INVEST | PIE BENEFITS
There can be real benefits for some investors if they invest in a PIE
The following four factors can mean that individuals are often able to pay less tax by investing in a PIE compared with an investment subject to normal income tax:
A Portfolio Investment Entity (PIE) is a managed fund which has certain
tax benefits for investors.
An individual investor in First Mortgage PIE Trust will select a Prescribed Investor Rate (PIR). A PIR is similar to a marginal tax rate and is used to calculate and pay tax on income from First Mortgage PIE Trust. First Mortgage PIE Trust will then pay tax based on each investor's PIR.
The PIR rates applicable to individual investors are 10.5%, 17.5% or 28%.
A 10.5% PIR can be elected if the investor's taxable income in either of the last two tax years was less than $14,000 per year, and combined taxable and PIE income was less than $48,000.
A 17.5% PIR can be elected if the investor's taxable income in either of the last two tax years was less than $48,000 per year, and combined taxable and PIE income was less than $70,000.
If an individual's taxable income, in both of the previous two tax years, was greater than $48,000, and combined taxable and PIE income is greater than $70,000, then a 28% PIR must be elected.
Tax paid by the PIE Fund on behalf of individual investors is a final tax. This means that there is no requirement for the individual to include this income in their own tax return unless the individual has incorrectly advised the manager of a PIR lower than the rate the individual is entitled to. The highest tax rate applicable to investors investing in a PIE fund is 28%.
For example, individuals who earned under $14,000 of taxable income (i.e
total income less PIE income) and less than $48,000 total income in either
of the last two years can elect a PIR of 10.5%. Income between $14,000
and $48,000 would be subject to income tax at 17.5% if it was not received
from a PIE fund.
Individuals who earned under $48,000 of taxable income (i.e excluding PIE income) and less than $70,000 total income in either of the last two years can elect a PIR of 17.5%. Income between $48,000 and $70,000 would be subject to income tax at 30% if it was not received from a PIE fund.
An individual's PIR is determined based on their previous two years income.
If an individual's income is increasing, they may be entitled to a 10.5% or 17.5% PIR rate even though their current year's income is above the threshold for those PIR rates. An individual's PIR rate is based on either of the last two income tax years. This provides an opportunity for investors with increasing or fluctuating income to pay less tax. If an investor is able to elect a PIR rate of 10.5% or 17.5% based on the last two years income, then PIE tax paid will be a final tax in the current year even though the current year's income may be greater than the income thresholds. i.e PIE income may be subject to PIE tax at 10.5% or 17.5% when the same income if earned from a non PIE investment would be subject to tax at 30% or 33%.
This means that there is no requirement for individuals to include PIE income in their own tax return unless they have selected an incorrect tax rate.
Unlike Resident Withholding Tax where any tax overpaid is refunded when
a tax return is filed, PIE tax deducted at 28% is a final tax and is not
refundable. If an investor's correct PIR is 10.5% or 17.5% and they do
not advise the investment fund, PIE Tax will be deducted at 28%. An individual
investor will therefore end up over paying tax and not being able to claim
this back on a tax return.
In addition, PIE Tax is taxed at a flat rate rather than a progressive rate, such as income tax rates. This means that all PIE income should be taxed at the elected PIR rate, ie. 0%, 10.5% or 17.5% or 28%. Therefore, you should consider your circumstances carefully when selecting the correct and most effective PIR for you.
First Mortgage Trust is not a Tax Adviser. The benefits of PIE will depend on each investor's personal circumstances. This information is of a general nature and we strongly recommend that you talk to your tax advisor to determine if investing in First Mortgage PIE Trust is right for you.