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Should I Invest In A PIE Or Term Deposits?

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Mary Holm
Mary Holm


Say I have a personal income derived solely from New Zealand share dividends in the $40,000-$70,000 range (gross dividend total). Thirty-three per cent will already have been garnered in the form of imputation credits, so I will have been over-taxed.

Come year-end, IRD will recognise that I have been over-taxed, but because the tax was in the form of imputation credits, I will earn tax credits for the following year - not a tax refund for the amount of tax overpaid. This tax credit isn't much use to me if I have no other source of income.

I can get around this by investing some of the money in term deposits instead, and any of the tax taken on the interest can be refunded to me at year-end if I have been over-taxed. My term deposit is effectively ``tax-free', in the sense that any tax taken will be returned if I have earned matching imputation credits.

If I invested in a PIE instead of a term deposit, wouldn't I be worse off?


Mary Holm: You've outlined the tax position on imputation credits and term deposits correctly. So what happens when we introduce PIEs - or portfolio investment entities - into the mix? It all depends.

Firstly, the key features of PIEs are:

  • The highest tax rate for any investor in a PIE is 30 per cent. This is helpful to people earning $40,000 to $70,000, who normally pay 33 per cent, and particularly good for those earning more than $70,000, who normally pay 39 per cent.
  • Lower-income investors will in most cases be taxed at 19.5 per cent on their PIE income. This is of some help to those earning $14,000 to $40,000, who currently pay 21 per cent - although those earning less than $14,000 would be worse off in a PIE investment.
  • What's more if, in any of the two prior years, your non-PIE taxable income is below $38,000 a year, and your total taxable income including PIE income is below $60,000 a year, then all of your PIE income will be taxed at 19.5 per cent. It sounds a bit complicated, but think it through. If it would apply to you, it could mean big tax savings.
  • A PIE that invests in New Zealand shares and/or in most large Australian listed shares won't be taxed on capital gains on those shares, even if the shares are traded frequently. In the past, schemes that traded frequently did pay tax on that income. Managed funds that haven't become PIEs still do - as do some direct investors in shares.
  • If you don't currently have to file a tax return, being in a PIE won't change that. The PIE calculates the tax payable on the share of its income that it allocates to you. It then pays that to Inland Revenue without your bothering about it.
  • As long as your PIE income doesn't have to be declared on a tax return, it won't affect entitlements such as Working for Families, child support, or repayments on student loans. This could make a big difference.

Now to your question. I assume you are talking about direct investment in shares, and are considering investing some of the money in a cash PIE - which is similar in many ways to a term deposit. Would it be better than a term deposit in the situation outlined?

No. Pie income does not go onto your tax return, so you wouldn't be able to use any excess imputation credits you have from your direct investments.

What's more, if you invest in a term deposit and work out that you will be entitled to a refund of the tax withheld from your interest (the resident withholding tax) of more than $500 a year, you could apply for a certificate of exemption. This would reduce the tax withheld through the year, so you would get the benefit of the money sooner.

However, if you are a bit flexible, there's a way you can achieve your goal using PIEs, and pay less tax in total.

To do this you would need to do your New Zealand share investing via a PIE that holds New Zealand shares, rather than investing directly. PIEs have their advantages, apart from tax. Generally, you can get much wider diversification, which reduces risk. And the fund managers keep track of dividends and other paperwork.

Then there's the tax. Most share PIEs can themselves use imputation credits, which will reduce the tax you pay on your PIE income.

Let's look at an example from Inland Revenue. The PIE allocates to you, as an investor, $100 of dividend income, $10 of deductions and $33 of imputation credits.

The taxable income would be $90 ($100 minus $10) and the tax on that would be $17.55 (at the 19.5 per cent rate) or $27 (at the 30 per cent rate). The PIE would then subtract the $33 of imputation credits, giving you a refund of $15.45 or $6.

You would be credited with that refund, which would go into your PIE account, buying you more shares.

You wouldn't need to file a tax return to do this. The PIE would take care of it all for you. And because you could take advantage of the generally lower tax rates in PIEs, your total tax would be lower.

Another advantage of this is that you could keep all your money in shares, if that is your wish - without having to put some in term deposits solely for tax reasons.


Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.     

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