Matthew Goodson's Tax response in the September InvestNow Magazine.
1. What do you think Kiwi investors should think about when it comes to tax in their investing and why – or should they simply ignore tax altogether?
Investors should always consider the effects of tax on their investment decisions. Tax reduces the final cash return investors receive in their pockets.
Further, in a lower return period, which many commentators say we are heading into1, anything that reduces your return, like tax and fees, may have a relatively larger adverse effect. For example, while investors in a Portfolio Investment Entity (‘PIE’) are not taxed on capital gains, they may be subject to a tax on a deemed 5% rate of return on offshore companies and on Australian stapled securities such as property trusts.
Investors should ensure they are on the lowest possible PIE tax rate (called a Prescribed Investor Rate or ‘PIR’) possible. A good time to do this is when your provider sends out your annual tax statement in May/June each year. That will ask you to confirm back your PIR. If you have overstated your PIR, you may not get back any overpaid tax from Inland revenue.
Investors should ensure that they are investing in the most tax effective vehicle possible. Inefficient investment vehicles can mean you pay more tax than necessary for access to the same investment assets. More about this below.
2. Within Salt, can you give us some examples of how you have structured a fund or portfolio to make it tax efficient and/or take into account tax issues or considerations?
The Salt NZ Dividend Appreciation Fund is a tax efficient fund as it is a NZ PIE and provides investors with a capital gains tax free return on the NZ shares it invests in. Investors only pay tax on fund’s dividend income at their PIR tax rate. The PIE tax is typically paid once a year as at 31 March.2
The Salt Long Short Fund & Salt Enhanced Property Funds are also NZ PIEs. As well as the advantages above, these funds also invest in Australian listed shares and also Australian stapled securities. Like NZ, Australian listed shares3 are capital gains tax free, however, Australian stapled securities, such as property trusts, are taxed on a deemed 5% annual return, meaning that any dividend or income from these securities over 5% is effectively tax- free. These Salt funds are structured to take advantage of this treatment and pass this benefit on to investors.
The Salt Sustainable Global Shares Fund is a NZ PIE that invests in global shares. Salt have taken the time to open custody accounts in the relevant global markets. This means the fund holds its shares directly rather than investing via another inefficient offshore vehicle such as an Australian or European unit trust. This is a critical difference. The benefit of this structure is in providing our NZ investors with access to foreign tax credits issued by the tax authorities of those global markets. These credits can be used to reduce your tax liability.
3. To what extent should portfolio construction incorporate the specific tax position of the individual end-investor – can you give examples of how an ideal portfolio may differ for different tax rate investors?
Structuring your investments via a PIE may have tax advantages for you, if:
you pay income tax at a rate of 30%, 33%, or 39%. That’s because the highest prescribed investor rate (PIR) is 28%;
you’re a trust with a trustee tax rate of 33% or 39%, or a trust beneficiary on a 30%,
33%, or 39% income tax rate; or
you’re now paying a higher rate of income tax, as a result of a salary increase, or you’ve returned to the workforce following a period of being out of work.
Another common example is a NZ resident taxpayer wanting to invest in NZ and/or Australian- listed shares. Careful thought should be given whether to invest directly or via a PIE vehicle. The benefits of investing via a NZ-managed PIE, such as the Salt NZ Dividend Appreciation Fund, are:
Investors pay tax at their PIR tax rate, which is usually slightly lower than their income tax rate;
a PIE is a safe harbour from paying tax on capital gains when selling New Zealand and Australian shares, while regularly buying and selling shares could be classified a trader by Inland Revenue and be liable for tax on any capital gains and dividends; and
you are utilising the investment expertise of Salt’s highly experienced managers who have a multidecade perspective on investment opportunities and investment risk.
For more information on PIE tax go to the following link.
1 See NZ Super Fund active strategies buffer difficult year in markets, NZ Super, 12 September 2022
2 Investors may also pay PIE tax on withdrawals, depending on the PIE elections of the Manager.
3 Shares listed on the ASX200