Government to close PIE tax loopholes

The PIE rules coming into force on 1 October 2007 prevent lower-income people being over-taxed on their earnings through passive savings vehicles such as managed funds. Investors in savings vehicles that choose to become PIEs and whose personal tax rates are 33 or 39% will have their earnings taxed at a final rate of 33% until the beginning of the 2008-09 income year, when it will drop to 30%. Investors on lower income tax rates will be taxed at 19.5%.

Finance Minister Michael Cullen and Revenue Minister Peter Dunne say, “To ensure that these tax rate benefits are not clawed back, dividends paid by companies qualifying as PIEs are not taxed – unless the shareholder elects that they are.This makes PIEs an attractive form for companies that earn some non-taxable income that they want to distribute to shareholders”.

“It appears that, because PIEs can invest in land, some land-owning companies that run active businesses are contemplating using a gap in the new rules to structure the land part of their business as a PIE, to reduce final tax on shareholder earnings. That is against the policy intent of the PIE rules. The government will introduce legislation at the earliest opportunity to prevent it occurring, allowing sufficient time for consultation.
 
“A second recently identified gap in the new rules concerns the requirement that income earned by PIEs must be passive in nature. An error in the legislation, however, means that requirement does not apply to PIE subsidiaries, which it should. That error will be corrected as soon as possible,” the Ministers say.

A set of guidelines has been released to help land-owning companies that are contemplating becoming PIES to determine whether such a move would be consistent with the policy rationale of the rules.