Sophia decided to switch to a different superannuation provider. When the fund manager processed her withdrawal from their superannuation scheme, they applied a 0% prescribed investor rate (PIR) for the quarter when Sophia withdrew. Her usual PIR was 28%.
The fund manager’s documentation set out that they would deduct portfolio investment entity (PIE) tax at the date of withdrawal or, alternatively, they would apply a 0% PIR.
Sophia did not realise her investment, for the withdrawal quarter, had not been taxed at her usual PIR. She found this out when her accountant told her she had a tax liability. Sophia was not able to withdraw funds from her superannuation account (at her new provider) to pay the tax. She was going to have to borrow funds to pay it.
Sophia complained to the fund manager that they had used a 0% PIR. She was not satisfied with their response and complained to FSCL.
The fund manager said they always used a 0% PIR when investors exited their superannuation scheme during the quarter. The scheme was a quarterly PIE, which meant investors’ PIE tax liabilities were calculated and attributed quarterly.
When Sophia withdrew, the fund manager had to use a 0% PIR for the withdrawal quarter because they would not have been able to pay tax on her behalf at the end of the quarter (when they calculated PIE tax).
Sophia believed the 0% PIR method was to the detriment of exiting investors, and that investors’ interest should come first. She also questioned why the fund manager’s documentation set out two tax methods if all investors are treated the same (a 0% PIR).
We concluded that the fund manager had not done anything wrong. The 0% PIR method was not in breach of PIE rules, and it was consistent with information the fund manager gave in their documentation.
However, we encouraged the fund manager to review their communications with their clients. Their documentation set out two tax methods, but an exiting investor would not know which method had been used until they received their annual tax summary.
If the fund manager had told Sophia about the tax treatment of her withdrawal when they received her withdrawal application, she would have had more time to make plans for how she would pay the tax.
Sophia was disappointed with our review, but she agreed to discontinue her complaint.
Insights for consumers
Consumers may want to contact their fund manager, before they withdraw in full from a PIE, if they are unsure how their investment will be taxed for the withdrawal quarter. If a 0% PIR is used, the consumer may have to pay tax.
Consumers can also seek financial advice or tax advice before they withdraw from a PIE.