Different Tax on SmartShares and SuperLife ETF

Recently a tax accountant contacted me regarding my post on comparing cost on ETF investing between SmartShares and Superlife. He pointed out that apart from the admin fee and management cost, investors also need to consider the tax implication when investing. I’ve known about this issue but did not include on my blog because I did not fully understand the rules. After I’ve asked around and done some research, here is my finding on different tax treatment on SmartShares and Superlife ETF and why does it matter to New Zealand investor.

Disclaimer: I am NOT a tax accountant or expert. In fact, I am pretty bad at tax despite I’ve done a couple tax papers at university. So what I am going to say would be incorrect. If you notice anything wrong in my blog post, please let me know and I will correct that ASAP. You should contact a tax accountant or IRD for tax advice.

What are PIE and PIR?

According to IRD website,  a portfolio investment entity (PIE) is a type of entity, such as a managed fund that invests the contributions from investors in different types of investments. Eligible entities that elect to become a PIE will generally pay tax on investment income based on the prescribed investor rate (PIR) of their investors, rather than at the entity’s tax rate.

Prescribed investor rate (PIR) is the tax rate that PIE fund use to calculate the tax on the income it derives from investing your contributions. It based on your taxable income, e.g. income from salary, wages and any additional sources of income (including the income from your investment) that you would include on your income tax return.

For an individual, your PIR can be 10.5%, 17.5% and 28%. Check out IRD web site to work out your PIR rate.

How PIE Works?

I will explain PIE with ‘interest on saving account’ as an example. You usually received interest by saving money in a bank account. If you look closely at that interest transaction, you can see the bank gave you some interest, then IRD take away some as ‘Withholding tax’. Check out the transaction below.

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So I earned $0.79 in interest, but IRD took $0.26 away.  The amount decided how much IRD can take is based on my Resident withholding tax (RWT). In this situation, the RWT is 0.26/0.79 = 33%. You can work out your RWT here.

For people who are having a full-time job, their RWT rate will likely to be 30% or 33%. That’s where PIE come in. The most common PIE fund you will see is the PIE account at your Bank. There are ANZ PIE Fund, Term PIE at BNZ, PIE Funds at Kiwibank and Westpac Online Saver PIE.

If you put money in those PIE accounts, in stead of paying 30% or 33% on your interest earned, you will be paying the max PIR rate at 28%. So in my situation, IRD will only tax $0.22 on my $0.79 interest income. The amount may seem tiny here, but if you have $20,000 saved in a PIE Term deposit with 3.5% interest, you will just have to pay $196 on tax instead of $231.

Different PIEs with SmartShares and SuperLife ETF

There are different types of PIEs and we will talk about Multi-Rate PIE and Listed PIEs here.

Multi-rate PIE (MRP) is a type of PIE that uses the investors’ prescribed investor rates (PIRs) to calculate the tax on the investment income it earns from the investors’ contributions. Most PIEs are multi-rate PIE including SuperLife and Simplicity fund.

A listed PIE is a type of PIE listed on a recognised exchange in New Zealand, and they calculate the tax on a fixed rate regardless of investors PIR. SmartShares ETFs are listed PIE, and they will pay tax at 28%. Check out section 6 on SmartShares’ product disclosure statement.

So the main difference between those two investments are you will pay 28% tax on SmartShares ETF and with SuperLife ETF Fund, you will pay tax according to your PIR.

Why Does it Matter to Investor

An investor needs to work out their PIR so they can decide each provider is more tax efficient. You don’t want to overpay your tax. There are three different PIRs for individuals: 10.5%, 17.5% and 28%.

For people who earn over $48,000 a year for the past 2 years, their PIR will likely to be at 28%. In this case, there is no tax different between SmartShares and SuperLife ETF as you will pay 28% on taxable income with both funds.

For people who are on low or no income, their PIR could be at 10.5% or 17.5%. They can be students, children, part-time/casual worker, stay-home mum/dad and retirees. In this case, they will pay tax on their PIR with SuperLife ETF Fund while SmartShares will still charge 28% tax on them. Therefore, they will pay extra tax with SmartShares.

Here is an example on US 500 ETF valued at $20,000. We will compare the value after tax and fee with the different tax rate. Assume there was no contribution and no value change during the year. Taxable income calculated at 5% of the portfolio under FIF rule. Ignored Smartshares $30 setup fee.

