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If I Overestimate My PIR Rate Can The IRD Keep The Overpayment?

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Contributor:
Mary Holm
Mary Holm

Question:

I read in the Herald recently that if I underestimate my PIR tax rate for my KiwiSaver account then I will have to pay more tax, but if I overestimate the rate then it's tough luck and the IRD keeps the overpayment.
 
That seems a remarkably unfair situation. I guess this applies not just to KiwiSaver but all PIR investments. Why?

Answer:

Mary Holm: Firstly, yes, these rules apply to all PIEs, or portfolio investment entities, which include practically all KiwiSaver accounts as well as other PIE savings vehicles.

PIEs pay tax at 30 per cent unless an investor gives the provider their PIR (prescribed investor rate) and IRD number, in which case the investor's share of the income is taxed at their PIR - which might be 12.5, 21 or 30 per cent.

It's worth making the effort to look into this each year, as you could save heaps in taxes. Children are among those likely to benefit.

Inland Revenue's answer to your question is not particularly satisfying. PIE tax, a spokesman says, "is generally a final tax, and is not a withholding tax like resident withholding tax (RWT) that is deducted on behalf of the investor. RWT, but not PIE tax, can be refunded if it is more than an individual's tax liability.

"The relevant tax is paid by the PIE not the investor. That is, it is not the investor's tax and therefore cannot be refunded to the investor. Although a PIE pays tax based on the tax rates of its investors, it is still the PIE's tax."

What this is really about, I suspect, is that things might get horribly complicated if investors in PIEs started changing their minds about their tax rates. Tax on PIEs is taken care of by the PIE managers. It doesn't appear on our tax returns. So alterations looking backwards could lead to an administrative nightmare.

Given that many people's taxes are lower because they invest in PIEs, perhaps we have to accept that the onus is on us to make sure we tell our KiwiSaver or other PIE provider our correct PIR.

What are the correct rates, after the changes that took effect on April 1, 2010? Some articles have got this wrong, so I asked Inland Revenue to check that this rundown is accurate.

Your PIR is based on two components:

* Your taxable income, which excludes PIE income.

* The total of your taxable income and PIE income in the last two years that end on March 31.

Situation one: Let's look first at people whose income from their PIE investments is less than $22,000 a year - which will apply for the vast majority of people in KiwiSaver at this stage, unless they have other substantial PIE investments.

Where your taxable income:

* in either of the last two years is $14,000 or less, your PIR is 12.5 per cent.

* in either of the last two years is $48,000 or less, your PIR is 21 per cent.

* in both of the last two years is more than $48,000, your PIR is 30 per cent.

If you qualify for more than one PIR, use the lower one.

Situation two: If you have more than $22,000 in PIE income and your taxable income in both of the last two tax years is more than $48,000, your PIR is 30 per cent.

Situation three: This applies if you have more than $22,000 in PIE income and your taxable income in either of the last two tax years is less than $48,000. You'll need to find out your PIE income for the two years. Your PIE provider should be able to give you the number for the year ending March 2010 in the next month or so.

Then, in either of the two years - you can choose the year that gives you a lower PIR - see which of the following applies:

* Your taxable income is less than $14,000. If the total of your taxable and PIE income is less than $48,000, your PIR is 12.5 per cent. If the total of both incomes is $48,001 to $70,000, your PIR is 21 per cent. If the total of both incomes is $70,001 or more, your PIR is 30 per cent.

* Your taxable income is $14,001 to $48,000. If the total of taxable and PIE income is less than $70,000, your PIR is 21 per cent. If the total of both incomes is $70,001 or more, your PIR is 30 per cent.

Until this month, PIRs were 19.5 or 30 per cent. Unless both your old and new rates are 30 per cent, it would be wise to tell your provider your new rate. Ring or email them or check their website to find out how to do this. It should be quite simple.

As our reader says, if you give a lower rate than you should, and you are caught, you may have to pay the extra tax plus penalties. If you give a higher rate than you should, bad luck!

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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