We understand that talking about taxes can be less than interesting. But understanding how you investments are taxed means that you get to maximise the money you are investing.
This also applies to the 2.5 million KiwiSaver members in New Zealand.
This year, the IRD send out letter to over 120,000 Kiwis telling them they had been paying the wrong tax. Did you know that you are not entitled to a refund if you have been paying a higher tax rate?
Read on to understand what it all means and how to get it right.
First of all, what does PIE and PIR mean?
The PIR (Prescribed Investment Rate) is the method used to tax a PIE (Portfolio Investment Entity).
A PIE is the tax method used by KiwiSaver, some Term Deposits, some investments and some superannuation schemes.
The tax for KiwiSaver (PIE) is based on your income from the previous two years. This is not to be confused with the Income Tax (PAYE) which is an assumption as to what you will earn for that year.
With the PAYE, you can claim a refund if you overpay it. Unlike the PIE where, if you overpay it, you cannot claim a refund. However, if you underpay the PIE, Inland Revenue can send you a bill.
Check that you’re paying the right PIR for your income
Answer these question to find out what's your PIR tax rate.
1. Are you a NZ Tax Resident?
Yes – go to question 2
No – PIR is 28%
2. Did you earn less than $14,000 for each of the previous two tax years? And less than $48,000 each year including your PIE income? (Your PIE income refers to all the investments you have that are taxed using the PIE method. In a lot of cases, your KiwiSaver investment would be the only PIE income you have.)
Yes – PIR = 10.5%
No – go to question 3
3. Did you earn between $14,000 and $48,000 for each of the previous two tax years? And less than $70,000 each year including your PIE income?
Yes – PIR = 17.5%
No – go to question 4
4. Did you earn more than $48,000 for each of the previous two tax years?
Yes – PIR = 28%
Bob is 30. He is earning $50,000 per year. At the last financial year, he earned $50,000, but the year before that he was working part time and earning $15,000. The only PIE income he has is from KiwiSaver, which has a balance of $10,000, with a 5% return of $500.
The taxable income in one of the previous two tax years was between $14,000 and $48,000 and his total income for that year (including PIE income) was less than $70,000 ($15k + $500).
Therefore, his PIR is 17.5%.
Still not sure what your PIR should be? Contact us here and we'll help you find out.
By Stephen France - KiwiSaver Specialist