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Portfolio investment entity rules

Investors – prescribed investor rate

Issue: Zero-percent prescribed investor rate for individuals

Submission

(31 – NZ Funds)

An individual PIE investor with an effective marginal tax rate of 0% should be able to elect a prescribed investor rate of 0%, upon application to Inland Revenue.

Comment

Officials do not support the submission for the following reasons:

  • The proposal would add significant complexity to the PIE rules.
  • There could be a 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 could be viewed as inequitable as investors that incurred an unexpected loss during the year would be disadvantaged relative to those with historical losses that could elect a 0% at the start of the year.

Recommendation

That the submission be declined.

Issue: Prescribed investor rate for trustees

Submission

(61 – Trustees Corporations Association of New Zealand)

PIE legislation for trustees should allow trustees to choose a “prescribed investor rate” of 12.5% or 21%. The tax paid then by the PIE will not be a final tax and the income allocated to the trustee will be taxable in the hands of the trustee or beneficiaries. The tax paid by the PIE will be available as a credit to either the trustee or beneficiaries.

Comment

Officials agree. Allowing trusts to elect a lower PIE rate than 30% with the PIE income taxable at the trust level (and a credit for tax paid at the PIE level) should help certain trusts with provisional tax payments.

This amendment should apply from 1 April 2009.

Recommendation

That the submission be accepted.