Tax hikes make PIEs shine

Financial advisers can’t control the markets but they can control what their clients pay in tax.

Wednesday, June 7th 2023, 6:00AM

by Andrea Malcolm

Speaking on the release of Kernel Wealth Management’s new tax guide for international equities, CEO Dean Anderson says, tax should be part of all investment planning and client advice.

He hopes the new paper, developed with My Fiduciary, will make advisers aware that tax differences between various products can make a meaningful difference to returns. That scrutiny should extend to the complexity or paperwork burden around meeting tax obligations.

“It should be part of the consideration, particularly when we go into a period where returns are lower, as tax is something we can control.”

Since Kernel’s last tax guide came out in 2020, the main change in the tax regime has been the introduction of a 39% trust tax rate. Although the report was written before the newly announced 39% tax rate, advisers can still look at it through that lens, says Anderson.

For funds and equities outside New Zealand, extra taxes may offset gains from the lower management fees of huge overseas fund managers. The report summarises the tax take drag due to tax for the most common investment vehicles, including UKITs (UK Investment Trusts), AUTs (Australian Unit Trusts) and fixed income, used by New Zealanders. All have potential for tax leakage.

For an investor in the top marginal tax rate investing in international equities, tax will reduce long-term returns by 1.3% to 2.9% depending on how the investment is set up. For Australian equities, the tax drag ranges from 1% to 2.7% per annum.

And although investors can benefit from FIF (foreign investment fund) rules allowing them to change the tax calculation method each year, this comes with the cost of a greater paperwork burden and may need extra advice from a tax accountant.

For those who can’t switch from year to year, a New Zealand unlisted PIE will always be the most tax efficient option, says the guide. For a tax paying investor, saving varies from 0.55% to around 0.9% per annum compared to other investment options.

Kernel is seeing a shift in advisers wanting to move to PIE-based products for tax benefits and simplicity, says Anderson.

“A lot of conversations we're having at the moment, particularly as people have been thinking about changes to the trust rates as well, are around how to get into PIES and how much better off their clients will potentially be. The purpose of the guide is to give a sense of what those numbers might look like. The gap between a 39% top rate or trust tax rate and a 28% PIE rate is now hard to ignore. I think all trustee customers will probably be asking their advisers or brokers what they are doing about tax?”

He says a lot of investors and advisers have used AUTs historically because there has been a limited range of PIE funds available.

“And we often haven't had the types of strategies or manager options available overseas, so naturally, a lot of advisers will be holding offshore-based funds to get exposure to the styles they need for their clients.

“I think that’s starting to change. We've seen a lot more PIEs come to market in New Zealand. Kernel itself now provides a choice of 19 different funds that didn't exist three years ago.”

On the selection of PIE products now on the market, Anderson thinks there are now enough building blocks available for a core portfolio for the majority of clients.

Tags: Kernel