, investors who have non-PIE taxable income of less than $48,000 and combined non-PIE and PIE income of less than $70,000 can use a 17.5% PIR. Investors with income higher than $70,000 apply a PIR of 28%.



Trusts have a ‘pass through’ option whereby they can apply a PIR that reflect the effective tax rate of beneficiaries 10.5%, 17.5% or 28%), or alternatively they can apply for a 0% rate and have no tax deducted at source. Companies, Charities and Incorporated Societies can apply for 0% PIR.

Investors with a 0% PIR will have to include all unlisted PIE income in their own tax returns. 

Implications of PIEs
The PIE income thresholds and PIR rates represents a material benefit for people to source income from a PIE rather than directly. For example, applying personal tax rates, an investor who earned $70,000 from their portfolio of direct investments will have to pay $13,949 in tax, an effective tax rate of 19.9%. If they had instead sourced this $70,000 of income from a PIE their applicable tax rate would have been 17.5% and tax paid would have been $12,250. Investing in a PIE therefore would have produced a tax saving of $1,699 (a 2.4% benefit).

The small matter of fees
PIEs don’t come for free. The management fees incurred on an investment in a PIE will often offset the potential tax advantage.

To generate an income of $60,000 an investor may have $1 million invested in a PIE (we are assuming a yield of 6%). In 2009, a management fee of just 0.12% would be enough to offset the $1,149 tax benefit from investing in a PIE.

Conclusion – buy PIEs for diversification, not perceived tax benefits
It is never wise to allow tax to drive investment decisions. In our view, investors should consider PIEs not for their perceived tax benefit (this will be largely offset by fees) but for the usual benefits of pooled funds; diversification and access to astute fund managers. To be attractive investments, PIEs will need to 1) have a fair level of fees, 2) be prudently diversified and 3) be managed well, and in the best interests of investors.
 

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