Fund administrators are poised for a huge influx of form-filling in the wake of last week’s prescribed investor rate (PIR) sweep by the Inland Revenue Department (IRD).
Ryan Bessemer, Trustees Executors (TE) chief, said the IRD PIR shock, which found approximately 450,000 portfolio investment entity (PIE) fund investors with faulty tax settings, would inevitably flow through to back-office providers.
“It will create a substantial amount of work for us,” Bessemer said.
He said TE had already noted an uptick in PIR changes last week but expected a wave of updates ahead.
Fellow fund admin firm MMC had yet to see any effect from the IRD action, according to a spokesperson, although the end-of-month figures would offer a better indication.
“We haven’t seen a big jump in PIR changes,” the MMC spokesperson said. “We normally do about 3,500 PIR changes each month and we’ve had 780 in June so far.”
However, direct-to-consumer platform InvestNow had experienced more PIR change notifications than usual last week, according to founder, Anthony Edmonds.
“There’s been a significant increase in the number of InvestNow clients changing PIRs,” Edmonds said.
He said InvestNow regularly reminded members to check their PIR. Most other retail fund managers (or administrators on their behalf) also issue PIR reminders but the message has clearly fallen between the cracks, Bessemer said.
“There’s not much else the industry can do,” he said. “But maybe there needs to be more education with input from both industry and the government.”
The IRD won’t say how much underpaid tax it would collect following last week’s PIR but the damage, at least, is limited to only the 2018/19 tax year.
Investors have until February 7 next year to pay any overdue tax identified in the data-match but they “can supply their correct PIR anytime they want”, an IRD spokesperson said.
Under the PIE legislation, individual members must supply the correct PIR to fund managers based on a couple of methodologies.
Most simply, the lowest (excluding some zero-rated investors) PIR of 10.5 per cent applies to those earning $14,000 or less each year: the rate rises to 17.5 per cent for annual income up to $48,000 and 28 per cent thereafter.
Of course, being tax, it’s not quite that simple: the two lower PIRs can apply based on income in either of the two previous years while the 28 per cent PIR kicks in only when investors have taxable income of $48,000 or more in each of the two previous years.
PIR calculation rules change again when investors include both taxable income (which would include employment, non-PIE investment income etc) and PIE fund earnings: for example, investors with taxable income up to $14,000 can earn a further $34,000 in PIE money while retaining the low 10.5 per cent PIR.
The Sir Michael Cullen-led Tax Working Group proposed a move to “simplify the determination of PIE rates”, which the government later pencilled in for further consideration after ditching the core capital gains tax proposal of the group in April.
Given the current PIR complexities, perhaps the relatively high rate of non-compliance identified by the IRD’s flash new IT system – that also went live in April – was not so surprising.
But the IRD tech-led surveillance has ended the PIR ambiguity.
“Up to now, people have been responsible for giving their investment provider the correct PIR for them,” the IRD spokesperson said. “The difference now is that our new system can help IR ensure each person has indicated the right PIR.”
And the IRD oversight of investment income is only going to get sharper as the IT system rollout continues.
For example, as of 2020 financial institutions will be required to report taxpayer investment income direct to the IRD more frequently. KiwiSaver and student loans, meanwhile, will be included in the IRD auto-reporting system following ‘Release 4’ updates by 2021.
Last week the government added another administrative task for KiwiSaver schemes with a new regulation requiring providers to include retirement income projections in member annual statements.
The retirement income projection rule – first flagged by the previous government in 2016 – includes a standard set of underlying assumptions “informed by consultation with KiwiSaver providers, actuarial advice from Melville Jessup Weaver, and behavioural research by Colmar Brunton”, Commerce Minister Kris Faafoi says in Cabinet paper.
Faafoi says the industry standard retirement income calculation would contrast with the various methods currently used by some KiwiSaver schemes.
“The assumptions used by these providers tended to have, for instance, unrealistic rates of return without accounting for tax,” he says in the note. “This kind of overstatement of retirement savings and income projections will be avoided in annual statements by mandating consistent assumptions across the industry.”
Faafoi also dismisses concerns the KiwiSaver return assumptions were “too conservative”.
“… using conservative assumptions is appropriate so as not to overstate projections, and to encourage investors to save,” he says.
The retirement income projections would first appear in the annual KiwiSaver member statements for the 2019/20 financial year.