Special report on the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021
Portfolio investment entities – remedial amendments
- Changing the due dates for locked-in PIEs
- Changes to the PIE schedular income year-end adjustment rules
Changing the due dates for locked-in PIEs
Sections 25E, 25J, 25K and 61 of the Tax Administration Act 1994
The amendment brings forward the date to 15 May by which multi-rate portfolio investment entities (PIEs) that are a superannuation fund or retirement savings scheme are required to file detailed income information for their investors.
Existing rules provide for a year-end square-up of the tax on income from multi-rate PIEs for natural persons. This PIE tax square-up happens alongside the year-end process for income tax. The outcome of the square-up is applied to the person’s end-of-year income tax position, resulting in one overall tax refund or bill, if any. However, currently the due date for filing of PIE information is not standardised which can result in delays in squaring up taxpayers PIE tax.
The amendment brings forward the filing due date by which multi-rate PIEs that are a superannuation fund or retirement savings scheme are required to file detailed income information for their investors to 15 May, to align with that of other multi-rate PIEs and enable the year-end square-up.
This amendment applies retrospectively from the 2020−21 income year to align with the application date of the new PIE rules. The first filing due date under the change is 15 May 2021.
For individuals who only have reportable income, (income that Inland Revenue receives regular information about, typically from third party payers such as employers), the year-end process for tax on PIE income is an automated process at the same time as the auto-calculation process for income tax.
Section 25K of the Tax Administration Act 1994 has been amended to require multi-rate PIEs that are a superannuation fund or retirement savings scheme (for example, a locked-in fund) to file the detailed income information for their investors by 15 May each year (previously 30 June), to align with other, non-locked-in funds.
This avoids delays to the year-end income tax automatic calculation process for a large number of individuals under the new PIE tax square-up.
Changes to the PIE schedular income year-end adjustment rules
(Sections BC 7, DB 53, HM 36B, HM 52, HM 56, LA 6, LS 3, LS 4 and YA 1 (residual income tax) of the Income Tax Act 2007)
Amendments have been made to the way in which the portfolio investment entity (PIE) year-end process works to clarify the rules, and to simplify and future proof the calculations.
The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 introduced changes to allow for overpaid tax on PIE income of individuals to be refunded from the 2020/21 tax year. This is achieved through a year-end square-up comparing the amount of tax paid on PIE income during the year (by PIEs on behalf of their investors) with the amount of tax that should have been paid on a person’s PIE income for the tax year. This year-end square-up addresses any over- or underpayment of tax on PIE income during the tax year. Any resulting refund due or tax payable is added to the person’s end of year tax position and would either be refunded, payable, or would reduce the person’s tax payable or reduce the person’s tax refund.
These current amendments clarify the year-end adjustment process and better integrate it into existing income tax legislation and processes.
All references are to the Income Tax Act 2007 unless otherwise stated.
The key changes are as follows:
- The year-end adjustment calculation formula described in legislation is replaced with an outline of what the Commissioner needs to take into account when calculating the adjustment.
- PIE losses and loss tax credits attributable to a natural person investor are included when calculating the individual’s PIE schedular tax adjustment.
- Only taxpayers who have used the incorrect prescribed investor rate (PIR) or who have changed their PIR during the year will have additional tax to pay or a refund from a PIE schedular tax adjustment.
- Clarification that the year-end PIE schedular tax adjustment:
- applies only to natural person investors who are resident in New Zealand, and
- does not apply to a natural person who derives PIE income as beneficiary income from a trust that is not a PIE.
- Multi-rate PIE income is taxable income for the purposes of the calculation of the PIE schedular tax adjustment only. This limits the removal of PIE income from excluded income.
- The PIE schedular tax adjustment will form part of an investor’s residual income tax for provisional tax purposes.
The amendments apply retrospectively from 1 April 2020, when the new year-end PIE tax adjustments came into effect.
PIE schedular income year-end adjustment calculation
The year-end adjustment calculation formula described in subsections HM 36B(2) and (3) was overly prescriptive. This risked preventing the ability to include some types of attributed tax credits in the calculation for the benefit of the investor both in the 2020–21 year or in the future as more detailed information can be supplied by fund managers.
The prescriptive formula is changed to an outline of what the Commissioner needs to consider when calculating the adjustment. The recommended amendments are designed to future-proof the calculation and enable the Commissioner to incorporate any potential improved data reporting around credits in the future.
A PIE schedular tax adjustment is only required where a natural person investor resident in New Zealand has had tax deducted from their PIE income using an incorrect prescribed investor rate (PIR). This could occur when an incorrect PIR is provided by the investor, where they have changed their PIR during the year, or where a PIE has not applied the correct PIR or applied a zero rate to some or all of the PIE income. This change eliminates the charging of small amounts of tax payable to investors due to the timing of the calculation process.
