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PIEs give IRD tummy ache

The Inland Revenue Department appears less than happy with the effect of the new PIE (portfolio investment entity) regime.

Wednesday, December 10th 2008, 7:24AM

by Rob Hosking

With banks now aggressively marketing PIEs as good savings options, with their 30% tax rate, the department is now saying this may be opening up too big a gap for people to minimise their tax.

The PIE changes, along with lowering the company tax rate to 30%, mean “increased incentives and opportunities for individuals to structure their affairs in ways which reduce their exposure to higher personal marginal tax rates,” says the department's briefing to the incoming government.

There is also an anomaly in the PIE rules which mean investors can borrow money for PIE investment and claim the interest at 39%.

“By borrowing $1 million at a 10% interest rate and lending this through a PIE at a 10% rate, the individual might claim a deduction for $100,000, which would reduce the personal tax liability by $39,000.

“The PIE income would only bear $30,000 of tax. Thus, a scheme like this might be used to generate a net tax benefit of $9,000."

The IRD says that under current rules this sort of scheme – which it says is not uncommon – would probably not be illegal, although officials would very much like it to be.

“At this time it is doubtful that any of these schemes could be struck down as tax avoidance without much greater clarification of that term by the courts.

“Exact borderlines are uncertain.”

It has advised Minister for Revenue Peter Dunne to look at clearing up this anomaly and making those borderlines clearer.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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