Investing platform age makes PIEs extra tasty
Article written by InvestNow
July 7 marks an important date in the tax calendar with most end-of-financial-year income tax returns due for filing.
This July, however, will likely pass unnoticed by the majority of Kiwis who benefit from one of the most automated tax systems in the world.
But not everyone will reap the benefits…
Those invested in shares or direct equities might find themselves caught out by an unexpected tax bill. And considering the rise in popularity of dabbling in shares among retail investors, this could be a shocker for a few.
According to a recent survey by industry group the Financial Services Council (FSC), the proportion of New Zealanders using ‘micro investing’ platforms is set to rise from the current level of almost 17% to 40% in the near future.
“Investing is becoming more popular in New Zealand through a mix of the rise of KiwiSaver and digital retail investment platforms, such as InvestNow, and this growing diversity in different investments is seen as healthy,” the FSC report says.
As novice investors will soon discover, though, venturing into managed funds or direct shares can throw up a raft of challenging tax questions that can’t all be automated away.
Just how difficult those tax questions are will ultimately depend on what products investors choose to invest in – direct shares or managed funds.
Dangers of the direct route
The FSC survey found steady support for managed funds among NZ investors but notes a huge growth in those looking to buy shares directly.
While the study shows about 17.6% of Kiwis had invested in managed funds (up from 17% in 2020), the proportion holding direct NZ and international equities both jumped considerably year-on-year — a 30% increase in direct NZ equities and an almost 19% increase in direct global equities.
Many new direct share investors experienced considerable returns during the 12 months to March 31 2021 as equity markets everywhere bounced back in record time from the COVID-19 lows in early 2020.
However, the boom-time performance also triggered some tax concerns among new platform investors.
Generally, the NZ tax rules for individuals investing directly in shares differentiates between Australasian stocks (covering NZX- and certain ASX-listed companies) and rest-of-the-world equities.
International shares are taxed under the Foreign Investment Fund (FIF) regime, with a de minimis exemption. (See ‘Foreign investment fund rules exemptions’ and ‘Foreign investment funds (FIFs)‘ on the Inland Revenue Department (IRD) website for more information).
However, individual investors typically only pay tax (at their marginal rates) on dividend income from Australasian equities.
In a statement to media, the IRD, says: “Investors tax liability is usually taxed at source by the share platforms and the information of investors tax collected by the platforms is provided to Inland Revenue to pre-populate people’s annual income tax assessment.”
But there is an important exception to the rule that could see Australasian share investors subject to a further tax on realised capital gains if the IRD considers individuals are operating as ‘active traders’.
“There is no capital gains tax in New Zealand, however income from the sale of certain shares is taxable where an investor trades on revenue account,” the IRD says. “Shares are held on revenue account where an investor is in the business of trading in shares, is carrying on share trading activities for the purpose of making a profit, or acquires a share with the purpose of disposing of it for a profit.”
With the splurge in online trading on the new platforms, as noted in the FSC survey, there is a growing risk that more direct Australasian share investors, as well as those who are under the $50,000 de minimis threshold for global shares, could fall into the ‘active trader’ definition.
In its recently published ‘Understanding the risks of online investing platforms’ report, the Financial Markets Authority cautions that investors could wind up with “additional tax responsibilities” if they were classified as a trader by the IRD.
Furthermore, while it’s a poorly understood aspect of NZ’s opaque tax rules, ‘de minimis’ investors can’t rely on the exemption as a get-out-of-jail-free card for any capital gains if they fall under the active-trader definition.
For example, investors with $50,000 or less who are actively trading global shares, including via AUTs, face the risk of a surprise call from the IRD requesting the payment for tax on any capital gains.
And the IRD is paying attention to platform investors via its “compliance programme that looks into share dealing activities”. In 2020, for example, the IRD demanded client data from local cryptocurrency trading platforms after deeming profits from Bitcoin and the like would be subject to capital gains tax. The shock move woke up the new breed of crypto-investors to their tax liabilities and the extensive powers of the IRD to enforce the law.
