Pathfinder Monthly Commentary: Death and taxes – how certain are they?

In 1789 Benjamin Franklin famously wrote “in this world nothing can be said to be certain, except death and taxes.”  However tax rules are not always certain - the real world application is often unclear.  This month we look at tax issues for investors around PIE and Australian Unit Trust structures.  We recognise that for most sane advisers, fund managers and investors, tax is not an exciting topic – so we’ll keep this commentary short and succinct.

There are a number of factors to consider when comparing the efficiency of PIE and Australian Unit Trust (AUT) structures for investing in international shares.  Before we jump into the tax considerations, here is a summary of some of the key non-tax factors:

• Currency exposures:  Australian Unit Trusts are typically not built for NZ investors – any currency hedging will be for the benefit of A$ investors.  Be aware of underlying currency exposures (do you want un-hedged A$ exposure in the portfolio?).
•  Compliance costs matter:  PIEs are a clear winner over AUTs on the tax compliance front. PIE income does not need to be included in a tax return – a significantly lower compliance burden for investors.
•  Watch out for the “fund of funds” structure:  Many PIE funds investing in international shares do not hold any shares because they feed into an offshore share fund.  This will introduce another layer of costs and may also mean that some of the inefficiencies of offshore structures (that we mention below), also apply to that PIE fund. 

1. Australian Unit Trusts (AUTs) and the hidden withholding tax drag