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Despite SmartShares have a lower management cost and no annual admin fee, investors with 10.5% or 17.5% PIR will end up better with SuperLife as they paid less tax. That’s more reason for you to choose SuperLife ETF Fund if you are on low PIR rate.

Conclusion

  • If your PIR is at 28%, pick SmartShares or SuperLife based on cost, functions, and experience. In my opinion, SuperLife is the better choice for most ETF except US 500 ETF. You can check out my comparison here.
  • If your PIR is at 17.5% or 10.5% SuperLife ETF Fund provide a better return due to the lower tax paid. The amount of tax saved will increase the value of your portfolio.
  • Investor at lower PIR can get the excess tax back with a tax return.
  • Since most of the investment funds are multi-rate PIE. It is essential you work out the correct PIR and submit that to your fund manager. You can work out your PIR here.
  • Consult IRD or a tax accountant for tax advice.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

SmartShares, SuperLife, Simplicity & InvestNow. ETF & Index Fund Investing in New Zealand

ETF and Index Fund are simple, low-cost and diversified investment option with a positive result in the long term. It plays an important part in my plan to achieve financial freedom by only do a few smart things and nothing much else. To put my money where my mouth is, over 90% of my investment is in ETF and Index Fund. I believe everyone should have at least some investment in those products. SmartShares, SuperLife, Simplicity, and InvestNow are the four investment services in New Zealand that I am currently using. Here is a breakdown of them.

The Breakdown

(updated Oct 2017)

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SmartShares

New Zealand Stock Exchange owns SmartShares. They issue the ETF for local share markets such as NZ Top 50 (FNZ), NZ Top 10 (TNZ), NZ MID CAP (MDZ) and NZ Bond (NZB). They also repackage ETFs and index funds from overseas to sell to New Zealand investor. Those ETFs cover Austraila, Europe, Asia Pacific, US, emerging markets and world markets. You can check out the list of offering here. The most popular overseas ETF is US 500. It tracks the top 500 companies on US stock example, most of them are top international corporations.

Some people have mistaken SmartShares as an investment service provider but in fact, SmartShares is an ETF issuer. Their job is to manage and issue ETF for New Zealand stock exchange. That’s why investor can’t log onto SmartShares site for track their holding because they are not managing the holding for you (hence there is no annual admin fee).

If you invested in their ETF, you are basically buying a share on the share market. You can but those ETF directly on share market if you wish.  SmartShares will direct investor to Link Market Service to register and track their ETF holdings. An investor can track their holding on other services like ASB securities, ANZ Securities or Share Sight.

SuperLife

Superlife offer the most ETF and Index Funds investment options in New Zealand. They not only offer SmartShares ETF in fund format but also provide managed fund and sector fund options for the investor. All of those funds invested in a passive index fund or ETF.

The Sector fund cover different country (NZ, AUS, Overseas), industry (Property, Shares) and investment vehicle (Cash, Bond, Shares). Those are great options to build your own balanced and diversified portfolio.

The Managed Fund is is a grouping of financial assets such as stocks, bonds, and cash equivalents. The nature of those financial assets can be classified into two groups, income asset, and growth asset. Income asset includes cash and bond. They tend to carry lower risk levels and, therefore, are more likely to generate lower levels of return over the long term. Growth assets are shares and property. They tend to carry higher levels of risk, yet have the potential to deliver higher returns over longer investment time frames.

Superlife managed fund has different names, like SuperLife 30 or SuperLife 80. The number at the end show the target portion of growth asset in that fund. Superlife 30 will aim to hold around 30% of growth asset and 70% of income asset in the portfolio. So this fund is a low risk (or conservative) fund. On the other hand, Superlife 100 will aim to invest 100% into the growth asset. So the risk is high. Here is a breakdown.

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SuperLife offer the most options, functions in the breakdown. The entry requirement is basically nonexistent, and the cost is relatively low. That’s why I recommend the beginner to start with Superlife.

Simplicity

Simplicity started as a nonprofit KiwiSaver provider. They provide low-cost KiwiSaver options to New Zealander while donating 15% their income to charity. Simplicity recently opened up their investment fund as non-KiwiSaver options as investors can deposit and withdraw their investment anytime they want. Simplicity only offers three managed funds as conservative, balance and growth fund. The majority of Simplicity fund invested in Vanguard’s funds or ETFs. The management fees are the lowest in New Zealand at 0.31% for managed fund. However, the initial investment requirement is $10,000.

