PIE tastes even sweeter on cash deposits

Page 1 of 2 View as a single page 4:00AM Friday April 25, 2008
By Maria Scott

Why would you pay 39 per cent tax, or even 33 per cent, on cash deposits when you could pay only 30 per cent?

"You'd have to have rocks in your head," is the blunt reply from Anthony Edmonds, head of sales and marketing at AMP Capital Investors. He would say that, of course: AMP has just launched a fund that will enable people on the 39 per cent tax rate to reduce the tax on interest from their savings to 30 per cent. But even allowing for the marketing hyperbole, Edmonds has a point and he is not the only person in the investment industry to be making it.

"There is a large part of the population who would be better off with these products," says John Bolton, a former general manager of products for ANZ who is now principal of Squirrel Financial Solutions, a firm of advisers that specialises in low-risk products.

The device that delivers this tax cut is the cash PIE; a cash version of the Portfolio Investment Entity created by the Government last year. PIEs allow investors to be taxed at their own personal rates, whereas managed funds were previously taxed at rates that looked penal compared with various other forms of investment. From April 1, the tax break on PIEs was boosted further for higher-rate taxpayers with the introduction of a new 30 per cent maximum rate. Any managed fund can be a PIE, provided it fulfils certain criteria, but the new twist is that banks and other institutions are launching and promoting the cash versions.

Market conditions could not have been kinder to promoters; a troubled sharemarket, high interest rates and a new mood of risk aversion after the collapse of a string of finance companies.

Edmonds says a 39 per cent taxpayer would need a rate of 9.85 per cent on a one-year term deposit, (with interest paid annually) to match the 8.25 per cent being paid at the end of last week on the AMP cash PIE, the Cash Advantage Fund, which invests in a Rabobank deposit. Returns are boosted by the daily compounding of interest, while tax is paid only once a year.

Jeff Matthews, of financial adviser Spicers, says his firm's new cash PIE for clients, paying 8.25 per cent last week, offered an effective rate of 8.62 per cent to a 33 per cent taxpayer and 9.47 per cent for a 39 per cent taxpayer.

Squirrel Financial Solutions has published a table (www.mysquirrel.co.nz) giving examples of cash gains available by investing in PIEs versus non-PIE deposit accounts. Someone on an income of $50,000 and holding $300,000 in deposits would earn an extra $1560 net income per year through a PIE, assuming an interest rate of 8 per cent. The extra income for a $100,000-a-year earner with $300,000 of deposits would be $2160.

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