What Is a PIE Fund in New Zealand? A Simple Explanation

If you’ve spent any time looking at KiwiSaver, managed funds, index funds, or even term deposits in New Zealand, you’ve probably come across the term PIE fund. And if you’re anything like most people, your first thought was probably: what on earth is a PIE?

I enjoy my classic, Kiwi meat pie, but this is a whole different thing!

Thankfully, it’s nowhere near as complicated as it sounds. PIE stands for Portfolio Investment Entity. In simple terms, it’s a special investment structure created under New Zealand tax rules. The important bit for everyday investors is this:

A PIE allows your investment income to be taxed using a special tax rate called your Prescribed Investor Rate, or PIR, rather than being taxed at your normal personal income tax rate.

For some New Zealanders, particularly higher-income earners, that can mean paying less tax on investment income. Let’s break down exactly how it works.

What actually is a PIE?

A PIE isn't a particular type of investment - that's the first mistake many people make.

Instead, PIE is basically a tax structure that an investment can sit inside. So imagine you invest $10,000 into a diversified managed fund. The actual investments might include companies such as Apple, Microsoft, Fisher & Paykel Healthcare, bonds, or cash. The PIE isn't what you're investing in. It's the tax wrapper sitting around that portfolio.

A good way of thinking about it is like a container. Inside the container are the investments. The PIE rules determine how the income generated inside that container is taxed.

For example, PIE funds can include:

• KiwiSaver funds
• managed investment funds
• index funds
• cash funds

So when a fund manager takes your money and invests it, the special PIE tax rules apply to all the investment income that fund generates. So non-PIE funds can go as high as 39% (under the normal income rules settings), and PIE funds are capped at 28%. Bueno!

Why do PIE funds exist?

The big attraction of PIEs is tax...of course! Under New Zealand's normal income tax system, individuals can face marginal tax rates as high as 39%.

PIE investments work differently.

For most individual New Zealand investors, PIE income is taxed at one of three Prescribed Investor Rates: 10.5%, 17.5%, or 28%.

The highest PIR for a normal NZ-resident individual is therefore 28%.

That can be particularly valuable if you're otherwise paying tax at 30%, 33%, or 39%. BNZ, for example, notes that investors on those higher personal tax rates may benefit because the maximum PIR is 28%.

That doesn't mean putting money into a PIE magically makes all of your tax 28%. It only relates to the income attributed to you through the PIE. Your salary, rental income and other taxable income are still dealt with under the normal tax system.

What is a PIR?

Your Prescribed Investor Rate, or PIR, is the tax rate the PIE generally uses when calculating tax on your share of the fund's taxable income. For NZ-resident individuals, the main PIRs are:

• 10.5%
• 17.5%
• 28%

Your PIR isn't simply based on your salary today, it depends on your income during the previous two income years, including certain PIE income.

That means you shouldn't just assume your PIR is the same as your normal income tax rate. IRD provides a calculator and flowchart for working it out, and it's worth checking your PIR periodically, particularly if your income has changed.

If you don't provide a PIR, the default rate is generally 28%.

Why can PIEs be good for higher earners?

This is probably easiest to understand with an example.

Imagine two investments both generate $3,500 of taxable investment income. One is taxed at your personal tax rate of 33%, and the other is a PIE investment where your PIR is 28%. At 33%, $3,500 of income would result in $1,155 of tax, leaving you with: $2,345 after tax.

At a 28% PIR, the tax would instead be $980, leaving: $2,520 after tax.

That's a difference of $175.

ANZ uses this example when comparing a traditional term deposit with a PIE investment offering the same underlying return.

Now imagine you're investing much larger amounts of money over several decades, small tax differences can start to matter. For someone paying the 39% top personal income tax rate, the contrast can be even larger because the maximum individual PIR remains 28%.

Do I have to calculate all the tax myself?

Usually, no, and this is another major reason PIE funds are popular. With a typical multi-rate PIE, the fund provider calculates the taxable income attributed to you, applies your PIR, and handles the tax administration.

BNZ explains that the PIE fund manager generally pays the tax on your behalf based on the PIR you've supplied. For most people using the correct PIR, this can make investing significantly simpler.

