We still have clients using the wrong tax rate for portfolio investment entities (PIEs). For the purposes of this article, we will assume your PIE income is less than $22,000.
Investing money through a PIE may save you tax. If your income is more than $48,000 you will save between two and five cents in the dollar. If you have a family trust, you can save 5 cents in the $ tax on its income. If the trust distributes income to beneficiaries, use 0% for your PIR.
If you’re putting money into a savings account, find out if you can get the same interest rate by investing through a PIE and you may be able to save tax. Banks are unlikely to remind you, so remember to ask.
Note: For individuals on incomes below $48,900, investing in a PIE will usually offer no advantage. The tax rate in a PIE is the same as the ordinary income tax rate for individuals. A PIE therefore is usually best avoided as you can’t get ripped off in the following ways:
1. If the husband and wife were to invest the sum jointly and one of them was on a higher tax rate than the other, they would have to have the whole sum taxed at the higher tax rate.
2. If you supply the wrong tax rate (called PIR or prescribed investor rate) and it is too high you can’t get the overpaid tax back. If the rate is too low, you have to put the income from the PIE in a tax return and pay the shortfall.
Each year check before you confirm your PIR. For the year ended 31 March 2013 look at your top tax rate for your 2011 tax return and your 2012 tax return, (if this has been completed). Take the lower one. For example, your income for the 2011 year is $47,000 and for the 2012 year it is $51,000. The highest tax rate on $47,000 is 17.5% so your PIR is 17.5%. The highest tax you pay on $51,000 is 30% but your PIR is 28%. You may choose the lower i.e. 17.5%.
Note: A PIE could actually save you a massive 12.5% (30%-17.5%) in the above example. This is because if your interest income for 2013 was going to be taxed at 30%, you can legitimately use a PIE to get it taxed at 17.5%!