PIR questions that can catch retirees out - Ask Susan

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I recently completed a draft tax return, which resulted in a bill for $1469.75.

The reason I received a bill was that my PIE tax rate is calculated to be 28 percent, based on income for the previous two years. My income has fallen sharply since then.

I have retired and my only income in the year ending 31 March 2026 is national superannuation. My current PIR is 17.5 percent, but because my PIR rate for this year is based on a much higher income, I have been assessed at 28 percent.

I believe assessing PIR tax rates on the previous two financial years income leads to an inequitable result when there is a significant decrease in income. Is there anything I can do about this?

Deloitte tax director Phil Claridge said a New Zealand-resident natural person's PIR was always determined by their income in the previous two income years - and whichever year was lower determined the appropriate PIR.

"This means a significant fall in current-year income, such as on retirement, is not accounted for," he said. "The reason for this is that the PIE rules were designed to ensure PIE tax was a 'final tax' for most investors, avoiding annual 'wash-ups'.

"In some cases, this may produce outcomes that could be viewed as unfair for some taxpayers, such as those in [this] position. On the other hand, some other investors will benefit from lower PIRs when their income has increased relative to the prior two years."

At the bank, when I was opening a Notice Saver account, they wanted me to declare my income tax rate and my PIR rate. It became quite a debate and even though I cross-checked myself several times, they insisted I should be on a different, higher rate.

Can you explain PIE and PIR in plain language please?

PIE stands for a portfolio investment entity, which is a type of managed fund. When you invest in one of these, your returns are taxed at your prescribed investor rate (PIR).

Your PIR is determined according to the rest of your income and is decided by the lower of the previous two years, as stated above.

If your income is up to $15,600, your PIR is 10.5 percent. If it's up to $53,500, it's 17. 5 percent and if it's above that, it's 28 percent.

PIEs generally give a simpler way to manage the tax on investments.

I have question about the tax efficiency of PIE term deposits that I haven't been able to find a clear answer to.

Most articles from banks and other providers say that PIE term deposits are advantageous for people whose marginal income tax rate is above the 28 percent PIR. For example, someone on a 33 percent tax rate is said to save 5 percent and someone on 39 percent saves 11 percent.

However, New Zealand has a progressive income tax system, which made me wonder whether the analysis is more nuanced.

Suppose someone receives about $25,000 a year from NZ Superannuation and earns the rest of their income from term deposits. They have around $3 million invested, and can choose whether to hold the deposits as ordinary term deposits or PIE term deposits.

Assume the gross interest rates are identical.

If all the money is invested in PIE term deposits, all the interest is taxed at the 28 percent PIR and does not form part of the person's taxable income, but if some money is left in ordinary term deposits, the first portion of that interest would fall into the person's remaining 17.5 percent income tax bracket, which is lower than the 28 percent PIR.

Only the higher layers of interest would be taxed at 30 percent and 33 percent.

Is the most tax-efficient strategy to keep enough money in ordinary term deposits to fully utilise the remaining 17.5 percent tax bracket and only invest the balance in PIE term deposits? Or is there some feature of the PIE tax regime that means this reasoning is incorrect?

I've searched the Inland Revenue website and several banks' explanations of PIEs, but they all compare the 28 percent PIR with a person's marginal tax rate. I haven't found any discussion of whether a combination of ordinary and PIE term deposits can produce a lower overall tax bill than holding everything in either one or the other.

Chartered Accountants Australia and New Zealand tax leader John Cuthbertson points out there are lower PIR rates available than 28 percent. The 28 percent rate is appropriate for people whose marginal tax rate is higher than $53,501, but if your income is lower than that, your PIR could be 10.5 percent or 17.5 percent, and this can apply to your PIE investments.

He notes the 28 percent is the default rate, but if you notify the investment provider of the correct one, you could be taxed at a lower rate.

If you end up being on the wrong PIR, Inland Revenue can complete a "wash-up".

Cuthbertson said, with ordinary term deposits, you would need to notify the bank of the appropriate rate for resident withholding tax (RWT), but beyond that, you'd want to be "savvy" about your structure. That might mean making the most of income that you can have taxed at lower rates elsewhere, before shifting into the PIE regime, once your income is at that top bracket.

"Income up to a rate that's taxed less than 28 percent, you'd want to fully utilise and then, once you get over that rate, then you're better at 28 percent."

He said, for some products, PIE rates were not always as good as non-PIE offers, because the provider would effectively take a cut of the tax advantage.

"If you look at the interest rates that are offered, if it's in a PIE, it won't be quite as good as it's outside a PIE. There's always a bit of an arbitrage that goes on there."

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