November 02, 2023

Overtaxed Term Deposit Interest?


Claire Bryant

Are you paying too much tax on interest earned from your term deposits?

In April 2021, the top marginal tax rate was lifted from 33% to 39% for individuals with taxable income over $180,000. More recently, the Government has announced that the tax rate for trusts will also go up to 39% from April 2024, and both Labour and National plan to go ahead with this change. This 39% tax rate will apply to all taxable income of the trust.

You will also be aware that interest rates have risen sharply over the last 18 months. With higher interest rates from term deposits, tax efficient investing becomes more relevant.

In October 2007, the government introduced the PIE (‘Portfolio Investment Entity’) regime, which provides a favourable tax treatment for certain investments.

One of the big advantages of PIEs is that the top tax rate is capped at 28% for individuals and trusts. For those investors on a 39% tax rate, investing via a PIE reduces the tax rate by 11%. This can result in a material saving in tax – for a $100,000 term deposit earning 5.2% over a year, the tax saving will be $572 for a 39% taxpayer.

Not only can PIEs be used for long-term investment strategies (with a mix of different assets such as bonds, shares, and property), but they can also be used for short-term investing such as bank term deposits. There are Cash PIEs that invest in the likes of short-term bank bills and deposits, providing returns in line with bank term deposits but with the PIE tax rate capped at 28%.

For example, a term deposit will have to earn interest of 6.1% for a 39% taxpayer to equate to a Cash PIE returning 5.2% less 28% PIE tax.

Shout out to our friends over at NZ Funds for providing the content in this blog.

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If you would like to know if PIEs will be tax efficient for you when compared to your existing term deposits or longer-term investment portfolio, then please contact us and we can discuss your options.