Term Deposit versus PIE term deposit

[tobo]

For those on 30 or 33% tax rates, it would seem obvious to choose a PIE term deposit over a straight Term Deposit. It is only taxed at 28% (or whatever lower prescribed rate). I think the interest also does not add to your income for tax bracket determination.
A Term Deposit is held with the bank, but the PIE deposit is held by a trust.
As far as I can see there is a tax benefit and no difference in risk of loss of capital (eg. bank going bankrupt still impacts the trust anyway).
What is the catch? Why is the TD still offered? Is the TD only still offered because it makes no difference to lower income earners?

[SBQ]

For those on 30 or 33% tax rates, it would seem obvious to choose a PIE term deposit over a straight Term Deposit. It is only taxed at 28% (or whatever lower prescribed rate). I think the interest also does not add to your income for tax bracket determination.
A Term Deposit is held with the bank, but the PIE deposit is held by a trust.
As far as I can see there is a tax benefit and no difference in risk of loss of capital (eg. bank going bankrupt still impacts the trust anyway).
What is the catch? Why is the TD still offered? Is the TD only still offered because it makes no difference to lower income earners?

There is a catch and there is extra risk involved. Going into a PIE is similar to going into a managed fund. The benefits of a PIE aren't very transparent as generally PIE rates are lower than TD rates. Second you're dealing with a separate entity under PIE than with TD that is issued directly with the bank. The bank is more secured than the PIE fund operations. Don't be fooled that there are no managements fees, the difference is given by the lower PIE rate than the TD interest rate.

Term Deposit rates for large sums can be negotiated for better rates - you can't do this under PIE. They will take the cash and work their own contracts to skim a margin on the day the funds are deposited.

But let's be serious... why are people putting their cash in such low interest return deposits??? IMO Cash is only served as a way to buy when the opportunities come (such as the recent CoronaVirus outbreak). Or use the cash to leverage into buying another house because if you factor the after tax on the TD or PIE TD, less inflation rate, the real rate of return after tax is well... pretty disappointing.

[Bjauck]

There is a catch and there is extra risk involved. Going into a PIE is similar to going into a managed fund. The benefits of a PIE aren't very transparent as generally PIE rates are lower than TD rates. Second you're dealing with a separate entity under PIE than with TD that is issued directly with the bank. The bank is more secured than the PIE fund operations. Don't be fooled that there are no managements fees, the difference is given by the lower PIE rate than the TD interest rate. ....
ANZ Term Pie rates are the same as ANZ Term Deposit rates.

[SBQ]

ANZ Term Pie rates are the same as ANZ Term Deposit rates.

You can't negotiate rates with the PIE but you can with the Term Deposit rate. The difference is considerable if you know the right person.

[Bjauck]

You can't negotiate rates with the PIE but you can with the Term Deposit rate. The difference is considerable if you know the right person. Do you know what amount of money for term deposit you would need to be able negotiate a higher rate? How much higher an interest rate can you negotiate? It does not sound to be a very transparent - or a particularly fair situation.

[SBQ]

Do you know what amount of money for term deposit you would need to be able negotiate a higher rate? How much higher an interest rate can you negotiate? It does not sound to be a very transparent - or a particularly fair situation.

Over 10 years ago there was a man I always went to at the BNZ branch in Sydenham, Chch. It didn't matter on the amount I would want to roll over but we would sit in his office and he would work the BNZ terminal doing his magic. What he did was he would fudge # in the interest rate cell (working at real time market rates) and the difference was at least over 1% more than advertised TD board rate. Keep in mind, the rates back then peak at 9% but over the years I met him, he would always spend a few minutes on the screen and work the interest rate figures (his method was he would start high and gradually work lower in 0.01% increments). Unfortunately he transferred to Auckland so my man that offered me the best rates were no more.

