KEY POINTS:
In this property obsessed nation, the average Kiwi may not have even heard of managed funds, let alone considered pooling his or her money with others and letting a fund manager choose where to invest it.
But anyone investing in KiwiSaver will soon be doing exactly that. Australians
have been doing it since 1992 through compulsory superannuation saving. Their managed funds industry now stands at more than $1 trillion.
In New Zealand there have been managed funds since deregulation in 1985, but the industry has stagnated since the early 1990s because of tax barriers which have made it more attractive to invest directly in shares or property.
Before October 1, all investors in active managed funds were taxed at 33c in the dollar because the funds were treated as companies. The funds were also taxed on any capital gains made from shares that were traded frequently.
Individual investors in direct shares were taxed at their personal tax rate (the rate at which you pay tax on your income) while property investors faced no capital gains taxes and were also able to claim certain expenses against the income on the property to put against tax.
But on October 1 the investment playing field was levelled. Investors will be taxed at theirown personal tax rate on income from any managed fund that has converted or set itself up as a portfolio investment entity (PIE).
Capital gains from investment in New Zealand and most Australian listed companies will be tax free.
Investments in non-Australasian companies will be subject to the Fair Dividend Rate, under which 5 per cent of the value of the overseas investments at the start of the year will be taxed. They won't be taxed if they have returned less than 5 per cent.
Those who are in the lowest tax bracket of 19.5 per cent will also be taxed at 19.5 per cent on any income from a PIE as long as their total income (salary and PIE income) is below $60,000.
This is designed to prevent investors such as retirees being pushed into the next tax bracket by their PIE income.
Investors in the higher 33 per cent and 39 per cent tax brackets will both be taxed at 33 per cent until April 1 next year, when the tax level will be dropped to 30 per cent.
Inland Revenue policy specialist David Carrigan says the changes mean managed funds can now go back on the investment menu for ordinary Kiwis.
"To invest directly in a company you need to have quite a lot of money. If you are an ordinary low-to-middle-income New Zealander your option really was to use a managed fund, but under the old rules ordinary people were being overtaxed. The changes have really levelled the playing field."
Not surprisingly, those in the fund management industry are very excited by the changes and the potential growth of the industry.
Binu Paul, general manager of NZX-owned fund research firm Fund Source, says the PIE regime is the biggest change for the industry since its inception in 1985.
"The PIE regime levels the playing field and on top of that KiwiSaver has come along. We have an industry that can potentially go only one way - and that is up."
He says there is around $22 billion currently in managed funds which are accessible to individual investors and around $55 billion invested across the managed funds industry in total.
Only the six default KiwiSaver funds have to be PIEs but it is likely that all KiwiSaver funds will be PIEs as well as new managed superannuation funds.
Roger Perry, savings and investment director of default KiwiSaver provider AMP, knows it is a positive move but believes it will take a while to shift the investment culture of New Zealand away from property.
"The average investor will take quite a little while to appreciate and understand PIE. Part of that is because of the cultural aspect of New Zealand - we are very wedded to property. We understand it. There is a long history of what we perceive to be good returns on property.
"But it's time people understood they now have other opportunities."
Brook Asset Management managing director Mark Brighouse sees property investment as the biggest challenge to PIE funds.
"There is around $300 billion to $400 billion in real estate in New Zealand. The question is now that the playing field has been levelled, will some of that move into managed funds?"
He is hoping the answer will be yes, and that New Zealand will follow in the footsteps of Australia. Home ownership rates there are about the same as in New Zealand but the average Aussie also has a big chunk in shares owned through a managed fund.
"We don't want to put the boot into real estate - having your own home is a good thing. But as a nation we can't create much wealth by selling houses to each other. We can't export them - we can sell them to a foreigner but then they just become part of the country's system."
Perry and Brighouse both make the argument that investing in managed funds has economic benefits for the entire country because the money has to be invested, pumping more into New Zealand businesses.
But for others, just getting New Zealanders to think about their investment options is the key.
Gordon Noble-Campbell, CEO of Spicers Wealth Management, says managed funds have always been attractive because of their ability to increase buying power by pooling money and gaining access to foreign companies.
"Looking at other parts of the world ... managed funds have been part of wealth creation so it is great that New Zealanders now have a strong reason to look at these types of vehicles."
Portfolio Investment Entities: The basics
What is a Portfolio Investment Entity?
A managed fund which meets set criteria for investing and taxes investors at their Prescribed Investor Rate (PIR). All default KiwiSaver funds are PIEs as well as most other KiwiSaver funds. Non-KiwiSaver funds can also be PIEs.
What is a Prescribed Investor Rate?
A PIR is the tax rate that your PIE uses to calculate the tax on the income it derives from your investment. The PIR is based on your taxable income - if your taxable income was $38,000 or less for each of the last two years and your total income including your PIE income was less than $60,000 you will be taxed at 19.5 per cent. If you are in the higher tax brackets and normally pay either 33 per cent or 39 per cent on your income you will be taxed at 33 per cent. From April 1 next year this will drop to 30 per cent.
When do you need to provide your PIR?
Your PIE will request your PIR and IRD number from you before it calculates the tax on the income it allocates to investors. This should be before the end of the tax year on March 31. The PIE will then pay the Inland Revenue the correct amount of tax for you so you don't have to fill out a tax return. You will need to review your PIR on an annual basis and let your PIE know if it changes.
What happens if I don't let my PIE know my PIR?
You will be charged at the higher rate of 33 per cent.
