A new statement from Inland Revenue considers whether PIEs can undertake land development.  The question is both technical and practical, with implications for investment structures.

To recap, a Portfolio Investment Entity (PIE) is a company or fund (often a unit trust) that invests money on behalf of investors. The PIE regime was introduced alongside KiwiSaver to support long-term retirement savings and to streamline the taxation of managed funds. A key policy objective was to align the tax treatment of managed funds with direct investment outcomes.

Managed funds, particularly KiwiSaver funds, are characterised by diversified investor bases and diversified portfolios. Funds are typically structured around risk profiles such as conservative, balanced or growth which influence their allocation across asset classes including cash, bonds, equities and property.

Against that background, a question arises: can a land developer qualify as a PIE?

For these purposes, a land developer is an entity that acquires land, undertakes subdivision and development, erects buildings and sells the resulting lots or dwellings.

Inland Revenue’s draft view is that such an entity can be a PIE. This appears consistent with the legislation. The PIE rules permit investment in land and the derivation of income from land disposals. There is no explicit restriction preventing a PIE from undertaking development activities, including building.

That said, the issue is not without tension. The original policy intent of the PIE regime was to facilitate broad-based, diversified investment for retail investors. A single land development project may not, on its face, align with that objective. However, the legislation focuses on permitted investments and income types, rather than prescribing specific investment strategies.

In practice, many retail funds including KiwiSaver funds access asset classes through wholesale investment structures. These wholesale funds pool capital from other funds and hold the underlying investments directly. In that context, a land development PIE could operate as a wholesale vehicle, providing exposure to development activity within a wider, diversified portfolio. Such an approach could expand the range of investments available to retail investors, including exposure to development opportunities that would otherwise be inaccessible.

More broadly, there may also be wider economic implications. To the extent that PIE structures can facilitate additional investment into housing development, they could contribute to increasing New Zealand’s housing supply without the need for foreign capital to fund new residential land developments. Overall, the clarification is welcomed and will give certainty to fund managers.