PIE Tax Changes
There were some changes which were introduced on 1st October 2007 in the New Zealand tax system which have an impact on the investment in Smartshares fund(s).
The main change for the Smartshares Exchange Traded Funds (ETF’s) is in relation to the enrolment in the Portfolio Investment Funds (PIE) tax regime introduced on 1st October.
The introduction of this new tax regime provides tax incentives for investors into managed funds rather than into direct equities. It also means that all managed funds products compete on a level playing field with investments in direct equities and we are confident that our low fees, transparent performance and overall passive management approach will ensure the continued growth of Smartshares and benefits for you as investors.
How does investing into a PIE benefit you?
The primary benefit from the PIE regime is the retention of the exemption from paying tax on profits made by trading in shares which is currently in place for the Smartshares passive funds.
The other significant benefit is that tax withheld on dividend payments to investors is capped at 33% (Which will reduce to 30% after 1st April 2008). If you are currently paying tax at a rate less than 33% then the difference can still be claimed back from the IRD at the end of each financial year in your tax return.
Tax return
Under the PIE regime, unitholders who reside in New Zealand for tax purposes have no further tax to pay. This distribution is an excluded distribution for tax purposes and does not need to be included in your income tax return. Individual investors on a 19.5% marginal tax rate may however want to include the dividend on the tax return to take advantage of the attached imputation credits.
Important note
There are some exemptions to the tax rules applicable to the sale of shares held by a PIE. The exemption relates to a majority of the investments within the Smartshares funds and are limited to rules including the following:
1. New Zealand companies; or
2. Australian resident companies that are both traded on an approved index under the ASX market rules and required under Australian tax legislation to maintain a franking account.
Shares in companies not covered by (1) or (2) will be subject to the new Fair Dividend Rate (FDR) rules which replace Foreign Investment Fund tax rules from 1 October 2007 for the Smartshares funds.
FDR is a replacement tax for the Foreign Investment Fund (FIF) tax currently in place and apply to some international investments, according to the abovementioned rules, which are held by the Smartshares Funds.
Compliance
In order to comply with the new PIE tax rules there are some new obligations that we are required to adhere to. Some of these obligations include ensuring that unit holder investments do not exceed minimum investment levels as follows:
(a) for an investor that is an investor within section 9(4) of subpart HL of the Income Tax Act, 40% of the Fund’s total issued units; or
(b) for other investor’s, 20% of the Fund’s total issued units. The holdings of an investors associated persons will be included when assessing whether the 20% threshold is breached.
Smartshares is monitoring all the obligations required under the new PIE rules to ensure that we consistently meet the requirements.
New offering documentation was released with effective date 1st October 2007 which includes further comprehensive narrative in relation to these tax changes. If you have any questions about the information in this letter please contact either your financial advisor or Smartshares on 0800 80 87 80.
