Who ate all the PIEs? Not enough of us it would appear.
A PIE is a Portfolio Investment Entity, something you should know if you have KiwiSaver or other investments.
PIEs allow you to squeeze a bit more bang for your buck from investments, which can add up over the 25 years of a KiwiSaver commitment.
The trouble is that the eye-glazing-over name is the exact reason why many Kiwis have never heard of them. Eleven years on from their inception I still struggle to describe the concept.
More cash in your pocket
Just to confuse readers, the first thing you need to know is that, technically, PIEs aren't investments. It's a way of taxing investments that mean you and I end up with more cash in our pockets after the taxman has had a go.
PIEs can be wrapped around all sorts of common investments such as term deposits and managed funds.
What's good about PIEs is that the highest tax rate is 28 per cent. So, if you're a 30 or 33 per cent taxpayer you're handing less moolah to the government.
At the time of writing, $10,000 invested in a regular nine-month term deposit at ANZ was paying 3.45 per cent interest.
The ANZ's term PIE for the same period and the same minimum investment paid 3.45 per cent. If, however, you're a 30 per cent taxpayer the PIE tax rate means your investment earns the equivalent of 3.58 per cent interest, and for 33 per cent taxpayers it's 3.75 per cent.
Term PIEs like these are simple investments that anyone investing in a term deposit should consider.
Most of the banks wouldn't answer my question about how many customers chose PIEs over equivalent investments. ANZ did comment that its term PIE balances are growing at roughly three times the pace of term deposit growth, which is good news.
Getting more of the Pie
In addition to term deposits and KiwiSaver, the other common investments that can be taxed favourably as PIEs are managed funds, John Berry of Pathfinder says.
The fund management industry prefers PIEs, he says, and the taxpayer benefits so it's a win/win.
PIEs are especially good for Kiwis who want to invest some of their money in other economies in order to spread their risk. Ordinary overseas investments are a paperwork nightmare for taxpayers because each and every dividend needs to be converted to New Zealand dollars and then a complex tax equation applied to them.
If those overseas investments are in PIE funds the foreign investment fund tax calculation is all done painlessly in the background.
Berry points out another advantage of having New Zealand-based PIEs instead of Australian funds, which have been popular with investors in recent decades. The New Zealand-based PIE funds hedge against currency fluctuations, meaning if the exchange rate between Australia and New Zealand, for example, drops by 10 per cent you don't suddenly lose 10 per cent of your investment.
The big winners tax wise are Kiwis on 30 or 33 per cent tax rates. Lower earners with investments who pay 10.5 or 17.5 per cent tax can still benefit from investing in PIEs instead of equivalent bank accounts, term deposits and funds.
Those earning between $14,000 and $48,000 from day jobs whose investment returns would tip them into a higher tax bracket can really benefit.
That means paying 17.5 per cent on their investments if their overall income including PIE returns is less than $70,000, says Jolayne Trim, senior tax advocate at Chartered Accountants Australia and New Zealand.
"For those on the 10.5 per cent rate, the benefit is slightly more complex but there is still a benefit."
There are Kiwis with investments who on paper don't have huge incomes and fall into this category. Retirees or those whose businesses have a low paper profit could fit this bill.
Are you paying too much?
Whether you have KiwiSaver or other PIEs such as term deposits and investment funds it's a really good idea to double check that you're paying the right tax rate.
If you don't tell your provider, they have to deduct tax at 28 per cent. That could be affecting growth on your investments significantly – especially if it's a long-running one such as KiwiSaver.
If you elect the wrong tax rate for your PIEs you may have to complete a tax return and pay back the money, which is hassle and expensive. If you've overpaid you can't apply to get that overpaid tax back. It's too late.
The ASB has a useful calculator at Tinyurl.com/ASBPIR