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Wait required for lower tax rate
 
Q.           I have recently retired at the age of 65.  I have built up a reasonable KiwiSaver balance and am looking to move some of my term deposits into my fund as well.  My question is, my tax rate for KiwiSaver (Prescribed Investor Rate or PIR) has been 28% but now that I am retired and living off NZ Super and income from my investments I think it should be 17.5%.  In a recent column you said that an investor’s PIR is based on the last two years’ income.  How long do I have to wait before I can drop down to a lower tax rate?
 
A.         Investors need to review their Prescribed Investor Rate or PIR each year. You will get reminders at least once a year from your fund manager to check your PIR and let them know if it has changed. This is because PIE tax is a final tax and you can’t claim back any excess if you are on too high a rate. If your rate is too low you may face penalties.
 
The PIE regime was introduced to lower tax on investment income as previously investments in similar managed funds were taxed at a flat company tax rate rather than the rate of the individual. As KiwiSaver has been designed as a ‘cradle to rocking chair’ Scheme, investors may start on 10.5% while they are children or students earning less than $14,000 per annum, move to 17.5% once they have gone into full-time work and then on to 28% if their earnings go over $48,000 per annum. Investment income is also taken into account in working out your PIR. Every KiwiSaver investment statement has a useful flow chart to help investors work out their correct rate.
 
You can’t change your rate either up or down as soon as your circumstances change, however. The rate for the current tax year is determined by what you earned in the two previous years.  If you have been on a PIR of 28% you will have been earning more than $48,000 per annum before you retired. If your taxable income was more than $48,000 in both of the previous two income years, your PIR is still 28%. In 12 months’ time you should review your income since you retired (NZ Super plus any investment income, including PIE income).  If at that stage for the two previous income years you qualify for two rates, your PIR is the lower rate and you can notify your fund manager that you should move to 17.5%.
 
The easiest way to check your income is via the IRD website. To do this you need to register for online services and create a myIR account. This not only gives you information on your income, but also provides a link to all KiwiSaver payments made through IRD including the annual Member Tax Credits (a good way to check that you received the correct entitlement). 
 
Depending on the type of fund you are in you may find there is little difference between a PIR of 17.5% or 28%. Tax is payable on income generated by the fund, but not on capital gains of New Zealand and most Australian shares. Take a look at the latest statement from your KiwiSaver fund manager to see just how much (or how little) you have been paying.
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838 or go to www.peak.net.nz. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz