The beginning of the new tax year on 1 April is a reminder to check that your investments are being taxed at the correct rate and that you are taking advantage of available tax benefits. There have been changes to tax rates over the last year and to the income bands in which those rates apply. You can check the tax rates that apply to you at www.ird.govt.nz..
The Resident Withholding Tax (RWT) rate used for investments should be the rate that will apply to income you earn over and above your other income. Income below $14,000 is taxed at 12.5%, income between $14,000 and $48,000 is taxed at 21%, income between $48,000 and $70,000 is taxed at 33% and income of $70,000 or more is taxed at 38%. These may change in budget to be announced in May 2010.
If the income from your investments is over $48,000 or is enough to push you into a higher tax bracket, you could pay less tax by investing in Portfolio Investment Entities (PIEs). Income from PIEs is taxed at a special rate, called a Prescribed Investor Rate (PIR). From 1 April, there will be three PIR rates; 12.5% for income up to $14,000, 21% for income between $14,000 and $48,000 and 30% for income higher than $48,000. This means that higher income earners pay no more than 30% tax on their investments in PIEs.
Once the income is taxed within the PIE, it does not be declared in your tax return. That means, for example, you can earn up to $48,000 from all sources other than PIEs (such as your job) and all income from PIE investments will be taxed at only 21%. For an investor with a large investment portfolio, this is a saving of up to 17% in tax!