Written by Tom Stanley, Investment Adviser, June 2023
“Behind every kick of the ball there has to be a thought”
– Denis Bergkamp.
**Feedback from my team is that these notes can get a little deep (apologies, it must be the engineer in me). For those short on time, or attention, I will now provide a summary to start.**
Summary – (Too Long Didn’t Read)
- The rules of sports and tax have evolved over time and will continue to do so.
- The football goal as we know it changed regularly till 1891 – Teams don’t challenge the goal size (24ft x 8ft), they simply pick a goalkeeper who fast, agile, skilful… and at least 6 ft tall.
- Rather than fight the rules or the ref, you’re better “to learn the rules of the game. And then, play better than anyone else.”
- Investing in a tax inefficient format is akin to defending a goal when you can only pick a 4ft tall goalkeeper – you’re likely to leak points (or dollars as an investor) when you don’t need to.
- Investing through a tax efficient vehicle such as a ‘Multi-Rate PIE’ means you likely retain more of your returns.
- The top tax rate for a PIE is 28%, while the top tax rates for income (and proposed in the latest budget for trusts) is 39%.
- There are also tax savings to be had from those not on the top tax rates as PIE tax rates have different brackets to income tax brackets.
- Dean Anderson of Kernel in partnership with MyFiduciary have done a great job quantifying the tax implications of investing abroad through different forms here.
For those that have a minute, make a cuppa, and let’s dig in…
With the FIFA Women’s World Cup kicking off across AUS/NZ in July, this month’s note sees me ‘bend it like Beckham’ and bring together two crowd favourites ‘football’ and ‘tax’.
Hear me out.
You may be wondering how I can link the world’s most popular sport, with the least popular topic for most – Easy, to paraphrase the great Albert Einstein… in tax and in football:
“You have to learn the rules of the game. (And then, you have to play better than anyone else.)”
At a minimum this month’s note will improve your football pub quiz knowledge, but my real goal is to help you understand or at least question if you can potentially pay less tax as an NZ based investor – let’s dig in…
On scoring a ‘goal’.
I first heard of “The Cambridge Rules” for football (soccer) when living in Cambridge, UK. My wife to be and I were on a tour of Parker’s Piece (a large centrally located park in Cambridge) with Tony Rogers of Cambridge Tour Guides (highly recommended) – One of the points Tony made was that the spacing of the trees around Parker’s Piece inspired the width of the goal in modern football – but the story runs deeper.
With different rules throughout England, university was often the first time football players were exposed to other variations of the game – university football fields saw many disagreements – In 1848 teachers from Eton, Harrow, Marlborough, Westminster, Shrewsbury and Rugby met at Cambridge to work through their different variations of the sport. “The Cambridge Rules” of football were born and widely adopted. The rules allowed for forward passes, goal kicks, and throw ins – The game developed and played on Parker’s Piece largely resembles what is now known as ‘the beautiful game’.
While The Cambridge Rules formed the basis for what became football as we know it, one aspect continued to vary significantly – the size and form of the goal.
The Cambridge rules spoke of a goal being awarded when the ball was put through upright flag posts and ‘underneath a string’ – the issue? There was no initial height specification, meaning many clubs didn’t bother with a string, and allowed a goal to be scored between the sticks even if the ball was 30ft up in the air.
In 1863 ‘Association Football’ rules deemed that posts should be eight yards (24 feet) apart, which remains the official width of a goal to this day. But, the idea of a ‘crossbar’ rather than ‘string’ or ‘tape’ set at 8 feet above the ground was only made compulsory in 1882.
With two sticks and a crossbar, drama was still to play out – International matches between England and Ireland ended in near riots as goals were awarded that had apparently missed the goal. The solution? Inspired by the pocket of a pair of trousers, “a huge pocket” was developed, and by 1891 a prototype was complete – The ‘goal’ we now know with a ‘net’ was born (source: FourFourTwo, 2016).
On picking goalkeepers and tax rates – You can pick your tax rate?
While the football goal evolved over time, teams have simply adapted and played to the rules. Protesting and pushing to lower the crossbar for a skilful, but vertically challenged goalkeeper would be a joke – Teams simply resource their squads accordingly – For example, of the 36 goalkeepers to play in the 20/21 English Premier League (through Feb 21), not a single goalkeeper was less than 6 foot tall. In fact there were only 5 goalkeepers that were less than 6′-2, with most between 6’-2 and 6’-5 (source: Goal Keepers Anonymous, 2021).
Teams are not out there challenging or complaining about the height or size of the goal, they are simply picking a fast, agile, skilful keeper, who is at least 6 foot tall.
As investors we can learn from this pragmatic approach – When it comes to rules of football or tax – ‘it is what it is’ – we simply need to learn the rules of the game and play as best we can.
The recent Budget and Tax Minister’s press release titled “Tax bill improves fairness at home and abroad” put Family Trust tax rates in the crosshairs. The press release announced the Government’s proposal to lift the trust income tax rates from 33% to 39% – Effectively closing the loophole that existed between trust tax rates and personal income tax rates (that already max out at 39%). While the proposal is not yet legislation, it is worth unpacking so we can be prepared to play by the rules – Even if you are not in the top 3% that will be impacted most by this change, read on there may still be material tax savings to be had.
The humble ‘PIE’.
