Key Takeaways
- New Zealand’s Prescribed Investor Rate (PIR) for Portfolio Investment Entities (PIEs) is set using the lower of the taxpayer’s income in the two preceding financial years, not the current year’s income.
- Consequently, a sharp drop in earnings—such as upon retirement—can leave a taxpayer taxed at a higher PIR than their present marginal tax rate would warrant.
- PIE tax rates are 10.5 % (income ≤ $15,600), 17.5 % (income $15,601‑$53,500) and 28 % (income > $53,500).
- While many sources claim PIE term deposits are advantageous only for those whose marginal tax rate exceeds 28 %, a more nuanced approach can lower overall tax by using ordinary term deposits to fill lower tax brackets before allocating the remainder to PIEs.
- Taxpayers can notify their PIE provider of the correct PIR; if the rate applied is wrong, Inland Revenue can perform a “wash‑up” to adjust the tax.
- Some PIE products offer slightly lower headline interest rates than comparable non‑PIE products because providers retain part of the tax advantage, creating an arbitrage effect.
- Strategic mixing of ordinary and PIE term deposits can be tax‑efficient for retirees with substantial investment income, but the benefit depends on individual income levels, PIE rates offered, and the willingness to manage separate tax notifications.
Introduction to the RNZ podcast and invitation for questions
The article opens by promoting RNZ’s podcast “No Stupid Questions,” hosted by Susan Edmunds, which invites listeners to submit money‑ and economy‑related queries. Readers are encouraged to send written questions or, preferably, a voice memo to [email protected]. This sets the context for the subsequent reader‑submitted tax dilemma that follows.
Reader’s personal tax situation and resulting bill
A retiree shares that after completing a draft tax return they received a bill for $1,469.75. The charge arises because their Prescribed Investor Rate (PIR) was calculated at 28 % based on income from the two previous years, even though their current income consists solely of New Zealand Superannuation, which would place them in a 17.5 % PIR bracket. The sharp decline in earnings after retirement has therefore produced an apparently unfair tax outcome.
Deloitte’s explanation of how PIR is determined
Phil Claridge, a tax director at Deloitte, clarifies that a New Zealand‑resident natural person’s PIR is always derived from the lower of the two preceding income years. This design ensures that PIE tax functions as a “final tax” for most investors, eliminating the need for annual wash‑ups. While this approach simplifies compliance, it can generate results that seem inequitable when a taxpayer experiences a significant income drop, such as upon retirement.
Plain‑language definition of PIE and PIR
The piece then explains that a Portfolio Investment Entity (PIE) is a type of managed fund whose investment returns are taxed at the investor’s Prescribed Investor Rate (PIR). The PIR depends on the taxpayer’s total income: 10.5 % for earnings up to $15,600, 17.5 % for earnings between $15,601 and $53,500, and 28 % for earnings above $53,500. By consolidating tax at the PIR level, PIEs aim to simplify the tax treatment of investment income.
Question about the tax efficiency of PIE term deposits
The reader queries whether the common claim—that PIE term deposits are only worthwhile for those whose marginal tax rate exceeds 28 %—holds true when considering New Zealand’s progressive tax system. They wonder if a combination of ordinary term deposits (taxed at the individual’s marginal rates) and PIE term deposits (taxed at a flat PIR) could yield a lower overall tax bill than investing entirely in one type or the other.
Illustrative scenario with NZ Superannuation and large term‑deposit holdings
To explore the question, the article presents a hypothetical retiree receiving $25,000 annually from NZ Superannuation and holding roughly $3 million in term deposits earning identical gross interest. If all funds were placed in PIE term deposits, the entire interest would be taxed at 28 % and excluded from taxable income. Conversely, keeping some funds in ordinary term deposits would allow the first slice of interest to fall into the taxpayer’s remaining 17.5 % bracket, with higher slices taxed at 30 % and 33 %. The analysis suggests that allocating enough to ordinary deposits to fully utilise the lower 17.5 % bracket before shifting the balance to PIEs could reduce total tax.
Insight from Chartered Accountants Australia & NZ on optimizing PIR use
John Cuthbertson, tax leader at Chartered Accountants Australia & NZ, notes that PIRs lower than 28 % are available for taxpayers whose income falls below the $53,500 threshold. He advises investors to inform their PIE provider of the correct PIR; if an incorrect rate is applied, Inland Revenue can perform a wash‑up to correct it. For ordinary term deposits, the resident withholding tax (RWT) rate must also be communicated to the bank. Cuthbertson recommends “being savvy” by first exploiting income that can be taxed at lower rates (e.g., via ordinary deposits) before moving the remainder into the PIE regime once income reaches the top bracket.
Consideration of PIE product pricing and provider arbitrage
The article cautions that PIE offerings sometimes carry slightly lower headline interest rates than comparable non‑PIE products because providers retain part of the tax advantage as a fee. This creates an arbitrage opportunity: the apparent tax savings may be offset by reduced returns. Consequently, investors should compare net yields after tax, not just the stated PIR, when deciding between PIE and ordinary term deposits.
Closing invitation to subscribe to RNZ’s money newsletter
The piece concludes by inviting readers to sign up for RNZ’s new money newsletter, “Money with Susan Edmunds,” promising further insights and practical guidance on personal finance and tax matters. This final call‑to‑action ties back to the opening invitation for audience engagement, reinforcing the publication’s commitment to addressing readers’ financial questions.