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Can a Slice of PIE Slim Down Your Taxes?

No, this isn’t about Patrick Lam’s creamy bacon mushroom and cheese pies, rather Portfolio Investment Entities. OK, they may not sound as appetizing as the former but it’s a simple recipe, you won’t feel guilty about having a piece of it and they’re much better for your heart – incidentally, the region where most people keep their wallet.

What is a PIE?

A portfolio investment entity (PIE) is a new type of entity, such as a managed fund that invests the contributions from investors in different types of investments. Importantly, you don’t need to use a managed fund – cash PIE’s qualify too!

Eligible entities that elect to become a PIE will generally pay tax on investment income based on the prescribed investor rate (PIR) of their investors, rather than at the entity’s tax rate.

Income earned through a PIE will generally not affect investors’ entitlements to working for families tax credits, or their student loan or child support obligations.

Tax Position for PIE’s

Since their introduction in 2007, the PIE tax rates have been favourable compared to direct investments. New PIE tax rates apply from 1 October 2010 which are going to increase both the range of investors who benefit from, and the extent of the potential benefits of, investing in PIEs.

The tax rates which will apply are as below:

Taxable income Combined taxable
and PIE income
Marginal tax rates
from 1 April 2011
PIE tax rates
from 1 October 2010
0 -14,000 0 -14,000 10.5% 10.5%
0 -14,000 0 – 48,000 17.5% 10.5%
14,001 – 48,000 14,001 – 70,000 30% 17.5%
48,001 – 70,000 48,000 – 70,000 30% 28%
Over 70,000 Over 70,000 33% 28

Even with the reduction in the top tax rates from 38% to 33% there will still be a 5% difference in the top marginal rate so PIE’s remain good value for higher tax rate investors. From 1 October 2010, investors on a marginal tax rate of 30% can be taxed on PIE income at 17.5% which will save them 12.5% and investors on a marginal tax rate of 17.5% will be taxed on PIE income at 10.5%, a saving of 7%. Fancy a cut of tax with your PIE then?

The information in this article is of a general nature and should not be relied upon as a substitute for specific advice.