In general, the IRD says: “Because this area can quickly get complex, Inland Revenue’s focus is on ensuring information is available to the investor so they understand the taxation requirements of their investment income.”
The sweet taste of PIE
Managed funds offered in NZ offer a few different flavours: including Portfolio Investment Entities (PIEs) and Listed PIEs.
For the most part, PIEs offer the simplest tax solutions for NZ investors. As explained in the InvestNow Tax Guide, PIE tax is collected and paid by the fund manager and/or platforms on behalf of investors at their ‘prescribed investor rate’ (PIR).
PIE tax is usually classed as a ‘final’ payment with investors not required to file end-of-year returns with the IRD.
But keep in mind, the PIE fund tax relies on investors supplying their correct PIRs, which can change along with income. However, there are plenty of resources out there to help you work out what your PIR rate is, such as the IRD’s ‘What is my prescribed investor rate?’ webpage.
Last year the IRD discovered some 1.5 million PIE investors (including KiwiSaver members) were using wrong PIRs – split about 50/50 between too high and too low. The government granted new powers to the tax department in 2019, allowing the IRD to now notify both investors and relevant PIE fund providers if it discovers individuals have the wrong PIR.
However, the IRD do warn “This does not remove your responsibility to let your PIE know your correct PIR. It’s a good idea to review your PIR each tax year and let your [platform and/or fund manager] know of any changes,” the IRD says.
Listed PIEs — Take care if you’re on a lower PIR
The situation is slightly different for listed PIEs such as the Smartshares exchange-traded fund (ETF) suite popular on InvestNow.
Listed PIEs are all taxed at a flat 28% (the top PIR). Investors on lower tax rates can claim back any overpaid listed PIE tax by filing an end-of-year return: this strategy only works if investors have other income to claim against, which may not be the case for children, for example.
The last bite is always the best
IRD has yet to widely enforce the ‘active trader’ capital gains taxes on retail direct share investors using online platforms, but there’s definitely a risk of them doing so.
…Something to be aware of if your find yourself getting stuck into shares.
July 7, however, will remain a good day for Kiwis to have a PIE…
Investing platform age makes PIEs extra tasty
Article written by InvestNow
July 7 marks an important date in the tax calendar with most end-of-financial-year income tax returns due for filing.
This July, however, will likely pass unnoticed by the majority of Kiwis who benefit from one of the most automated tax systems in the world.
But not everyone will reap the benefits…
Those invested in shares or direct equities might find themselves caught out by an unexpected tax bill. And considering the rise in popularity of dabbling in shares among retail investors, this could be a shocker for a few.
According to a recent survey by industry group the Financial Services Council (FSC), the proportion of New Zealanders using ‘micro investing’ platforms is set to rise from the current level of almost 17% to 40% in the near future.
“Investing is becoming more popular in New Zealand through a mix of the rise of KiwiSaver and digital retail investment platforms, such as InvestNow, and this growing diversity in different investments is seen as healthy,” the FSC report says.
As novice investors will soon discover, though, venturing into managed funds or direct shares can throw up a raft of challenging tax questions that can’t all be automated away.
Just how difficult those tax questions are will ultimately depend on what products investors choose to invest in – direct shares or managed funds.
Dangers of the direct route
The FSC survey found steady support for managed funds among NZ investors but notes a huge growth in those looking to buy shares directly.
While the study shows about 17.6% of Kiwis had invested in managed funds (up from 17% in 2020), the proportion holding direct NZ and international equities both jumped considerably year-on-year — a 30% increase in direct NZ equities and an almost 19% increase in direct global equities.
Many new direct share investors experienced considerable returns during the 12 months to March 31 2021 as equity markets everywhere bounced back in record time from the COVID-19 lows in early 2020.
However, the boom-time performance also triggered some tax concerns among new platform investors.
Generally, the NZ tax rules for individuals investing directly in shares differentiates between Australasian stocks (covering NZX- and certain ASX-listed companies) and rest-of-the-world equities.
International shares are taxed under the Foreign Investment Fund (FIF) regime, with a de minimis exemption. (See ‘Foreign investment fund rules exemptions’ and ‘Foreign investment funds (FIFs)‘ on the Inland Revenue Department (IRD) website for more information).
