Welcome to the September 2022 Manager Panel! The Manager Panel is where we ask fund managers some questions surrounding a topic. This month we asked Russell Investments and Salt Funds Management some questions in regards to tax in investing. Check out the questions and answers below.

Q1: What do you think Kiwi investors should think about when it comes to tax in their investing and why – or should they simply ignore tax altogether? 

As you go through your investment journey, keep in mind, that it’s not what you make, but instead what you keep that is the test of success. Alongside sound financial advice, appropriate asset allocation and manager selection, tax plays an important role in determining personnel wealth outcomes, and is too important to ignore.

New Zealand ‘s tax structure means that some funds are more efficient than others for taxable investors. For many people, multi-rate PIE funds are an efficient means for investing offering an edge over other fund structures such as Australian Unit Trusts or Exchange Traded Funds (ETFs). For global shares, funds that are New Zealand PIE funds and hold the securities directly (rather than feeding into another offshore fund or ETF) can often end up being more tax efficient for local investors. This is because foreign withholding tax credits cannot be passed through from an offshore entity to the NZ based entity (PIE funds).

Q2: Within Russell Investments, can you give us some examples of how you have structured a fund or portfolio to make it tax efficient and/or take into account tax issues or considerations? 

Over late 2021 Russell Investments adjusted our Global Shares and Hedged Global Shares Funds, switching from a PIE fund feeding into an underlying AUT to  directly held securities to take advantage of the enhanced tax efficiencies for taxable investors. All Russell Investments global equity PIE funds which have launched subsequently, being our Global Listed Infrastructure as well as Sustainable Global Shares and Hedged Sustainable Global Shares, also hold the underlying securities directly to again help taxable investors benefit from the enhanced tax efficiencies. 

Q3: To what extent should portfolio construction incorporate the specific tax position of the individual end-investor – can you give examples of how an ideal portfolio may differ for different tax rate investors? 

Delivered through our local team, Russell Investments creates tailor-made allocations between asset classes that optimise the risk and return trade-off for institutional investors in New Zealand in order to meet their financial goals. These tailor-made allocations are informed by asset class expectations, forecasting of various fundamental economic variables for each asset class, and tax is an important consideration. On an individual basis however, each end-investor will have specific tax requirements and as such they should look to discuss appropriate portfolio construction with a financial adviser.

Please note, Russell Investments does not provide tax advice. We have sought professional tax advice. The approximate after-tax gain is an estimate only.

The information contained in this publication was prepared by Russell Investment Group Limited. It has been compiled from sources considered to be reliable, but is not guaranteed. This publication provides general information only and should not be relied upon in making an investment decision. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. All investments are subject to risks. Past performance is not a reliable indicator of future performance.

Q1: What do you think Kiwi investors should think about when it comes to tax in their investing and why – or should they simply ignore tax altogether?

Investors should always consider the effects of tax on their investment decisions. Tax reduces the final cash return investors receive in their pockets.

Further, in a lower return period, which many commentators say we are heading into*, anything that reduces your return, like tax and fees, may have a relatively larger adverse effect. For example, while investors in a Portfolio Investment Entity (‘PIE’) are not taxed on capital gains, they may be subject to a tax on a deemed 5% rate of return on offshore companies and on Australian stapled securities such as property trusts.

Investors should ensure they are on the lowest possible PIE tax rate (called a Prescribed Investor Rate or ‘PIR’) possible. A good time to do this is when your provider sends out your annual tax statement in May/June each year. That will ask you to confirm back your PIR. If you have overstated your PIR, you may not get back any overpaid tax from Inland revenue.

Investors should ensure that they are investing in the most tax effective vehicle possible. Inefficient investment vehicles can mean you pay more tax than necessary for access to the same investment assets. More about this below.

Q2: Within Salt, can you give us some examples of how you have structured a fund or portfolio to make it tax efficient and/or take into account tax issues or considerations?

The Salt NZ Dividend Appreciation Fund is a tax efficient fund as it is a NZ PIE and provides investors with a capital gains tax free return on the NZ shares it invests in. Investors only pay tax on fund’s dividend income at their PIR tax rate. The PIE tax is typically paid once a year as at 31 March.**

The Salt Long Short Fund & Salt Enhanced Property Funds are also NZ PIEs. As well as the advantages above, these funds also invest in Australian listed shares and also Australian stapled securities. Like NZ, certain Australian listed shares are capital gains tax free, however, Australian stapled securities, such as property trusts, are taxed on a deemed 5% annual return, meaning that any dividend or income from these securities over 5% is effectively tax-free. These Salt funds are structured to take advantage of this treatment and pass this benefit on to investors.

The Salt Sustainable Global Shares Fund is a NZ PIE that invests in global shares. Salt have taken the time to open custody accounts in the relevant global markets. This means the fund holds its shares directly rather than investing via another inefficient offshore vehicle such as an Australian or European unit trust. This is a critical difference. The benefit of this structure is in providing our NZ investors with access to foreign tax credits issued by the tax authorities of those global markets. These credits can be used to reduce your tax liability.

*See NZ Super Fund active strategies buffer difficult year in markets, NZ Super, 12 September 2022
**Investors may also pay PIE tax on withdrawals, depending on the PIE elections of the Manager.

Q3: To what extent should portfolio construction incorporate the specific tax position of the individual end-investor – can you give examples of how an ideal portfolio may differ for different tax rate investors? 

Structuring your investments via a PIE may have tax advantages for you, if:

• you pay income tax at a rate of 30%, 33%, or 39%. That’s because the highest prescribed investor rate (PIR) is 28%;
• you’re a trust with a trustee tax rate of 33% or 39%, or a trust beneficiary on a 30%, 33%, or 39% income tax rate; or
• you’re now paying a higher rate of income tax, as a result of a salary increase, or you’ve returned to the workforce following a period of being out of work.

Another common example is a NZ resident taxpayer wanting to invest in NZ and/or Australian-listed shares. Careful thought should be given whether to invest directly or via a PIE vehicle. The benefits of investing via a NZ-managed PIE, such as the Salt NZ Dividend Appreciation Fund, are:

• Investors pay tax at their PIR tax rate, which is usually slightly lower than their income tax rate;
• a PIE is a safe harbour from paying tax on capital gains when selling New Zealand and Australian shares, while regularly buying and selling shares could be classified a trader by Inland Revenue and be liable for tax on any capital gains and dividends; and
• you are utilising the investment expertise of Salt’s highly experienced managers who have a multidecade perspective on investment opportunities and investment risk.

For more information on PIE tax go to the following link.

Disclaimer: The information in this publication has been prepared from sources believed to be reliable and accurate at the time of preparation but Salt Funds Management Limited, its officers, directors, agents, and employees make no representation or warranty as to the accuracy, completeness, or currency of any of the information contained within, and disclaim any liability for loss which may be incurred by any person relying on this publication. All analysis, opinions and views reflect a judgment at the date of publication and are subject to change without notice. This publication is provided for general information purposes only. The information in this publication should not be regarded as personalised advice and does not take into account an individual investor’s financial situation or goals. An individual investor should, before making any investment decisions, seek professional advice. Past performance is not a reliable indicator of future performance and no representation or warranty, express or implied, is made regarding future performance. More information is available at: saltfunds.co.nz. Salt Investment Funds Limited is wholly owned by Salt Funds Management Limited and is the issuer of units in the Salt Investment Funds and a Product Disclosure Statement can be found at saltfunds.co.nz