More people would invest in Cash PIEs if they were simpler to understand. One of the big stumbling blocks is the tax rate, which is called a “PIR”. That stands for: the prescribed investor rate of tax.
In plain English you pay a lower rate of tax on income from PIEs than you do from other savings. That’s great news. PIEs are taxed separately and don’t become part of your overall income, which is advantageous for people whose earnings are nearly into the next tax bracket.
To get the lower PIE tax rate, however, you need to tell your bank, fund manager or KiwiSaver provider your correct PIR rate every year.
There are three PIR tax rates based on the individual’s taxable income and income on PIE compliant investments in the previous two income years: 10.5%, 17.5% and 28%.
Working out the rate isn’t entirely straightforward. Your bank or other provider should send you a flow chart.
If you don’t provide your PIR rate your Cash PIE will be taxed at 28%, which could be higher than you should be paying.
Getting your PIR wrong isn’t a good idea either. It will mean that the interest from your PIE is then added to your overall income, which could push your marginal tax rate into a higher bracket. For some people that could have ramifications for Working for Families Tax Credits, student loans, and child support.Information about this can be found here.
If you notify a PIR that is higher than your correct PIR you won’t be able to claim back the excess tax paid.
If you can’t remember providing a PIR rate within the last year, call your provider and sort it out.