InvestNow

InvestNow is a new online investment platform. Investors can directly invest into the selected fund on their platform with as little of $250. InvestNow does not charge any transaction, admin, setup or exit fee at this stage. Investor only needs to pay the management fee on an individual fund.

The biggest advantage of InvestNow is to allow the investor to directly invest into two Vanguard index fund in Australia. They are Vanguard International Shares Select Exclusions Index Fund (currency hedged and non-hedged version) with management fee at 0.20% and 0.26%. Those two funds are not PIE fund, means you will have to do your own tax return. For under 50k holding, you will only have to do tax return on dividend received, which is not that hard. You can check out the detail in this blog post.

Fund Comparison

I picked a couple of index funds and ETFs from each provider and made a comparison. Here is the breakdown.

(updated Oct 2017)Screen Shot 2017-10-03 at 9.47.21 PM.png

 

As you can see, most of the option’s underlying asset are Vanguard ETFs and Index Fund. That’s basically what I am trying to do on my international exposure, putting money into low-cost Vanguard cost for long term.

 

Me try to invest in NZ 2

Accurate description of my international investment strategy.

Conclusion

  • Superlife have the most function, investment options and easy to start. Also, have the lowest cost aggressive managed fund in NZ. It is great for both beginner and experienced investor.
  • Simplicity has the lowest cost managed fund in Conservative, balance and growth area. Great for anyone with $10,000 to start investing.
  • InvestNow user can easily invest in Vanguard index fund in Australia with 0.20% – 0.26% fee. Great for someone who can handle their tax return on dividend received (not that hard) or calculate under FIF rule.
  • SmartShares is good if you wish to buy ETF on the share market.
  • There are other ways to invest into a passive fund and ETF in New Zealand, like ASB Investment Fund, AMP, and Lifestages. However, the cost of those funds is quite high compared to these four services, which defeat the purpose of low-cost passive investing.
  • New Zealand investors can buy Vanguard ETFs on Australian Stock market. The management fee can go as low as 0.04%. I will go into that later once I’ve done it myself.

 

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Why your KiwiSaver Employer Contribution are Less than Yours while Both Paying 3%

By New Zealand law, the employer required to contribute to their employee’s KiwiSaver account or complying fund at 3% of their gross salary or wage if the employee joined Kiwisaver. However, when you look into your KiwiSaver contribution transaction record as an employee, you may notice the employer contribution amount are less than your employee contribution.

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Here is an example, assume your weekly income before tax is $1200, $62400/year.

Without KiwiSaver, your take home pay will be $1200 – 225.77 (PAYE) – 16.68 (ACC) = $957.55.

If you join KiwiSaver and contribute 3%, your take home pay will be $1200 – 225.77 (PAYE) – 16.68 (ACC) – 36 (KiwiSaver) = 921.55 On your KiwiSaver statement, your contribution will be $36. However, your employer contribution will be $25.2, not $36. Why?

The reason is the employer contribution are taxed under Employer superannuation contribution tax (ESCT). Your employer payout extra 3% of your income to KiwiSaver but part of that went to IRD as tax.

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You may think why both employer and employee are paying 3%, how come the cash hit my KiwiSaver fund is different? (That was me two days ago)

Let’s break it down in detail. The 3% contribution is calculated based on your income before tax. In our example, the weekly 3% KiwiSaver contribution will be $1200 x 3% = $36. So both employee and employer will pay $36 each into the KiwiSaver Fund.

Here is the tricky part, on employee contribution, it was calculate based on pre-tax income and take out on after-tax income. So the $36 will take out after they deduct PAYE and ACC and that $36 will reach your KiwiSaver fund without IRD take out any more tax.

On the other hand, employer contribution will be taxed under ESCT. So 30% of $36 = $10.80 will go to IRD, and the cash hit your KiwiSaver fund will be 36 – 10.8 = $25.2

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Therefore, I was wrong by saying you will have 100% return on your employer contribution. It’s more like 67%-89.5% return. It’s still an unbeatable risk-free guaranteed return and one of the best investment in New Zealand.

Check out IRD website on ESCT for more information.

P.S. Thanks to gligorkot for pointing that out on a previous blog post.