Of course the average person doesn't have access to such better rates. But I do find it's not out of the ordinary to ask for a better rate if you're putting in more than $50K in term deposit. You're not going to get that rate over the phone. You really need to see the person at the branch or your 'bank manager' you deal with (and in close relations). They call up the trading desk and get a 'dealer rate' confirmation. I can't speak for other banks in NZ how they work.

[tobo]

Thanks for clarification. (The cash is, as you suggested, cash waiting for crash value buying. I want to keep some in the event of a longer/larger decline than the last few weeks...A bob each way at the moment.)

[turnip]

What is the catch? Why is the TD still offered? Is the TD only still offered because it makes no difference to lower income earners?

It is probably not a common situation, but there can be an advantage to an ordinary TD vs a PIE TD for someone on a low tax rate who has excess imputation credits, as they can use the excess credits to offset all the tax paid on the ordinary TD, but not for a PIE TD.

[Bjauck]

It is probably not a common situation, but there can be an advantage to an ordinary TD vs a PIE TD for someone on a low tax rate who has excess imputation credits, as they can use the excess credits to offset all the tax paid on the ordinary TD, but not for a PIE TD. Good point.
Also if you select too high a PIR rate than is actually required for your income level, you are unable to get a refund of the PIE tax already paid. Whereas if you select the top RWT rate for a TD, you can always get a tax refund for any excess paid, after filing a tax return for the relevant tax period.

However, If you select too low a PIR rate on your PIE income for your annual income level, then you could need to pay extra tax as though it were regular interest income. So I think PIE income can end up becoming quite complex for the individual. I guess the intention had been to encourage savings by offering a slightly reduced tax level. DYOR.

[GTM 3442]

"But let's be serious... why are people putting their cash in such low interest return deposits???"

Sometimes, having the money out of the way of temptation can be important. There can be reasons other than the simple one of interest rate.

[fungus pudding]

Good point.
Also if you select too high a PIR rate than is actually required for your income level, you are unable to get a refund of the PIE tax already paid. Whereas if you select the top RWT rate for a TD, you can always get a tax refund for any excess paid, after filing a tax return for the relevant tax period.

However, If you select too low a PIR rate on your PIE income for your annual income level, then you could need to pay extra tax as though it were regular interest income. So I think PIE income can end up becoming quite complex for the individual. I guess the intention had been to encourage savings by offering a slightly reduced tax level. DYOR.

Found on the web.

Why do PIE funds have special tax rules?
PIEs were created in October 2007, following the introduction of Kiwisaver. Before then, tax laws meant that investors in New Zealand managed funds could find themselves paying much more tax compared to if they had invested directly in shares – this was a significant disincentive to investing in managed funds and would have discouraged people from joining Kiwisaver.

The PIE rules mean that investors pay tax on their own tax rate (the Prescribed Investor Rate or PIR), which is usually slightly lower than their income tax rate. Under the old rules, managed funds paid tax at the highest rate (33%), which disadvantaged investors on lower tax rates. Also, managed funds paid tax on capital gains when they sold New Zealand shares, while direct investors usually only had to pay tax on dividends – the PIE rules removed this inconsistency.

[1leon]

There is also the anomalous situation with rebates on charitable donations. Since your rebate is ultimately calculated against taxable income and you don't return Pie income you can be better off with an offset against the Term Deposit income.

[SBQ]

Found on the web.

Why do PIE funds have special tax rules?
PIEs were created in October 2007, following the introduction of Kiwisaver. Before then, tax laws meant that investors in New Zealand managed funds could find themselves paying much more tax compared to if they had invested directly in shares – this was a significant disincentive to investing in managed funds and would have discouraged people from joining Kiwisaver.

The PIE rules mean that investors pay tax on their own tax rate (the Prescribed Investor Rate or PIR), which is usually slightly lower than their income tax rate. Under the old rules, managed funds paid tax at the highest rate (33%), which disadvantaged investors on lower tax rates. Also, managed funds paid tax on capital gains when they sold New Zealand shares, while direct investors usually only had to pay tax on dividends – the PIE rules removed this inconsistency.

