Tax Efficient Investing with PIE investments

Introduction

Are you concerned about paying the top tax rate on the interest income from your term deposits? In this blog post, we'll explore a tax-efficient strategy to help you cap your tax rate at 28%, allowing you to maximize your savings. Recent proposed tax rate changes and rising interest rates have made this approach even more relevant.

Understanding Tax Rate Changes:

In April 2021, significant changes were made to the top marginal tax rate. For individuals with taxable income exceeding $180,000, the tax rate surged from 33% to 39%. Furthermore, the government's plan to raise the trust tax rate to 39% from April 2024 means this higher rate will apply to all trust income.

The Impact of Rising Interest Rates:

Over the past 18 months, interest rates have experienced a substantial increase. With higher interest rates on term deposits, the need for tax-efficient investing strategies has become more crucial than ever.

Introducing PIEs: A Tax-Efficient Solution:

In October 2007, the government introduced the Portfolio Investment Entity (PIE) regime, offering a favorable tax treatment for specific investments. One of the most significant advantages of PIEs is that they cap the top tax rate at 28% for both individuals and trusts. For those in the 39% tax bracket, investing through a PIE can result in significant tax savings.

Calculating PIE Fund Tax Savings:

For instance, if you have a $100,000 term deposit earning 5.2% annually, transitioning to a PIE can save you $572 in taxes as a 39% taxpayer. We'll explore more examples and scenarios to help you understand the potential savings.

PIEs for Various Investment Strategies:

PIEs aren't just for long-term investment strategies with diverse assets like bonds, shares, and property. They can also be utilized for short-term investments, such as bank term deposits. Cash PIEs, for example, invest in short-term bank bills and deposits, delivering returns comparable to standard term deposits but with the tax rate capped at 28%.

Comparing Term Deposits to Cash PIEs:

We'll delve into a comparison between term deposits and Cash PIEs. To achieve an equivalent return after taxes, a term deposit would need to earn 6.1% for a 39% taxpayer, while a Cash PIE returning 5.2% after 28% PIE tax could be a more tax-efficient choice.

Exploring Your Tax-Efficient Options:

If you're curious about whether PIEs can offer tax efficiency compared to your current term deposits or longer-term investment portfolio, don't hesitate to reach out. Contact us, and we'll connect you with a financial adviser who can discuss your options in detail.

In conclusion, understanding how to optimize your tax position and cap your tax rate at 28% through PIEs can help you make the most of your investments. As Morgan Stanley wisely said,

"You must pay taxes. But there is no law that says you gotta leave a tip."

Explore tax-efficient strategies and start saving more of your hard-earned money today.

Written from content provided by NZ Funds. If you would like us to put you in contact with one of their advisors to discuss their current investment offerings, let us know, contact us at Business Like NZ Ltd. We have been Chartered Accountants for Auckland (and beyond) for over 30 years! – 09 262 0726.