How Does Tax Work When Investing in Kernel Funds?

Tax is an unavoidable cost of investing, so ensuring you understand how it works can support you in getting the most out of your investments. In New Zealand, Portfolio Investment Entities (PIE) funds offer a tax-efficient way to invest, but navigating their tax rules can be challenging at times. But not with Kernel! Find out how tax works when investing with Kernel in this Q&A-style blog.

Kernel Funds are registered with Inland Revenue as multi-rate Portfolio Investment Entities (PIE). In April each year, an amount of tax is due for the previous 12 months. This is compared to having tax deducted at intervals throughout the year as a unit pricing deduction.

The tax amount owing for investments in Kernel Funds is calculated using two different methods depending on whether the underlying investments in the funds you hold are in NZ or international investments.

For funds holding New Zealand investments, you are taxed on the income received in the fund (i.e., the dividends and interest payments paid into the fund from the underlying investments), less any available tax imputation credits. Imputation credits are available when an NZ company has already paid company tax on some or all of the amount they paid out as a dividend and avoids a double taxation issue.

In contrast, funds holding international shares, have their tax calculated under the complex FIF (Foreign Investment Fund) rules. The easiest way to explain this, is that tax is calculated according to the average balance of your investments through the year as if every investment paid a 5% annual dividend, not the actual income received.

This tax calculation takes your average balance throughout the year, multiples it by 5% and then multiples that number by your PIR. For investors with the top PIR of 28%, this equates to a tax cost of 1.40% of your average balance in the fund during the year. From this amount, foreign tax credits received from dividends paid by the underlying companies are deducted and you will have a net amount of tax payable.

In short, because tax payable on a PIE investment is not a capital gains tax. You are being taxed in relation to your income earned in the case of the NZ funds, or your average investment balance in the case of the global funds.

We understand that this stings a little when markets are down; no one likes paying tax at the best of times, let alone when their portfolio is showing a loss.

However, to put it into another investment context – we’ve all heard the property market is currently down and an investment property owner may find their property worth less than they bought it for last year. Do they still pay tax on the rental income received? Absolutely. In the tax world, those two factors are mutually exclusive.

We rely on you electing the correct Prescribed Investor Rate (PIR) when you open an account, and you can see what PIR you have selected under your profile settings. If your PIR needs to be changed, you can update this in your 'Profile and settings' or by sending us a message within the dashboard to have it updated. PIR changes cannot be backdated for previous tax years.

We work with Adminis NZ Limited, who provide our custodian and registry services for all Kernel funds. As part of their registry function, they calculate the tax payable across each individual account. They do this for over 30 NZ based fund managers and adviser groups, with a collective $5B+ under their administration services. We have full confidence in their systems and processes to ensure accurate tax treatment and reporting.

PIE tax statements giving the breakdown of income received, tax credits applied and tax amounts payable are available in late April. In the case your PIR was noted incorrectly, you can vary your deduction in your Income Tax Return. If however your PIR was correct, you do not need to complete any additional information in your personal return. Everyone’s tax situation is unique and if you are unsure you should seek advice from an accountant or suitably qualified professional.

It’s important to note that your tax is calculated on your PIR – which is either 10.5%, 17% or 28%. This is a benefit of a PIE; as the top tax rate is 28% rather than the higher amounts applicable under the Resident Withholding Tax (RWT) payable on direct share holdings. We would encourage all investors to look at tax as a small part of the bigger picture and a cost of investing, in a similar way that tax is a cost to earning an income. If you would like some clarity around tax for various investments or PIE tax specifically, we suggest you read our tax blog.