When the PIE scheme was set up some years ago, it was quite a big deal.
I had just started my career as an accountant back then, and I remember my manager looking at the dividend statement and saying, “Oh, it’s a PIE, we don’t need to worry about it” and throwing it aside.
That’s the first thing that stuck in my mind – you don’t need to include PIEs in your tax return!
As I came to understand the tax landscape more, it became clear what a great tax advantage PIEs can be, especially for individuals on the higher tax rates.
What is a PIE?
PIE is short for Portfolio Investment Entity.
It helps encourage investment by offering investors a lower tax rate on their investment income.
When you invest money in a PIE, you will pay the PIR tax rate, which is lower than the standard individual income tax rates.
What is a PIR?
The lower tax rate offered by a PIE is known as a PIR (Prescribed Investor Rate).
Take a look at how the rates differ – As of the 2023 tax year, Income Tax Rates versus PIE tax rates are as follows:
|Income Tax Rates For Individuals||Tax Rate|
|Up to $14,000||10.5%|
|$14,000 to $48,000||17.5%|
|$48,000 to $70,000||30%|
|$70,000 to $180,000||33%|
|PIE tax rates||Tax Rate (PIR)|
|Non PIE Income < $14,000|
AND Total Income < $48,000
|Non-PIE Income < $48,000|
AND Total Income < $70,000
|All other cases||28%|
You can see that when you invest money in a term deposit, stock or property, every dollar you earn over $48,000 will be taxed at 30%, or potentially 33% or 39%.
However, when you invest your money in a PIE, the maximum tax you will ever pay is 28%.
This can add up to quite a substantial tax saving once your portfolio grows past a certain size.
What PIEs can I invest in?
There are lots of options for PIEs.
For most people, there are two types of PIEs they will come across regularly.
The first is the MRP, or Multi-Rate PIE.
This is the standard PIE where you tell the entity your PIR and they will tax you at that rate.
The reason it’s called a Multi-Rate PIE is because it has the ability to tax all the different investors at different rates.
A good example is the PIEs offered by banks.
Most banks have Cash PIE funds you can invest your money in, rather than regular term deposits or savings accounts.
For example, take a look at Westpac’s savings options:
The second type of PIE you will come across regularly is the Listed PIE.
Smartshares offers ETFs that you can invest in on the sharemarket or directly through them, and if you look at their product disclosure, you’ll see all of their funds are listed PIEs:
Some companies listed on the sharemarket, particularly the unit trusts, are also PIEs.
In New Zealand, you can most commonly see this in the listed property sector.
For example, take a look at Argosy Property Trust’s dividend page here:
Listed PIEs treat all their unit holders the same, so they are unable to tax each investor at different rates.
Therefore, the PIR for an investor in a listed PIE is always a flat 28%.
However, if your tax rate is lower than 28%, don’t worry. You can still voluntarily include your PIE income in your tax return, and get the excess tax refunded.
This means if you invest in a listed PIE and paid tax at 28%, but your individual tax rate when you filed your tax return only worked out to 17.5%, you can include your PIE dividends in your tax return and the difference will be refunded to you. Nice!
How much tax can you save investing in a PIE?
When you’re on the highest tax rates, the tax savings in a PIE can be substantial.
Let’s say I make around $200k per year through my own business.
This means I’ll be on the highest tax rate, and any investment income I make will be taxed at 39%.
Say I have $1 million in savings I’m looking to invest.
Since I’m close to retirement, I decide I’m going to invest that $1 million into rolling term deposits and eventually live off the interest.
Here are the current Term PIE rates for ANZ, courtesy of interest.co.nz:
You can see a Term PIE is paying 5.2% interest.
Let’s look at the difference in taxes I would pay if I invested in a Term PIE versus a regular Term Deposit:
|Term PIE ($1m at 5.2%)||Term Deposit ($1m at 5.2%)|
|$52,000 interest||$52,000 interest|
|Tax at 28%: $14,560||Tax at 39%: $20,280|
|Tax saving: $5,720|
As you can imagine, over a 15 or 20 year retirement, that amount of tax savings will compound significantly.
This shows if you invest $1 million in the ANZ Term PIE for 20 years, you’ll pay $418k in tax, and end up with $2.075 million.
If you invest it in a regular term deposit, you’ll pay $548k in tax, and end up with $1.857 million.
When Should You Not Invest In a PIE?
Generally if your individual tax rate is less than 28%, there’s no advantage to investing in a listed PIE.
However, there is no disadvantage either, as any PIE tax that you overpay will be refunded by IRD when you file your return.
You can read IRD’s guidance on this here.
If you are a non-resident, there might also be no advantage to investing in an MRP or listed PIE, as your PIR is automatically set at 28%.
In most cases, investing in a PIE as an NZ tax resident will at best provide some tax benefit, and at worst the result will be neutral (assuming you file a tax return).