However, individual investors typically only pay tax (at their marginal rates) on dividend income from Australasian equities.
In a statement to media, the IRD, says: “Investors tax liability is usually taxed at source by the share platforms and the information of investors tax collected by the platforms is provided to Inland Revenue to pre-populate people’s annual income tax assessment.”
But there is an important exception to the rule that could see Australasian share investors subject to a further tax on realised capital gains if the IRD considers individuals are operating as ‘active traders’.
“There is no capital gains tax in New Zealand, however income from the sale of certain shares is taxable where an investor trades on revenue account,” the IRD says. “Shares are held on revenue account where an investor is in the business of trading in shares, is carrying on share trading activities for the purpose of making a profit, or acquires a share with the purpose of disposing of it for a profit.”
With the splurge in online trading on the new platforms, as noted in the FSC survey, there is a growing risk that more direct Australasian share investors, as well as those who are under the $50,000 de minimis threshold for global shares, could fall into the ‘active trader’ definition.
In its recently published ‘Understanding the risks of online investing platforms’ report, the Financial Markets Authority cautions that investors could wind up with “additional tax responsibilities” if they were classified as a trader by the IRD.
Furthermore, while it’s a poorly understood aspect of NZ’s opaque tax rules, ‘de minimis’ investors can’t rely on the exemption as a get-out-of-jail-free card for any capital gains if they fall under the active-trader definition.
For example, investors with $50,000 or less who are actively trading global shares, including via AUTs, face the risk of a surprise call from the IRD requesting the payment for tax on any capital gains.
And the IRD is paying attention to platform investors via its “compliance programme that looks into share dealing activities”. In 2020, for example, the IRD demanded client data from local cryptocurrency trading platforms after deeming profits from Bitcoin and the like would be subject to capital gains tax. The shock move woke up the new breed of crypto-investors to their tax liabilities and the extensive powers of the IRD to enforce the law.
In general, the IRD says: “Because this area can quickly get complex, Inland Revenue’s focus is on ensuring information is available to the investor so they understand the taxation requirements of their investment income.”
The sweet taste of PIE
Managed funds offered in NZ offer a few different flavours: including Portfolio Investment Entities (PIEs) and Listed PIEs.
For the most part, PIEs offer the simplest tax solutions for NZ investors. As explained in the InvestNow Tax Guide, PIE tax is collected and paid by the fund manager and/or platforms on behalf of investors at their ‘prescribed investor rate’ (PIR).
PIE tax is usually classed as a ‘final’ payment with investors not required to file end-of-year returns with the IRD.
But keep in mind, the PIE fund tax relies on investors supplying their correct PIRs, which can change along with income. However, there are plenty of resources out there to help you work out what your PIR rate is, such as the IRD’s ‘What is my prescribed investor rate?’ webpage.
Last year the IRD discovered some 1.5 million PIE investors (including KiwiSaver members) were using wrong PIRs – split about 50/50 between too high and too low. The government granted new powers to the tax department in 2019, allowing the IRD to now notify both investors and relevant PIE fund providers if it discovers individuals have the wrong PIR.
However, the IRD do warn “This does not remove your responsibility to let your PIE know your correct PIR. It’s a good idea to review your PIR each tax year and let your [platform and/or fund manager] know of any changes,” the IRD says.
Listed PIEs — Take care if you’re on a lower PIR
The situation is slightly different for listed PIEs such as the Smartshares exchange-traded fund (ETF) suite popular on InvestNow.
Listed PIEs are all taxed at a flat 28% (the top PIR). Investors on lower tax rates can claim back any overpaid listed PIE tax by filing an end-of-year return: this strategy only works if investors have other income to claim against, which may not be the case for children, for example.
The last bite is always the best
IRD has yet to widely enforce the ‘active trader’ capital gains taxes on retail direct share investors using online platforms, but there’s definitely a risk of them doing so.
…Something to be aware of if your find yourself getting stuck into shares.
July 7, however, will remain a good day for Kiwis to have a PIE…