PIE funds do not 100% remove this inconsistency. The individual that invests directly does not have to pay the capital gains tax (on NZ shares) that a managed fund would. This goes back to blatant misleading information in the NZ finance marketing that investors are no where near being fully disclosed on the taxation between an individual vs the managed funds. There's a hell of a big difference when a PIE fund pays tax at the individual rates when the individual that invests directly only has to pay tax on the dividend or interest streams ; none of the capital gain is taxable. (a disclaimer! if the individual trades frequently... then the capital gain would be treated as taxable income).

I'm also sick of NZ financial advisors not 'manning up' to be honest about the double standard / 2 measuring sticks on taxation. It's a weak excuse to say, "Oh well.. you'll need to seek a 'Tax Advisor' - I can set up an appointment for one if you would like?"

[Snoopy]

PIE funds do not 100% remove this inconsistency. The individual that invests directly does not have to pay the capital gains tax (on NZ shares) that a managed fund would. This goes back to blatant misleading information in the NZ finance marketing that investors are no where near being fully disclosed on the taxation between an individual vs the managed funds. There's a hell of a big difference when a PIE fund pays tax at the individual rates when the individual that invests directly only has to pay tax on the dividend or interest streams ; none of the capital gain is taxable. (a disclaimer! if the individual trades frequently... then the capital gain would be treated as taxable income).


SBQ did you even read Fungus's post before you replied to it?

Fungus said:
"Also, managed funds paid tax on capital gains when they sold New Zealand shares, while direct investors usually only had to pay tax on dividends – the PIE rules removed this inconsistency."

This implies wither that:

1/ PIE funds do not pay tax on capital gains for NZ based share investments, OR
2/ Individual NZ shareholders do pay tax on share capital gains (which as a rule is not true).

SNOOPY

[SBQ]

SBQ did you even read Fungus's post before you replied to it?

Fungus said:
"Also, managed funds paid tax on capital gains when they sold New Zealand shares, while direct investors usually only had to pay tax on dividends – the PIE rules removed this inconsistency."

This implies wither that:

1/ PIE funds do not pay tax on capital gains for NZ based share investments, OR
2/ Individual NZ shareholders do pay tax on share capital gains (which as a rule is not true).

SNOOPY

1/ Regardless of the managed fund status (PIE or not), the portfolio is taxed on the gains for the simple reason, the investment is "intent to profit" ; no different to operating a business.
2/ Individuals that invest directly on NZ shares - IF and to be clear.. IF they keep the investment long enough to show NO intent of buying and selling shares like a trading account or a managed fund would behave, THEN the capital gains are tax free (no different to holding a house for more than 5 years).

Therefore, the PIE rules do NOT remove this inconsistency and they're not even comparable. All it does is it gives a small break for the top income earners in the 33% tax bracket. Look at the whole picture - the PIE accomplishes nothing in removing the tax differences between individuals and those into managed funds despite both would invest in the same asset class.

[Snoopy]

1/ Regardless of the managed fund status (PIE or not), the portfolio is taxed on the gains for the simple reason, the investment is "intent to profit" ; no different to operating a business.


Please provide a reference for the share investing PIE having an 'intent to profit'. I would love to know if you are right. Why would the PIE not be 'intent on receiving dividends', which means any capital gain is incidental and 'tax free'? Why would Fungus's quote that the PIE format was created to remove the tax treatment anomaly between individual investors and funds investing in NZ markets not be true?

Kingfish which is a share investing in NZ PIE claims:

https://www.kingfish.co.nz/investor-centre/faqs/

"There is no tax on the distribution of capital gains to shareholders."

But could that be because the capital gain has already been taxed within the fund, so there is no more tax to pay?

SNOOPY

[SBQ]

Please provide a reference for the share investing PIE having an 'intent to profit'. I would love to know if you are right. Why would the PIE not be 'intent on receiving dividends', which means any capital gain is incidental and 'tax free'? Why would Fungus's quote that the PIE format was created to remove the tax treatment anomaly between individual investors and funds investing in NZ markets not be true?