In my last note I made mention of the Portfolio Investment Entity or PIE fund. In its simplest form, a PIE is a ‘wrapper’ that you can invest through. PIEs were created in October 2007, following the introduction of KiwiSaver. Before then, tax laws meant that investors in New Zealand managed funds could find themselves paying much more tax compared to if they had invested directly in shares – this was a significant disincentive to investing in managed funds and would have discouraged people from joining KiwiSaver – the PIE rules changed that… and tweaks to tax laws (proposed and implemented) in recent years have made PIE wrappers even more attractive.
The PIE rules mean that investors pay tax at a personal ‘Prescribed Investor Rate’ or PIR that differs to their income tax rate (PAYE) – An investors PIR is usually lower than their income tax rate – but how much lower?
In some cases, 12.5% lower!
Per the IRD’s PIE Factsheet “Your PIR is determined based on the lower rate from either of the last two years’ income. For example, to determine your PIR income for the 2023 year you use the income details for 2021 and 2022”:
(Source: IRD PIE Factsheet)
Comparing this to the current income tax rates – it is easy to see the benefit for high-income earners – capping their tax at 28% rather than 39% has serious advantages. BUT, there are some serious savings to be had for those earning a total income of less than $70,000 also…
(Source: MoneyHub – New Zealand Tax Rates)
Putting the above two tables in context – Let’s compare two (fictional) people holding term deposits (TD’s) not in a PIE vs TD’s held via a PIE (yes you can access TD’s in a PIE wrapper):
- Karen is a stay-at-home mum with no income from employment.
- TD in a PIE: Karen would incur tax at her PIR rate, meaning she could hold up to $800,000 of PIE TD @ 6% and only pay tax at 10.5% – Her total return would be $48,000 for the year, $42,960 after tax.
- TD held direct: Karen would incur tax at her income tax rate. If she held $800,000 of direct TD’s @ 6%, she would pay an effective tax rate of 15.5% – Her total return would still be $48,000, but after tax she would get $40,580. That’s $2,380 of tax Karen would pay to the government that she doesn’t need to.
- Judy is a partner at a law firm earning $250,000 per year – let’s assume she also holds $800,000 in term deposits @ 6%
- TD in a PIE: Judy would incur tax at her PIR rate (28%). She would also receive a total return of $48,000, but would pay away $13,440 of that in tax – Leaving a net return of $34,560.
- TD held direct: Judy would incur tax at her income tax rate (39%). Still, she would receive a total return of $48,000, but would pay away $18,720 in tax – Leaving a net return of $29,280. That’s $5,280 of tax Judy would pay to the government that she doesn’t need to.
Simple tweaks, big tax savings.
Beyond term deposits & back to goalkeepers.
I have used term deposits in the above example as 100% of the investment return is income – it keeps the math simple – But, PIE wrappers are useful for many more asset classes – real estate, fixed income, infrastructure, stocks etc… Fund managers who invest into these asset classes on behalf of others (typically for a fee based on % of the $ invested) understand the benefits and efficiencies available. This has been seen in the number of PIEs being created by fund managers, especially in recent years – Per the Disclose Register, there are currently 472 non-KiwiSaver PIE managed funds available to retail investors in NZ.
To dig deeper into the benefit of a PIE in other asset classes, Dean Anderson of Kernel (in partnership with MyFiduciary) has done a great job quantifying the tax implications of investing into stocks abroad through different forms here.
New Zealand is still a small place, and putting a PIE wrapper around an existing fund does not come for free, this means that there are many funds available to NZ investors that are not PIEs – At Amicus, we always seek to invest through the simplest, most cost effective, and tax efficient options available, but sometimes the exposure desired or clients goals dictate our choices.
In short. Where appropriate, we choose to invest through PIEs.
Why? I have really laboured the point of tax efficiency in this note, but the benefits of investing through managed funds/PIEs extend further. To drag things back to where we started and reconnect with the goalkeeper analogy – the following traits offer good parallels between a modern goalkeeper and PIE Managed Fund:
- Speed: PIE tax is managed within the fund’s wrapper meaning your tax return at year end for a PIE fund is simple and efficient – also likely reducing accountancy fees.
- Agile: Pooling your assets with other investors via a managed fund (PIE or not) creates significant economies of scale, often meaning lower costs to buy and sell + better implementation of ideas.
- Skilful: Typically, a managed fund will have a professional fund manager selecting what to buy or sell, and what price is fair value – Anyone with some wayward punts on Sharesies knows making successful investment decisions in the world we live in requires skill and intellect.
- Height (at least 6 foot tall): As outlined above, investing through a PIE can mean a significantly lower tax burden for a NZ investor.
Having a 4-foot-tall goalkeeper may be unavoidable at times, but if there is a fast, agile, skilful ‘player’, that is at least 6-foot-tall on offer – I know where I would be putting my money.
Points to ponder & where to from here?
While we are not accountants or tax specialists at Amicus, it is our job to be aware of the different ways a person or entity (trust, company, or other) can invest. With this context we can often offer additional perspective when you are working through your taxes and structures.
A few questions to finish:
- Do you know how your investments are held?
- Your investments through KiwiSaver and via Amicus may well be efficient, but are there rules or nuances that have emerged since last time you reviewed your investments and plans?
If you want to discuss your situation and the options available to you, we are here to help – please feel free to book a call with one of our advisers (links below).
Please note: This is general tax information, not tax advice in any form. Amicus does not give tax advice, nor does the IRD – that is a job for tax agents and accountants.