Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 amends the portfolio investment entity (PIE) rules.

Sections CB 26, DB 54, HM 12, HM 19C, HM 37, HM 60, LA 6 and YA 1 of the Income Tax Act 2007; section 31C of the Tax Administration Act 1994

Several amendments have been made to the portfolio investment entity (PIE) rules to ensure that they operate as originally intended. The amendments are largely of a technical or drafting nature.

Application dates

The amendments apply from various dates as set out below.

Key features

Disposal of certain shares by PIEs

Section CB 26

Under section CX 55, PIEs are generally not taxed on trading gains made on Australasian shares. They are, however, taxed on dividends. This creates an incentive for PIEs to sell shares just before a dividend is paid - the share price is likely to increase in anticipation of the dividend, and by selling the shares the PIE could turn a (taxable) dividend into a (non-taxable) share trading gain.

To counter this, section CB 26 provides that any gains are taxable if shares are sold after a dividend has been declared but before the dividend has been paid.

Section CB 26 has been amended so that it does not apply when the seller of the shares and the recipient of the shares are composed of the same ultimate investors (this may arise because of a restructure). This is to ensure that investors in a PIE that is restructuring are not double taxed: on the sale of shares under CB 26 (in the pre-restructure entity) and on the receipt of dividends (in the post-restructure entity).

The amendment applies from 1 April 2012.

Management fee rebates

Section HM 12

At least 90% of income derived by a PIE must be derived from specified investment types and consist of passive types of income listed in section HM 12. Section HM 12 has been amended by adding management fee rebates to the list of types of income. Management fee rebates are not active income so there are no policy concerns with PIEs deriving this type of income.

The amendment applies from 1 April 2012.

Allocation of expenses to a PIE

Section HM 37

Section HM 37 treats a multi-rate PIE's income or property in which no investor has an interest as relating to a separate investor class, in which the PIE is the sole investor. This unattributed income is taxed at 28%.

Section HM 37 has been amended to ensure that expenses that relate to the unattributed income can be allocated to this separate investor class.

There is an exception to this rule for foreign investment PIEs. For these PIEs, deductions are denied to the extent that the investments in the foreign investment PIE have been made by notified foreign investors. The policy is that expenses should not be deductible when they relate to notified foreign investors. Unattributed expenses could have been incurred for the benefit of notified foreign investors; allowing the PIE to deduct those expenses would provide a mechanism for PIEs to, in effect, deduct the expenses relating to notified foreign investors.

The amendment applies from 1 April 2012.

Changing the notified investor rate

Section HM 60

Section HM 60 has been amended to clarify that when an investor notifies an updated prescribed investor rate (PIR) to a multi-rate PIE, the PIE has the flexibility to apply this PIR from the beginning of the calculation period in which the PIE receives the notice or as soon as practicable after receipt.

The change accommodates differences in PIEs' systems and PIE return filing options, and clarifies the legislation to be in line with current practices.

In applying notified investor rates, a multi-rate PIE must use the same approach for all investors for an income year.

This amendment applies for the 2010-11 and later income years.

Refundability of PIE tax credits

Sections LA 6 and YA 1

Section LA 6 sets out the order in which any remaining refundable tax credits are used in the event that a taxpayer has any refundable tax credits remaining after satisfying their income tax liability for a tax year. Section LA 6(1) lists the types of tax credits that the section applies to. Previously it referred to a tax credit under section LS 1 (Tax credits for multi-rate PIEs). However, previously tax credits for investors in multi-rate PIEs under sections LS 2 to LS 4 were not listed in section LA 6(1), despite them being referred to in the definition of "refundable tax credit" in section YA 1.

Section LA 6 has been amended to make it clear when PIE tax credits are refundable to investors. Tax credits under sections LS 2 to LS 4 are refundable, except to natural persons unless they are a natural person having the tax credit as a beneficiary of a trust. This restriction on refundability is to ensure that natural person investors cannot benefit by notifying a PIR that is too low.

Consequential amendments have been made to the definitions of "non-refundable tax credit" and "refundable tax credit" in section YA 1.

The amendments apply from 17 July 2013.

Notification requirements

Section 31C of the Tax Administration Act 1994

Section 31C of the Tax Administration Act 1994 requires multi-rate PIEs to provide their investors with notices setting out certain information. Section 31C has been amended to allow these notices to be provided electronically to the investor or a person authorised to act on behalf of the investor, provided that this has been consented to by the investor and, where applicable, their authorised person.

This amendment applies from 17 July 2013.

Other amendments

Other amendments to the PIE rules are:

  • The heading of section DB 54, which previously read "Treatment of credits for investment fees", has been amended to read "No deductions for fees relating to interests in multi-rate PIEs". This rewording more closely reflects the content of the section.
    The amendment applies from 17 July 2013.
  • Section HM 19C has been amended to correct a section reference.
    This amendment applies from 29 August 2011.