The New Zealand Budget announced that from 1 August 2024, the income tax brackets that dictate what tax rate applies to income earned by individuals will change. This, combined with the increase in the tax rate applicable to Trustees to 39% which came in on 1 April, will lead to some decisions for investors, particularly around resident withholding tax rates and Portfolio Investment Entities (PIEs).
Individuals will be asked to reassess their resident withholding tax rate. For some, where the same tax rate applies, there is nothing to do. For others, they may want to change to a new tax rate that better reflects the tax bracket they will shift into.
Combined with this, investors are also likely to be offered investments in a PIE. PIEs typically offer a lower tax rate for investors than their marginal tax rate.
Those who invest in PIEs through companies and those who are not New Zealand tax residents get little benefit as their rates are fixed at 0% and 28% respectively, regardless of their income level.
For most trustee investors, two rates may be chosen: 17.5% or 28%. If no rate is selected, a 0% rate is applied.
The 17.5% Prescribed Investor Rate (PIR) may be beneficial in a limited number of instances. This will be most beneficial where the PIE income will be distributed to beneficiaries and the beneficiaries’ tax rates are all 10.5% or 17.5% - i.e., they earn under $53,500 with the new tax bracket applied.
However, for others, there is no tax rate benefit to investing through a PIE with a PIR of 17.5% as the income will be taxed at either the trustee’s tax rate of 39% or the recipient beneficiaries’ marginal tax rate, while losses will generally be subject to the lower 17.5% rate. Instead, these trustee investors should be looking to apply a 28% PIR which becomes a final tax for them and any beneficiaries the PIE income is distributed to.
For individuals, there are new bands for PIRs as well, which will apply from 1 April 2025:
These bands are applied to the previous two years’ income and it is the lower tax rate from the prior two years that are applied.
For those individuals, particularly at the margins of the bands, investing in PIEs may no longer be that beneficial. However, for some of these individuals, PIE income cannot be avoided – KiwiSaver schemes are all PIEs. For other individuals, the substantial difference between a 39% tax rate and a 28% tax rate remains great value, particularly if there is no difference to the return being obtained.
If you are uncertain about these changes and what rate would be best for you, we urge you to talk to your tax advisor.
Richard Muth, Findex Senior Manager, Tax Advisory
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.
This document contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.