What's a PIR and Why is it Important?

There are a lot of IRD notices floating around at the moment about incorrect Prescribed Investor Rates (PIRs). There is also a lot of confusion about what a PIR is and why having the correct PIR is important. So, if you’ve received one of these notices and are not sure what it means here’s an outline of what a PIR is and the consequences of nominating an incorrect PIR.

Portfolio Investment Entities (PIEs)

A PIE is a specific type of investment entity which provides a tax-friendly vehicle for passive investment which was developed to encourage retirement saving. The PIE regime was introduced at the same time as Kiwisaver and as a result a lot of Kiwisaver Schemes have been set up as PIE Investments.

In a PIE investment, investors are effectively subject to income tax on these investments at their personal income tax rate.

PIR Rates 2.png

PIEs generally calculate and pay tax on behalf of investors at the PIR that the investor has nominated. The objective is to ensure that investors in the PIE generally have no income tax liability or requirement to file an income tax return as these obligations are all met by the PIE.

A key benefit of a PIE investment is that the tax paid on this investment is capped at 28% as long as you have nominated the correct PIR. For this reason PIE investments appeal to those earning more than $70,000 per annum.

Nominating your PIR

When you first invest in a PIE you will be asked to confirm your PIR. On an annual basis, you will also be asked to confirm your PIR.

Your PIR is based on your income for the two years immediately preceding the current tax year. So your PIR for the 2020 tax year (the one we are in now) will be based on your combined taxable income and PIE income for the 2018 and 2019 income years.

Consequences of having an incorrect PIR

The key benefits of a PIE investment are that the income from the investment is taxed at your personal income tax rate and if you are in the top income tax brackets the tax on the investment income is capped at 28%. However, these benefits only apply if you nominate the correct PIR.

If you have nominated the correct PIR for the year then the income from your PIE investments is excluded income and you do not have to file a personal income tax return (or include the income in your return if you already file a personal income tax return for other reasons).

If you have nominated an INCORRECT PIR and the PIR you nominated is lower than your tax rate then you must file an income tax return with the PIE income included in that return. You are able to claim the tax credits for tax paid by the PIE during the year however you may also have further tax that you have to pay to IRD due to nominating a PIR that is lower than your overall tax rate.

There are two key disadvantages to nominating an incorrect PIR and they will cost you money:

  1. If you have nominated a PIR that is higher than your personal income tax rate, you DO NOT get to claim the overpaid tax back; and

  2. If you have nominated a PIR that is lower than your personal income tax rate (ie used a PIR of 10.5% or 17.5% when it should have been 28%) then you have to include the PIE income in your personal income tax return and will pay tax on this income at your personal income tax rate. As a result you could be paying tax at 30% or 33% on this income rather than the capped 28% available under the PIE regime.

Over the last few months there has been a lot of discussion about the inability of those on too high a PIR to claim a refund for the overpaid tax with it estimated that about $42m of tax has been overpaid on PIE investments in the 2019 tax year. The Revenue Minister is apparently looking to change this however application of any law change will NOT be retrospective.

As you can see, it is absolutely critical that you get your PIR correct to ensure that you do not pay any more tax than you are required to on these types of investments. If you receive a letter from IRD advising that your PIR is incorrect we recommend that you check with us to ensure that the advice is still correct based on your current position and then get the PIR on your PIE investments changed as quickly as possible to ensure that you do not pay more tax on these investments than you need to.