Kingfish which is a share investing in NZ PIE claims:

https://www.kingfish.co.nz/investor-centre/faqs/

"There is no tax on the distribution of capital gains to shareholders."

But could that be because the capital gain has already been taxed within the fund, so there is no more tax to pay?

SNOOPY

In bold is correct. The whole idea of PIE is for the individual not worrying about reporting their PIE investments. The PIE fund themselves are responsible for remitting to IRD on each individual's tax they've made (capital gains, dividends, etc) earned in the managed fund. As quoted before but entirely misleading :

"Why do PIE funds have special tax rules?
PIEs were created in October 2007, following the introduction of Kiwisaver. Before then, tax laws meant that investors in New Zealand managed funds could find themselves paying much more tax compared to if they had invested directly in shares – this was a significant disincentive to investing in managed funds and would have discouraged people from joining Kiwisaver.

The PIE rules mean that investors pay tax on their own tax rate (the Prescribed Investor Rate or PIR), which is usually slightly lower than their income tax rate. Under the old rules, managed funds paid tax at the highest rate (33%), which disadvantaged investors on lower tax rates. Also, managed funds paid tax on capital gains when they sold New Zealand shares, while direct investors usually only had to pay tax on dividends – the PIE rules removed this inconsistency."

Again, the key word here is "could" but the reality is PIR didn't change anything. All managed funds in their various forms are under the same tax rules of reporting. When you strip all these differences down the only benefit PIE funds have is for the high income earner over 30% tax bracket. The NZ gov't media was wrong in addressing the 'REAL' issue of the slow KiwiSaver uptake - because capital gains from NZ residential real estate back then and today remains relatively untaxed. You are not going to persuade NZ investors from hard assets to move into a business model of managed funds that are taxed 28% or the PIR.

Let's be real here. To the small investor (and i'm very certain this would apply to the majority of investors in NZ), the PIE rules make absolutely no difference to the individual returns at the end. 1) small investors aren't in the 30 or 33% tax bracket 2) and if they are, they could invest into the SAME shares and equities (NZ or overseas) as the so called "professional fund managers" in Kiwi Saver, yet being an individual that invests directly, they would not be subjected to the capital gains tax.

On the FIF front, there also needs to be a distinction where the individual directly invests abroad only has FDR 5% taxable income vs some fund like Sharesies etc that offer an S&P500 ETF or Vanguard ETF to their NZ investors would end up paying CGT on the SAME INVESTED ASSET. This is the lack of transparency i'm screaming about when I talk to NZ advisors and accountants. I get annoyed when their best answer is to direct me to see a tax specialist so they can rack up another set of fees.

[Bjauck]

...

"There is no tax on the distribution of capital gains to shareholders."

But could that be because the capital gain has already been taxed within the fund, so there is no more tax to pay?

SNOOPY

My understanding is that the PIE fund is not taxed separately.

It is only when distributions of income are apportioned to individual investors is tax levied at the investor's PIR rate. Capital gains generated in the PIE fund are not taxed.

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12215861

[fungus pudding]

My understanding is that the PIE fund is not taxed separately.

It is only when distributions of income are apportioned to individual investors is tax levied at the investor's PIR rate. Capital gains generated in the PIE fund are not taxed.

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12215861

Sounds about right to me.

[Snoopy]

My understanding is that the PIE fund is not taxed separately.

It is only when distributions of income are apportioned to individual investors is tax levied at the investor's PIR rate. Capital gains generated in the PIE fund are not taxed.

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12215861

Thanks for the reference, but I am not sure the author of this article, Tamsyn Parker, has a complete grasp of the subject The article is worded in a way that makes ithe issue of tax on capital gains ambiguous.