Compare that with owning certain overseas investments directly, where you may eventually have to understand New Zealand's Foreign Investment Fund rules, calculate FIF income and include information in your tax return. A PIE can effectively deal with much of that complexity inside the fund. That doesn't mean there is no tax on international investments, however.

It means the fund handles the relevant tax calculations rather than you personally having to calculate everything from scratch.

What happens when a PIE owns overseas shares?

This is where PIE taxation gets slightly more complicated.

If a PIE owns international shares, it may itself be subject to New Zealand's rules for taxing foreign investments. One of the most common methods used under the Foreign Investment Fund system is the Fair Dividend Rate, or FDR. Under FIF rules, taxable income can sometimes arise even though an investor hasn't physically received that amount as cash.

So it would be incorrect to assume: "It's a PIE, therefore only dividends are taxed." The actual taxation depends on what the fund owns.

For NZ and certain Australian shares, the treatment can be different again. BNZ notes that PIEs investing in New Zealand shares and certain Australian shares are generally not taxed on capital gains or losses from those investments. This distinction causes a lot of confusion.

One discussion on New Zealand's PersonalFinanceNZ community, for example, highlights exactly this problem: investors often assume PIE tax simply means "dividends taxed at your PIR and capital gains ignored", when foreign investments can be subject to FIF-style calculations inside the PIE.

For the average investor, however, you generally don't need to sit there calculating this yourself when investing through a PIE fund. The fund manager does the tax work.

What happens if my PIE investment goes up in value?

Suppose you invest $10,000 into a PIE fund and several years later it's worth $15,000. You might naturally wonder: Do I get a $5,000 capital gains tax bill when I withdraw?

Not necessarily. New Zealand does not have a broad standalone capital gains tax where every investment gain is automatically taxed when you sell. The tax treatment instead depends on what the fund owns and the tax rules applying to those investments.

For example, gains on NZ shares held by a PIE are generally treated differently from offshore shares caught by the FIF regime.

The important takeaway is that you shouldn't think of a PIE as something where IRD simply waits until you withdraw your money and taxes the difference between your purchase price and your sale price. That's generally not how PIE taxation works.

Is KiwiSaver a PIE?

Very often, yes. Many New Zealand KiwiSaver schemes are structured as PIEs. That means you've potentially been investing through a PIE for years without even realising it.

Your KiwiSaver provider invests your money and pays tax on the investment income using your PIR where the scheme is a PIE. IRD confirms that investment earnings inside a PIE KiwiSaver scheme are generally taxed at PIRs of 10.5%, 17.5%, or 28%, depending on your circumstances.

Importantly, you don't then pay another layer of income tax simply because you eventually make an eligible KiwiSaver withdrawal.

Are PIE funds only for shares?

No, this is another common misconception.

A PIE is a tax structure, not an asset class. A PIE could invest primarily in:

• shares
• bonds
• property
• cash
• term deposits
• international investments
• or a combination of all of the above.

There are even savings products (e.g. Kernel PIE Save) that operate in a similar way to term deposits but use a PIE structure. For someone on a higher marginal tax rate, a PIE-based cash or term investment can therefore sometimes produce a better after-tax return than an otherwise identical investment taxed at their personal rate.

Again though, you need to compare the actual interest rate, fees and terms rather than assuming the PIE product automatically wins.

Are all managed funds PIEs?

No, PIE is a specific legal and tax status. A managed fund may be a PIE, but you should check the provider's documentation rather than assuming.

It's the same for ETFs too. An ETF listed overseas is not magically a New Zealand PIE simply because you bought it through a New Zealand investment platform.

Likewise, buying shares directly in Apple or Microsoft doesn't make them PIE investments. The investment itself needs to be held through an entity that qualifies for and uses the PIE tax regime.

The simplest way to remember it

If all of this still feels slightly confusing, remember this:

The investment is what's inside the box. PIE is the tax rules surrounding the box.

You could have NZ shares, global shares, bonds or cash inside it. The PIE structure simply determines how the taxable investment income associated with that portfolio is dealt with. And for a large number of New Zealand investors, particularly those earning enough to face higher personal tax rates, that structure can be extremely useful.

This article is general information only and isn't personalised financial or tax advice. Tax rules can depend on your individual circumstances, so check your PIR with Inland Revenue and consider getting professional tax advice where appropriate.

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