Understanding how your investments are taxed can make a meaningful difference to your long term returns. One of the most important tax structures for New Zealand investors is the Portfolio Investment Entity fund, or PIE fund.
What is a PIE Fund and Why Should You Care?
If you’ve ever felt like investing was only for people who speak a second language, one made entirely of jargon, you’re not alone.
In this article we break down one of New Zealand’s most investor-friendly structures: the PIE fund.
The basic idea
A PIE is a type of managed fund with a special tax status. The New Zealand government introduced PIEs in 2007 to make saving through managed funds fairer and more attractive for everyday investors.
The big tax advantage
With a regular managed fund, your investment returns could be taxed at a flat rate of up to 39%.
With a PIE fund, your returns are taxed at your Prescribed Investor Rate (PIR), which is based on your income.
If your marginal tax rate is 33% or 39%, your PIE tax rate is capped at 28%.
If your marginal tax rate is below 28%, your PIR generally matches your income tax rate – so you don’t pay more than you should.
Before PIEs
Before 2007, investing directly in New Zealand shares meant you only paid tax on dividends. Any growth in the value of your shares was tax free.
But if you invested through a managed fund, you could be taxed on both the dividends and the growth because the fund was seen as a share trader. PIE funds fixed this imbalance. Today, investing through a fund is treated much like investing directly.
What about investing overseas?
Overseas investments are taxed under the Foreign Investment Fund (FIF) rules. These rules can be complex, and choosing between calculation methods often requires an accountant.
Some investors try to save money and reduce their tax bill by switching between these calculation methods. In theory, this could save around 0.20% per year. In practice, the extra costs, i.e., accounting fees, platform costs, foreign exchange charges – usually outweigh any benefits.
For most people, the simpler (and smarter) option is to use an unlisted New Zealand PIE fund for international investments. The fund handles all the tax calculations for you at a predictable flat cost. No accountants, no complex forms, no surprises. For example, Kernel charges 1.40% per year in total tax cost for their international funds.
The bottom line
PIE funds were designed to make investing simpler and fairer. They:
• Tax your investment returns at your PIR.
• Handle the complex tax calculations inside the fund.
• Make investing in both New Zealand and overseas shares simpler and fairer.
If you’re looking for a straightforward, cost-effective way to grow your savings and investments, a PIE fund is one of the most accessible tools available to New Zealand investors.
