As shown in the above picture, a significant number of taxpayers have tax deducted from their investment income at the wrong rate.
The Government thinks it would be easier for people if Inland Revenue could help them work out which tax rate they should select for their investment income. This will reduce the instances of taxpayers being overtaxed during the year, or under taxed and facing a tax bill later. Inland Revenue would be in a better position to do this if it received more information about taxpayers’ income during the year, rather than after the end of a year.
This is especially important for portfolio investment entity (PIE) income as it is usually a final tax.
A PIE invests contributions from investors in different types of investments, for example, a managed fund. Investors in PIEs select a tax rate, known as a prescribed investor rate (PIR), which is based on their income in the previous two years. Because of difficulties in working out their income or not updating their PIR as their income level increases, taxpayers may not have tax withheld at the correct PIR:
- If the PIR selected is higher than the correct rate, the tax cannot be refunded.
- If the PIR selected is lower than the correct rate, the income must be included in the taxpayer’s tax return and taxed at their marginal rate. This may result in more tax being paid than if the correct PIR had been selected, as the top PIR is 28%, compared to the top marginal tax rate of 33%.
Receiving PIE information more regularly would help Inland Revenue to make sure people use the correct PIR and reduce the chances of them being over or under taxed.