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Portfolio investment entity rules

Investors – income allocated by the PIE

Issue: Individuals and inadvertent errors

Submission

(31 – NZ Funds)

Portfolio investor allocated income should not be excluded income to a person who has accidentally elected a prescribed investor rate that is too high for that individual.

Comment

Officials do not support the submission for the following reasons:

  • The proposal would add significant complexity to the PIE rules.
  • There would be a very high cost to Inland Revenue in administering the application process.
  • The proposal would be asymmetrical as investors could elect a 0% rate and flow through losses when they are in a loss position, and when they are in a positive income situation they could elect a non-flow-through treatment and have their tax rate capped at 30%.
  • It removes the current incentive for people to elect the correct rate up-front.
  • The current rules already allow individuals to change their PIE tax rate at any time during the calculation period (usually a year).

Officials also note that investors can change their portfolio investor rate before the end of the relevant period.

Recommendation

That the submission be declined.

Issue: Zero rate investors in provisional tax PIEs

Submission

(32 – KPMG)

A zero-rated investor in a provisional tax PIE should be entitled to make use of its share of tax credits to offset tax on the allocated income. This should also be reflected in the rewritten PIE rules.

Comment

The policy intent behind introducing provisional tax PIEs was to provide the key benefits of the PIE rules but with lower compliance costs. As part of this approach to keep compliance costs low, losses are carried forward at entity level rather than allocated to individual investors. To allow zero-rated investors to make use of their share of tax credits would be inconsistent with the policy intent of introducing provisional tax PIEs. Officials note that provisional tax PIEs have the option to become full PIEs (portfolio tax rate entities) and in this case, zero-rated investors can make use of their share of tax credits.

Recommendation

That the submission be declined.

Issue: Corporate investors in PIEs – no relief on subsequent distribution of excluded income

Submission

(33 – Investment Savings and Insurance Association of NZ Inc)

Excluded PIE income derived by a company investor that is a public unit trust (that is not a PIE) should retain its non-taxable character when the public unit trust distributes that income to its shareholders. This change would require retrospective amendment to the application date of the PIE rules.

Comment

A deliberate design feature of the company tax rules is that amounts that are exempt or excluded from tax at the company level are taxable if they are distributed to shareholders as a dividend. The issue described in the submission was considered and not accepted when the PIE rules were designed. It is therefore recommended that the submission be declined.

Recommendation

That the submission be declined.