PIE remedials
Issue: Changing the notified investor rate
Submission
(KPMG)
The rules should be amended to clarify that a portfolio investment entity (PIE) can apply a change to an investor’s notified investor rate either from the first day of that year (retrospectively) or from the day the new tax rate is provided (prospectively).
Comment
The prescribed investor rate (PIR) is the tax rate for an investor in a PIE which the PIE uses to calculate the tax on that investor’s income.
When an investor provides the PIE with an updated PIR, the PIE should have the flexibility to apply the correct PIR either from the beginning of that year/quarter/calculation period or as soon as practicable after receipt. This accommodates differences in PIEs’ systems and PIE return filing options. This amendment would clarify the legislation to be in line with current practices.
Recommendation
That the submission be accepted. As the change clarifies the original intent of the legislation, it should apply from 1 October 2007. This will provide certainty for transactions that have occurred during this period.
Issue: Allocation of expenses to a PIE
Submission
(KPMG)
The rules should be amended to clarify that expenses incurred in deriving income in which no investor has an interest are also not attributable.
Comment
A PIE is able to treat income in which no investor has a beneficial interest as relating to a separate investor class (in which the PIE is the sole investor). The net income (or loss) is then taxable at the PIE rate of 28%.
The submitter proposes that the legislation be amended to make it clear that expenses relating to this unattributed income are also not attributable.
This is in line with current policy. When clarifying the law, however, it should also be made clear that expenses are not attributable for resident investors only and not to non-resident investors.
Recommendation
That the submission be accepted, subject to the comment above and that this change apply from the 2012–2013 income year to provide certainty for transactions that have occurred in that year.
Issue: Refundability of PIE tax credits
Submission
(BDO Wellington Limited)
The rules should be amended to make it clear when PIE tax credits are refundable to investors.
Comment
In situations when an investor has to square up their PIE tax obligations at the end of the year, the investor gets a tax credit for the amount of tax that has already been paid on their behalf by the PIE.
For most types of investors, these PIE tax credits should be refundable. However, they should be non-refundable for natural (individual) investors that are not trusts. This would ensure that these investors are not incentivised to elect PIRs that are too low for them, as this is the only instance when PIE tax is not a final tax for individuals.
The submission is consistent with current policy settings.
Recommendation
That the submission be accepted.
Issue: Disposal of certain shares by PIEs
Submission
(PricewaterhouseCoopers)
Section CB 26 should be “turned off” for investors who issue dividends as long as they are received by the same investors.
Comment
A taxable dividend is deemed to arise to the seller of certain shares for which a dividend has been declared but not yet paid. The actual dividend is also taxable to its recipient. This is an anti-avoidance provision to ensure that the otherwise taxable dividends are not converted into a non-taxable disposal of shares.
This double taxation should be removed where the seller and the recipient of the shares comprise the same investors. In practice, this can arise as a result of the restructuring.
Recommendation
That the submission be accepted, and that this change apply from the 2012–13 income year to provide certainty for transactions that occurred in that year.
Issue: Management fee rebates
Submission
(Matter raised by officials)
Management fee rebates should be included in the types of income a PIE can derive.
Comment
At least 90 percent of a PIE’s income must be passive income, such as dividends, interest and rent.
A PIE can receive management fee rebates in situations when a retail PIE pays a wholesale PIE for the wholesale PIE’s expenses but the wholesale PIE partially refunds these fees.
Particularly in periods of a market downturn, a PIE could be either in a loss situation, or its income could be reduced, so that the percentage of income from the fee rebate causes it to breach the PIE eligibility criteria. This would cause the entity to lose its PIE status. This breach of the PIE rules was not intended.
Fee rebates are not active income of the PIE and should be added to the types of income a PIE can earn.
Recommendation
That the submission be accepted, and that this change apply from 2012–13 income year. This would provide certainty for transactions that occurred in that year.
Issue: Notification requirements
Submission
(Matter raised by officials)
PIEs should be allowed to provide notices to their investors electronically, provided either the investor or an authorised person has consented to this.
Comment
Section 31C of the Tax Administration Act 1994 requires PIEs to provide their investors with notices setting out certain information relating to their investment. Officials recommend that the language of the section should be amended to allow these notices to be provided electronically, provided the investor or their authorised person has consented to this.
Recommendation
That the submission be accepted.
Issue: Heading of a section
Submission
(Matter raised by officials)
The heading of section DB 54 should be changed from “Treatment of credits for investment fees” to “Treatment of certain fees charged by multi-rate PIEs”.
Comment
The proposed heading would more accurately reflect the content of the section.
Recommendation
That the submission be accepted.