How does tax work?
Kernel Funds are registered with Inland Revenue as multi-rate Portfolio Investment Entities (PIE). In April each year, an amount of tax is due for the previous 12 months. This is compared to having tax deducted at intervals throughout the year as a unit pricing deduction.
How is it calculated?
The tax amount owing is calculated in two different methods depending on whether the funds you hold have underlying investments in NZ or international shares.
NZ 20, NZ 50 ESG, NZ Commercial Property & NZ Small & Mid Cap Funds:
For New Zealand shares, you are taxed on the income received in the fund (i.e. the dividends paid into the fund from the underlying companies), less any available tax imputation credits. Imputation credits are available when an NZ company has already paid company tax on some or all of the amount they paid out as a dividend.
For all other Funds:
In contrast, funds holding international shares, have their tax calculated under the complex FIF (Foreign Investment Fund) rules. The easiest way to explain this, is that tax is calculated according to the average balance of your investments through the year, not the income received.
This tax calculation takes your average balance throughout the year, multiples it by 5% and then multiples that number by your PIR. For investors with the top PIR of 28%, this equates to a tax cost of 1.40% of your average balance in the fund during the year. From this amount, foreign tax credits received from dividend paid by the underlying companies are deducted and you will have a net amount of tax payable.
Why do I pay tax when my portfolio value has declined?
In short, because tax payable on a PIE investment is not a capital gains tax. You are being taxed in relation to your income earned in the case of the NZ funds, or your average investment balance in the case of the global funds.
We understand that this stings a little when markets are down; no one likes paying tax at the best of times, let alone when their portfolio is showing a loss.
However, to put it into another investment context – we’ve all heard the property market is currently down and an investment property owner may find their property worth less than they bought it for last year. Do they still pay tax on the rental income received? Absolutely. In the tax world, those two factors are mutually exclusive.
How can you ensure you are paying the right PIE tax?
We rely on you electing the correct PIR when you open an account and you can see what PIR you have selected under your profile settings. If your PIR needs to be changed, you can send us a message within the dashboard to have it updated. PIR changes cannot be backdated for previous tax years.
Who calculates the tax?
We work with Adminis NZ Limited, who provide our custodian and registry services for all Kernel funds. As part of their registry function, they calculate the tax payable across each individual account. They do this for over 30 NZ based fund managers and adviser groups, with a collective $5B+ under their administration services. We have full confidence in their systems and processes to ensure accurate tax treatment and reporting.
What is my PIE tax statement?
PIE tax statements giving the breakdown of income received, tax credits applied and tax amounts payable are available in late April. In the case your PIR was noted incorrectly, you can vary your deduction in your Income Tax Return. If however your PIR was correct, you do not need to complete any additional information in your personal return. Everyone’s tax situation is unique and if you are unsure you should seek advice from an accountant or suitably qualified professional.
A final note on PIEs
It’s important to note that your tax is calculated on your PIR – which is either 10.5%, 17% or 28%. This is a benefit of a PIE; as the top tax rate is 28% rather than the higher amounts applicable under the resident withholding tax (RWT) payable on direct share holdings. We would encourage all investors to look at tax as a small part of the bigger picture and a cost of investing, in a similar way that tax is a cost to earning an income. If you would like some clarity around tax for various investments or PIE tax specifically, we suggest you read this blog.