April marks the start of a new tax year, and is a significant month for investors. KiwiSaver members or investors in any other Portfolio Investment Entity (PIE) need to ensure they start the new tax year on the correct tax rate. These investments are taxed at what is called the Prescribed Investor Rate (PIR) and this should be confirmed at the beginning of each tax year. Set your PIR too low and you may be in danger of incurring a tax penalty. On the other hand, if your PIR is too high, you will not be able to claim a refund as tax paid in a PIE is final tax. Your PIR is based on your income in the previous two years and for most investors will be 10.5%, 17.5% or 28%. The income bands for these rates are income of less than $14,000, between $14,000 and $48,000 and more than $48,000. Investors whose income is close to these cut-off points, or who have had a substantial change in their income due to a promotion, redundancy or retirement, should pay close attention to their PIR. Investing in PIEs makes good sense for those on high incomes, as the top rate of tax for a PIE is 28% compared with the top rate of 33% for Resident Withholding Tax.
If you are a salary and wage earner and you think you may have paid too much income tax during the year, you should check to see if you are eligible for a refund. This can be done free of charge on the Inland Revenue website. In particular, you should check for refunds if your income is low, you have worked only part of the year, or you have expenses to claim. Don’t pay more tax than you need to!