Despite increasing the trustee tax rate (and, previously, the top individual tax rate) to 39%, Parliament has made no changes to the tax rates applicable to income earned via portfolio investment entities (PIEs). The most common form of PIE fund attributes income to its investors and pays tax on that income at the investor’s prescribed investor rate, which is capped at 28%. As a result, trustees who choose to invest via a PIE, rather than holding investments directly, could increase their post-tax returns by as much as 18%.1
The potential rate saving associated with investing via a PIE has potential to strengthen demand for PIE structures.
The rate differential is particularly relevant to offshore fund managers that operate funds with a significant New Zealand investor base, or who are seeking to attract New Zealand investors. In the new tax rate environment, New Zealand investors may be incentivised to seek out PIEs that provide similar exposure to incumbent offshore funds, in order to increase their after-tax return. PIEs may not be attractive to all investors. In particular, investors that are natural persons or family trusts have greater flexibility regarding the calculation of their taxable income from offshore investments, which would not apply if those investors were to invest via a PIE. However, the rate advantage of investing via a PIE is material.
To remain competitive, offshore fund managers should be thinking about whether to establish PIE structures, as a conduit for investment into their main offshore funds. Whether establishment of PIE structure is warranted will depend on significance of the New Zealand investor base, and whether the establishment and operating costs associated with establishing a PIE in New Zealand are justified.
Offshore fund managers can establish and offer a managed fund PIE to “wholesale investors”2 in New Zealand, without being licensed in New Zealand as a fund manager or having the fund registered in New Zealand under the Financial Markets Conduct Act 2013. A governing document and information memorandum for the fund would be required, and the offshore fund manager may be required to register as an overseas company and financial service provider in New Zealand and comply with New Zealand anti-money laundering legislation.
For further information regarding the PIEs and their benefits, please contact Bell Gully’s fund management and tax advisers.
[1] Based on achieving post-tax returns of 72c in the dollar (reflecting a prescribed investor rate of 28%), compared to 61c (reflecting a trustee tax rate of 39%).[2] As defined in clause 3(2) and (3)of Schedule 1 of the Financial Markets Conduct Act 2013.