Commentaries
Helpdesk
Getting the best cash return & why x% is not equivalent to y%
- 1/1/2011
Advertisements appear in the media from time to time offering cash investment returns of “X%” but quoted being as “equivalent to Y%”.
It is important to realise that while factually correct, such advertisements fall into the “misleading category”. The return is X% before-tax. This is what the organisation pays and what you are taxed on. The Y% is made up.
Under the New Zealand tax regime, the level of tax you pay on your investment income, depends in part on the type of vehicle you invest through. Under some vehicles, you pay less tax than others.
If the cash return is paid through a vehicle that has PIE status (“portfolio investment entity”), including registered superannuation schemes with PIE status, the rate can be 10.5%, 17.5% or 28%, depending on your total taxable income. For registered superannuation schemes that are not PIEs, it is a standard flat 28% rate for everyone from 1 April 2011 (until then it is 30%).
If the vehicle is not a PIE or a registered superannuation scheme, the ultimate tax rate is the marginal tax rate of the investor. This is up to 33% and will be the same or higher than under a PIE.
Therefore, if a cash investment pays, say, 5.0% gross and you have a marginal tax rate of 30% or 33%, the net return you receive varies between 3.60% and 3.35% depending on the vehicle.
| Tax at 28% | Tax at 30% | Tax at 33% | |
| Gross return | 5.00% | 5.00% | 5.00% |
| Tax | 1.40% | 1.50% | 1.65% |
| Net return | 3.60% | 3.50% | 3.35% |
If you make the investment in a non-PIE structure, e.g. a bank deposit, and pay 30% or 33% tax, your net return is less than it is under a PIE vehicle. At 33%, the net of tax rate is 3.35% compared to 3.60%. There is a clear advantage to paying tax at a maximum of 28% under a PIE.
If you earn 3.60% after-tax and your marginal income tax rate is 33%, the 5.00%, is portrayed as “equivalent” to 5.37% i.e. you would have to earn 5.37% with a bank deposit, less 33% tax, to receive 3.60% after-tax.
However, the only return that matters is the net-of-tax and the net-of-fees return, i.e. what you get. Being “equivalent” to something that you don’t get, and they don’t pay, is misleading. Unfortunately, such claims can be typical of the complex tax environment we are in and for some reason “appear” not to breach the securities laws.
The answer is SuperLife
SuperLife is a PIE and has all the advantages of a PIE and a superannuation scheme. SuperLife’s cash pool generally earns the wholesale bank deposit[1] rate and is currently taxed at a maximum rate of 28%.
Investors who are looking for good cash returns from a provider who does not use jargon such as “equivalent to” or “very competitive” would be advised to consider using the SuperLife cash pool as a substitute for bank deposits as part of their retirement savings. Remember members have access to their retirement savings before retirement².
¹ the actual after-tax return SuperLife earns from time to time on its investments varies depending on market conditions.
² subject to the rules of their employer if they are a member of SuperLife through their employer.
