PIE tax cap wouldn't work in capital gains environment: Advice

PIE funds could get a shake-up if New Zealand were to implement a broad-based capital gains tax regime.

Tuesday, September 25th 2018, 6:00AM

The tax working group issued its interim report last week.

It stopped short of recommending a capital gains tax yet, although it laid out two possible scenarios, and said it was the key issue for discussion.

In a background advice paper, given to the tax working group by its secretariat and issued along with the report, questions were asked about the sustainability of the PIE regime, if a capital gains tax were implemented on other investments.

PIEs were introduced to even out the imbalance created by a system in which directly-owned shares are not usually subject to tax on capital gains, while units in managed funds usually are.

But the secretariat's advice said there were anomalies in the tax rates, compared to personal income rates.

It suggested, if a tax on capital were introduced more widely, the 28% capped tax rate could be removed, allowing 30% and 33% tax rates to apply to PIE investors, as well as applying individuals' tax rates for those on lower incomes.

“The reason the top PIE tax rate is aligned with the company tax rate is the fact that it was difficult to make a higher rate stick,” the report said.

“There was a concern that companies could be used to avoid the higher personal tax rates. Taxing capital gains could mitigate this concern. In the absence of a capital gains tax, other changes such as mandating PIE tax treatment for managed funds may achieve this.”

It said the system would be more coherent if the capital income earned through a PIE was taxed at the investor's personal tax rate.

"Without doing this, the capped PIE rate will become more anomalous in an environment where we tax capital gains and make it more difficult to achieve other ways of avoiding the top-up tax, such as with dividend stripping transactions. It raises the question of why we tax active businesses that take risks and employ people at 33% (after dividends and if capital gains are taxed), but allow passive investments to be taxed at lower rates."

In its main report, the working group recommended removing tax on employer KiwiSaver contributions for people earning up to $48,000 and a five percentage point reduction in the lower PIE rates for savings in KiwiSaver accounts.

Tags: PIE tax