"Funds are currently taxed using the portfolio investment entity regime which means individuals are taxed on the income from their fund at a prescribed investor rate which is based on what they earn. There are three rates - 10.5 per cent, 17.5 per cent and 28 per cent. The income tax is calculated daily and tax is paid annually. The aim is to ensure people are not taxed at a rate that exceeds their personal tax rate."

That bit at least seems clear, even if no reference is given to confirm it,

"Currently there is no tax on the gains from trading in New Zealand and Australian shares. Tax on foreign shares is worked out at the fair dividend rate."

For an individual 'trading' in shares in NZ and Australia -with the aim of making a profit- is taxed. So is Ms Parker telling us that PIE funds have an advantage over the individual in this regard? That doesn't square with the levelling of the playing field argument for creating PIE. And as SBQ has pointed out, shares invested subject to the under the FIF regime pay tax in all years when in a fund. As an individual you get a tax holiday if the sum of your shares in the FIF regime makes a loss during the year. One again 'not equal'.

SNOOPY

[SBQ]

Thanks for the reference, but I am not sure the author of this article, Tamsyn Parker, has a complete grasp of the subject The article is worded in a way that makes ithe issue of tax on capital gains ambiguous.

"Funds are currently taxed using the portfolio investment entity regime which means individuals are taxed on the income from their fund at a prescribed investor rate which is based on what they earn. There are three rates - 10.5 per cent, 17.5 per cent and 28 per cent. The income tax is calculated daily and tax is paid annually. The aim is to ensure people are not taxed at a rate that exceeds their personal tax rate."

That bit at least seems clear, even if no reference is given to confirm it,

"Currently there is no tax on the gains from trading in New Zealand and Australian shares. Tax on foreign shares is worked out at the fair dividend rate."

For an individual 'trading' in shares in NZ and Australia -with the aim of making a profit- is taxed. So is Ms Parker telling us that PIE funds have an advantage over the individual in this regard? That doesn't square with the levelling of the playing field argument for creating PIE. And as SBQ has pointed out, shares invested subject to the under the FIF regime pay tax in all years when in a fund. As an individual you get a tax holiday if the sum of your shares in the FIF regime makes a loss during the year. One again 'not equal'.

SNOOPY

The article explaining CGT on shares, is not very clear and does not tell much from the individual investor's point of view. Common sense logic need apply. The difference between a PIE fund and all the other managed funds is simply, the PIE funds have a tax that is maxed out at 28% ; which we spoke before, benefits the high income earners in the 30%+ tax bracket. I'm uncertain what planet the WTG was on during the CGT discussions. It seemed like they wanted to make things as complicated as possible just so Sir Michael Culleen could show his pay he received was worthy.

We have all sorts of different measuring sticks in taxation. Wouldn't it be easier just to assume all managed funds and investments into shares were tax free UNTIL the time you sell the asset? That's how other countries do it ; that article talks about taxing the capital gain on a daily basis which is no different than the current regime of managed funds being taxing on paper profits?? I mean talk about complications on a daily basis or more of NZ's phobia of wanting to get the tax FIRST before the investor can cash up in retirement.

Under the issue of FIF / FDR for investing foreign shares by the individual. It seems there's no mention of the de-minus threshold by the individual of up to $50,000 NZD. Yes. all accounts under $50K are exempt from FIF or any sort of taxation on the capital gain. To a married couple, that would be up to $100K they can have invested in without a worry about FIF. How come financial advisors in NZ aren't tweeting about this??? They must think all people who start to invest must have well over $50K to start with... (sarcasm:laugh:). The crux of the issue I find here is... for the small individual investor looking to invest abroad, they can spend several years making contributions to their portfolio while remaining under the $50K value, without a concern of tax, while if they took that SAME $ to a managed fund in NZ, they would be subjected to PIR tax from the first $1 they put on day one to the several years that managed fund would of managed their account holdings. The better question is what % of these managed funds or those under Kiwi Saver have in excess of $50K in account value? Keep in mind, all these managed funds take a mgt fee.