Fund manager Nikko points out the raising of the top tax rate turbocharges the benefits of using PIEs

Content supplied by Nikko Asset Management

It may not have grabbed the headlines from this year’s ‘No Frills’ budget, but the Government’s proposed trust tax increase will have a profound impact on investors who use a family trust to house their investment assets.

The proposed increase, from 33% to 39%, will bring trusts into line with the top marginal tax rates for individuals from 1 April 2024. And while implementation is still subject to Select Committee consultation, with the top tax rate for PIE structures remaining at 28%, Nikko AM NZ Managing Director, Stuart Williams, says investors are already beginning to look at mitigating the potential impact on returns.

“Investors are realising that the impact of the widening of this tax rate gap on net returns will be felt both immediately and exponentially over time, and we have seen an increase in enquiries into the benefits of investing via the PIE investment vehicles versus investing via directly-held assets,” says Williams.

“For those investors who use a family trust as their vehicle for investment assets, now is a good time to seek independent tax advice on the structure of your investments. There are a wide range of PIE vehicles available in New Zealand to meet different needs and strategies and, should the Bill pass into law, these will likely present more efficient tax structures than directly held securities.”

Williams offers the following scenario to illustrate the point.

“A trust investor accessing the Nikko AM NZ Cash Fund (a PIE fund) can currently expect to earn approximately 6%* in gross income over the next year. After paying PIE tax at 28%, this drops to a net rate of 4.32%. So for a $1m investment, they would generate net income of $43,200 for the year.

A trust investor accessing term deposits or cash assets directly at the same rate of 6% and paying the higher marginal tax rate of 39% will now earn a net rate of 3.66%. Put another way, for the same $1m investment, they would generate net income of $36,600 for the year; $6,600 lower than from the PIE assets.

Therefore in terms of headline rates, a trust investor would have to generate income from directly held assets at a gross annual rate of 7.1% to earn the same net rate of 4.32% from the PIE.

It goes without saying that the disparity gets worse over time. If you were to compound the above example over 10 years, the gap widens to over $93,000.”

*Note: management fees have not been included in the above example for simplicity. 6% gross income from the Nikko AM NZ Cash Fund is based off the fund’s approximate gross yield to maturity of 6% as at 29 June 2023. Additionally, different assets are subject to different tax treatments and may not be equally affected by these proposed tax changes.