Now don't get me wrong, my Mum's a good stick and I love her dearly, but she does have one habit that baffles me. She assumes that just because something is obvious to her, everyone else will know exactly what she means. Meanwhile, I find myself lost as she delivers the punch line to a joke or a story.
Recently I was reminded that I am well and truly a chip off the old block. At a recent series of presentations I asked each audience the same question: "Why was the tax on PIE [Portfolio Investment Entity] funds capped at 30% when we have marginal tax rates of 33% and 39%?" As I heard the answers, I repeatedly found myself in the same position my Mother often is. Knowing exactly what the punch line is, but with everybody else around me confused. In the main, people said it was either to align the tax rate for investment funds with the new company tax rate, or that it was in fact a mistake that would be fixed later.
On only one occasion did I hear the punch line that I had assumed everyone knew to the PIE story: "It is a tax incentive to get people to save." My first response to this experience was to check my facts to see if I was right. Perhaps the purpose of PIE wasn't really to create tax incentives. But, no. Right there in question one on the Treasury's website it said:
- Why is the tax rate on different savings products being reduced to 30 per cent?
"The tax reduction is to encourage individuals to save. Less tax paid on income from the savings vehicles will mean faster accumulation of savings by individuals."
It might just be me, but I am absolutely sure you can read this as being a tax incentive for the financial services industry. And what a great incentive it is. There is something in it for investors (less tax and more money in their pocket), something for advisers and investment managers (faster accumulation of funds by investors), and, finally, something for the Government (a greater pool of savings with which to grow the economy, which in turn will generate more tax revenue). At this point I had to ask myself why, if the answer was so obvious, is the answer not rolling off every audience members' tongue.
I guess this is where I have to stand up and take some responsibility. I have written many articles and done various media interviews about the tax benefits that relate to PIE funds. In these, I have gone into complicated explanations about how, for a 39% tax payer, PIE lifts their net return by some 14.75%. There have been lots of tables highlighting things, like for an investor on a 39% marginal tax rate, 8% from a PIE is like earning 9.18% from a normal investment. But I don't think I have ever explicitly promoted the simple fact that the PIE regime provides investors with tax incentives. And this is a primary purpose of PIE - pure and simple. It is not some loophole that the Government intended to fix. They created these tax incentives specifically to get more New Zealanders to invest in managed funds and to increase their wealth.
This is where Mum comes back into the picture. Just because something is obvious to you, don't expect other people to do mental gymnastics and understand your punch line. Despite the current investment environment, I think that, if the Government looked at the fund flow data into the managed funds industry at the moment, they would wonder what needs to be done beyond tax incentives to get people to save. To this I say: Be patient. There is a fantastic platform to get people to save into PIE funds. People will ultimately be 'money rational' and move to using PIE funds. This is because there is now a tax incentive to do so. It simply takes time to change conventional wisdom