Taxation of Investment Income – understanding the new rules

The introduction of Fair Dividend Rate on 1 April 2007 and Portfolio Investment Entities on 1 October 2007 means the way investment income is tax has changed.

The Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Act was enacted in December 2006.  It became effective from 1 April 2007, although the introduction of some aspects of the Act did not become effective until 1 October 2007.

Fair Dividend Rate (FDR) is now applied to international share investments

From 1 April 2007, income from international share investments is now calculated in a different way.  The new method of calculation is Fair Dividend Rate (FDR) which means income from international share investments for a New Zealand based managed fund is taxed not on actual income but on a deemed return of 5% per annum, based on the daily opening market value of investments.

Those who invest in international shares through a New Zealand-based managed fund will not need to be concerned about the FDR tax changes as these funds will determine any income from offshore share investments and deduct and pay the tax payable to the Inland Revenue on behalf of investors (where applicable).

Those who invest directly into international shares, or invest through an Australian or international-based unit trust or fund, may elect to use either the FDR of 5% of the opening value at the beginning of the year or the comparative value method to calculate the tax on their international investments.  Direct investors will also need to be aware of the rules for "Quick Sales".  Quick Sales is the term applied to an investment that is bought and sold in the same tax year.  These transactions are treated separately and calculations can be complex.  Direct investors in international shares are advised to consult a financial adviser or tax specialist. 

Introducing PIEs and the new tax rules on investment income from 1 October 2007

On 1 October 2007, most of TOWER's New Zealand-based managed funds became Portfolio Investment Entities (PIEs) - a new taxation structure created by the Government to achieve balanced tax treatment of all New Zealanders' investment income.

The principal change is that investors will have to choose the rate at which their investment income is taxed, instead of being taxed at the fund level - this rate is known as the Prescribed Investor Rate or PIR.  There are three PIRs - 0% (for trusts, estates, charities and companies) and 19.5% or 30% for individual investors.  Superannuation funds, estates and trusts which are taxed as trusts can elect to have a 30% PIR.  The maximum PIR of 30% was reduced from 33% on 1 April 2008.  This means many investors will now pay less tax than they did before.

The new PIE taxation regime will not affect investors' entitlement to social benefits (such as student loans, or working for families) as PIE income is not included in those social benefit calculations. 

For a list of all the TOWER Funds that are now PIEs please click here.

Prescribed Investor Rates under the PIE regime

The PIR is the tax rate which investors choose to apply to their investment income.  To help you work out your correct PIR, use the flowchart below.  Investors should advise TOWER of their PIR and their IRD number at the same time.  If an investor does not provide their PIR, TOWER must tax the investment income at the maximum rate of 30%.  Non-resident investors will have a PIR of 30% from 1 April 2008.

Click here to submit your PIR.

Below is a list of frequently asked questions about taxation of PIEs.  Please click on the question for the answer.

How are tax payments or refunds managed where a fund is a PIE?
What if I get my PIR wrong?
How are joint investors treated?
What happens if an investor wishes to withdraw from a PIE fund?
What about partial withdrawals?
Are the funds going to distribute income under PIE?
What happens if an investor wishes to transfer or switch their investment between funds?
What if an investor wishes to change ownership of the investment under the PIE regime?

Where is more information available?

• Read the Investment Statements for TOWER's retail funds on www.tower.co.nz
• Consult a financial adviser
• Call 0800 4 TOWER (0800 486 937)
  

Disclaimer: The information provided here is for general guidance only and is not financial or taxation advice.  Each investor's personal circumstances will be different.  Every effort has been made to ensure correctness, but TOWER takes no responsibility for any errors or omissions.  Always read the Investment Statement and take independent financial and taxation advice before making investment decisions.