Becoming a PIE
Issue: Listed PIEs should be able to elect to be portfolio tax rate entities
Submission
(18A – Staples Rodway)
There should be an option for PIEs that are listed on a recognised exchange to elect to be portfolio tax rate entities.
Comment
Officials agree with the submission as it is consistent with the policy intention of the PIE rules. This change should apply from 1 April 2009.
Recommendation
That the submission be accepted.
Issue: Active company exclusion should be reconsidered
Submissions
(32 – KPMG, 62 – Minter Ellison Rudd Watts)
The proposed changes to preclude active land-owning companies from setting up PIEs should be reconsidered. (KPMG)
The proposed rules for income sources relating to income derived from a lease of land in section HL 10(2)(b)(iii) of the Income Tax Act 2007 (section HM 12(b)(iv) of the rewritten provisions in the bill) should not apply where land holdings are separated by an active business into a PIE to raise funds from new investors by way of an offer made to the public. (Minter Ellison Rudd Watts)
Comment
The policy intent of the PIE rules has always been that PIEs should be passive investment vehicles, such as managed funds. The existing PIE rules therefore prevent companies with active operations from becoming PIEs.
PIEs are able to hold land, as well as shares and debt investments, since prudent investment management principles generally require portfolio investments to be diversified. Widely held companies can be PIEs if their main activity is to lease land and buildings to people who run businesses on those premises, since passive income includes rent from leases (but not payments from licences to occupy). Listed property trusts that own commercial buildings would generally fall into this category.
The PIE rules were not, however, designed for active businesses that hold most of their assets in land – such as airports, hotels and rest homes.
The proposed amendments in the bill referred to by KPMG were announced in 2007. Consistent with the original policy intent of the PIE rules, these amendments prevent active land-owning companies from using certain loopholes in the law to set up PIEs – for example, by separating the land and active business parts of the business into different companies.
Officials also do not agree that an entity with an associated entity that runs an active business from which it derives rental income from land should be able to be a PIE simply because the entity running the active business previously sought funds from new investors by way of a public offer. The treatment suggested in the submission would be inconsistent with the core policy principle of the PIE rules that PIEs should be deriving the majority of their income from non-active sources.
Recommendation
That the submissions be declined.
Issue: Public unit trusts
Submission
(33 – Investment Savings and Insurance Association of NZ Inc)
The current investor interest size requirement in section HL 9 should be retrospectively amended so that there is no investor interest size requirement for a portfolio investor class that, if treated as a unit trust, would meet the requirements of one or more of paragraphs (a) and (c) to (e) of the definition of a public unit trust. This should be in addition to the current provision which applies for an investor who would meet those requirements.
Comment
Officials consider that the correct interpretation of the investor interest size requirement in relation to certain funds in section HL 9(2) is that it applies to the class rather than the investor. This is consistent with the policy intent of the provision.
Officials agree that the provision be expanded so that the public unit safe harbour can also apply at the investor level. As this amendment is consistent with existing policy and practice, it should apply from 1 October 2007.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Exception for community trusts
Submission
(33 – Investment Savings and Insurance Association of NZ Inc)
In the new investor interest size requirement rules, section HL 9 of the Income Tax Act 2007 (section HM 21(1) of the rewritten provisions in the bill) “community trusts” should be added to the list of investors to which exceptions apply, after Auckland Regional Holdings.
Comment
Officials agree that as community trusts are established to manage public assets they are analogous to other entities that have been exempted such as the Earthquake Commission and Auckland Regional Holdings. The amendment should apply from the start of the 2009–10 income year.
Recommendation
That the submission be accepted.
Issue: Portfolio investor proxy
Submissions
(33 – Investment Savings and Insurance Association of NZ Inc, 32 – KPMG, 35 – PricewaterhouseCoopers, 60 – ASB, 62 – Minter Ellison Rudd Watts)
We propose that the use of “investor” in the investor interest size requirement rules in section HL 9 be amended to ensure that where a portfolio investor proxy is concerned, the underlying investor is the person who is limited to holding 20 percent or less of the class, rather than the portfolio investor proxy.
A more compliance-efficient approach would be to allow a portfolio investor proxy to be an excluded investor, subject to a notification requirement at certain levels of holdings. (KPMG)
Comment
Officials agree that a look-through approach should be taken, provided that the portfolio investor proxy assumes the obligations of the PIE being invested into. As this amendment is consistent with existing policy and practice, it should apply from 1 October 2007.
While the second submission has some merit, we consider that the current PIE rules, combined with the recommended amendments, would achieve the outcome that KPMG requests.
Recommendation
That the first submission be accepted.
That the second submission be declined.
Issue: Investor size requirements – charities
Submission
(60 – ASB)
Registered charities should be permitted to hold more than 20 percent of a PIE.
Comment
Officials do not consider there is a policy basis for having an exception in the general investor size requirement for charities. If this submission were accepted, it would provide the opportunity for charities to control PIEs, which was not the intention of the rules.
Recommendation
That the submission be declined.
Issue: Exemption for investor interest size
Submission
(32 – KPMG)
There should be provision similar to the less than 20 persons provision in the investor membership requirement in section HL 6(1)(j) in the investor interest size requirement in section HL 9 for certain small classes of investors in multi-class superannuation funds.
Comment
Officials agree with the submission.
As this amendment is consistent with existing policy and practice, it should apply from 1 October 2007.
Recommendation
That the submission be accepted.