I came across a fund manager the other day advertising ‘the tax advantages of PIE funds’.
PIE stands for ‘Portfolio Investment Entities’.
The scheme came in at around the time of KiwiSaver. It does have some tax breaks:
- The managed fund works out the tax and deducts it from your fund returns. You usually only need to make sure you’re on the correct rate.
- The tax is deducted at your PIR (prescribed investor rate).
- This rate is a maximum of 28% — so even those on 33% or 39% income-tax rates may benefit.
International share portfolios
The New Zealand and Australian stock markets have limitations. Limited sectors. A lack of value (at least here in New Zealand, where the exchange seems picked bare).
Right now, there are opportunities in European property, banking, and manufacturing. There are also opportunities in American technology and innovation.
Smart investors willing to embrace some risk do not want to miss these opportunities.
Now, this is where having your own international portfolio built directly in a managed account (rather than a managed fund) could have tax advantages beyond the PIE.
Direct FIF accounts vs. managed PIE funds
Source: AI image generated by Freepik AI
Individual investors with global share portfolios of over $50,000 come under the FIF (foreign investment funds) tax regime in New Zealand.
- The FDR (Fair Dividend Rate) is often used by PIE funds to calculate tax on their international shares.
- Under this method, a 5% investment return is assumed, based on their average portfolio value for the year.
- Investors who directly own international shares (such as in a managed account) can choose their FIF method.
Advantages of a directly managed FIF
- You can choose the FIF method if you’re an individual or eligible trustee.
- For example, you can choose to use the CV (comparative value) method or the FDR method — at 5% of the opening balance at the start of the financial year.
- The CV method is usually elected if capital returns are less than 5% for the year. This will lower or negate any tax due for that year.
- This relief is not available to PIE fund investors.
- Further, direct investors can calculate tax based on the opening value of their portfolio at the start of the financial year. This has advantages particularly where the portfolio increases over the year.
- When starting out, direct investors may also effectively benefit from a tax holiday in their first year. This is a benefit not available in PIE funds.
Structuring a portfolio for FIF tax
Some wholesale managed account clients are concerned about the tax work involved in reporting. This is usually not onerous at all.
- A statement for the New Zealand financial year can be downloaded from the broker.
- The process of preparing a FIF return from this can be made into a template. We find returns can be done in less than an hour.
- IRD provides an FIF exemption tool here to work out any ASX shares that may be exempt.
- It may also be possible to deduct any foreign tax paid on dividends.
Finally, managed account investors can optimise for tax with skilled management.
- Typically, we focus on achieving dividend yields that over time work out to be above the FDR (fair dividend rate of 5%).
- This effectively means the yield beyond 5% can be tax-free when using this method.
- In a down year, where the CV method may be used, some of the dividend income may effectively be tax-free if the overall portfolio value falls more.
International investing presents many opportunities.
When it comes to tax, it is our experience that individually managed accounts may have some advantages over managed funds and PIE funds.
Regards,
Simon Angelo
Editor, Wealth Morning
(This article is the author’s personal opinion and commentary only. It is general in nature and should not be construed as any financial, tax or investment advice. Please contact a licensed Financial Advice Provider to discuss your personal situation. Wealth Morning offers Managed Account Services for Wholesale or Eligible investors as defined in the Financial Markets Conduct Act 2013.)