Tim is an investor in the B&E PIE. Tim started the year on a 17.5% PIR, however, after filing his tax return for the prior year he works out that his PIR for the year should be 28% but he fails to change his PIR with the B&E PIE. At the end of the year the B&E PIE undertakes a tax calculation using the following information:
|Tax on that @17.5%||$3,500|
|Tax to pay||$3,500|
The B&E PIE redeems some of Tim’s units and pays the PIE tax liability.
At the end of the year Inland Revenue performs the PIE tax adjustment for Tim’s PIE income from the B&E PIE using the following information and Tim’s correct PIR:
|Tax on that @28%||$5,600|
|PIE tax paid||$3,500|
|Tax to pay||$2,100|
Tim will have additional tax to pay of $2,100 to bring his PIE tax for the year up to the correct PIR. As Tim used an incorrect PIR and tax was deducted using that incorrect PIR during the year this amount will be charged to him.
The PIE schedular tax adjustment is now included as part of residual income tax, which forms the basis for any provisional tax liability. This amendment reduces complexity for taxpayers and Inland Revenue’s systems in that the tax liability for the year will be the same as their residual income tax liability on which provisional tax is calculated.
Noel is an investor in a KiwiSaver fund administered by Spoons Funds Limited (Spoons). When Noel opened his fund in the 2023–24 income year he gave Spoons his PIR at 10.5% thinking that he would get a good timing advantage from having his funds taxed at a lower rate than his correct PIR of 28%.
Noel is self-employed and he is a provisional taxpayer with residual income tax (before PIE schedular tax adjustment) in the 2023–24 income year of $26,000. Inland Revenue adds his PIE adjustment of $6,000 to his income tax liability for the year and his residual income tax for the 2023–24 income year will be $32,000 on which his 2024–25 provisional tax will be based.
Eddie, an employee of The Lost Cat Cattery Limited, is an investor in a PIE fund administered by Pioneer Phunds Limited (Pioneer). Eddie figures that it will be great timing advantage to delay paying as much PIE tax on his investment as possible and gives Pioneer a PIR of 10.5% even though he should be on the 28% PIR. Inland Revenue has notified Eddie that he is on an incorrect PIR but he does not notify the PIE.
At the end of the year Inland Revenue calculates his PIE schedular tax adjustment as $5,300 which he will have to pay but it will also mean that Eddie will be a provisional taxpayer for that year. He will be liable to pay provisional tax in the following year even though the rest of his income is taxed at source.
However, it is likely that cases such as the example of Eddie will be reduced, as Inland Revenue will be notifying investors that they are on an incorrect PIR to enable them to correct this and reduce the exposure to provisional tax liabilities.
PIE losses and loss tax credits are incorporated when calculating a person’s PIE schedular tax adjustment
PIE schedular tax adjustments calculated under section HM 36B only referred to attributed PIE income. This amendment clarifies that attributed losses and resulting tax credits are included when calculating the PIE schedular tax adjustment.
The amendment will ensure that a natural person investor, who is resident in New Zealand, that is attributed a loss that has or is entitled to have a tax credit calculated on the loss using their prescribed investor rate (PIR), can also receive an adjustment where the rate used is not the investor’s PIR.
Clarification of whom the PIE schedular tax adjustment rules apply to
Specific rules apply to non-resident investors in a multi-rate PIE and to trustees of a trust investing in a multi-rate PIE. The new year-end PIE schedular tax adjustment rules were not intended to make changes to these rules.
The amendments clarify that the new year-end adjustment only applies to natural person investors who are resident in New Zealand, and that the new year-end adjustment rules do not apply to a person who is an investor in a multi-rate PIE and derives income as a beneficiary of a trust that is not a PIE.
Limiting the removal of the excluded income status for multi-rate PIE income
Prior to the new PIE schedular tax adjustment rules being introduced, income from a multi-rate PIE was largely excluded income of a natural person, meaning this income did not flow through to the person’s income tax assessment. To better incorporate the new year-end adjustment process into existing income tax processes, this excluded income status was removed entirely, meaning attributed income from a locked-in PIE (such as KiwiSaver) was included in a taxpayer’s PIE taxable income.
The excluded income status is reinstated for multi-rate PIE income attributed to a natural person who is resident in New Zealand except for the calculation of the PIE schedular tax adjustment. This avoids any unintended flow-on consequences that treating the adjustment as non-excluded income might have for loss offsets and any added complications for Working for Families tax credits, student loans, and child support.
Iris works for Ghost Girl Comics Limited as an illustrator. She has a student loan obligation which is deducted from her salary each fortnight. She is also a member of KiwiSaver and has her fund held by One Step Ahead Funds Limited (OSA). When Iris started in KiwiSaver she made a mistake in calculating her PIR and gave OSA a PIR of 10.5% when she should have been on 17.5%.
At the end of the year Inland Revenue calculates a PIE schedular tax adjustment for Iris and because she was on an incorrect PIR she has additional tax to pay of $346.50. Although this amount is included in her income tax liability for the year it will be excluded income for the purposes of calculating her liability to repay her student loan.