Q: A few final words in regards to the discussion about purchasing a new versus used car. Your previous contributors have all made some valid points in regards to both options. However, something else your readers should keep in mind, whether they decide to buy used or new, is market conditions, which can often have a substantial impact on the price they pay.
Currently, a number of different factors are all contributing to a perfect purchasing environment.
The strength of the New Zealand dollar means new car prices are dropping. At the same time, we are seeing heavy discounting from manufacturers battling for a share of the new car market. This is also flowing through into second-hand car prices. And as more people trade up to a new car, supply in the second-hand trade-in market has increased.
There has also been an influx of imported used cars to New Zealand. The strong kiwi dollar against the yen is making New Zealand importers of used Japanese vehicles more competitive against other international buyers.
We have also seen a jump in the level of used cars being imported from Japan in the second quarter, as Japanese car buyers brought forward their purchase of a new car ahead of an April Japanese sales tax increase.
While used car prices have risen steadily since the global financial crisis, there has been a "drop" in pricing, particularly for used imports, in the last quarter, as vendors start to react to the increase in supply.
Changes to the Consumer Guarantees Act also kicked in on June 18, 2014, giving consumers who buy through auction, either on-site or online, the same protection as any other business-to-consumer sales transactions. This is great news for consumers as it reduces the risk associated with buying any product, not just a vehicle, at auction.
However, it is important for consumers to be aware that the legislation changes only apply to business-to-consumer transactions, not for private auction sales.
Signed: Todd Hunter, CEO Turners Auctions (name published with his permission).
A: A cynic might respond that of course you would say, "Now is a good time to buy"! But you back it up with some pretty solid facts.
I agree that these should be the final words on car buying for a while in this column. There are too many good letters on other topics waiting in the wings.
Q: In the first item in last week's column, you quote David Parker saying:
"KiwiSaver schemes, in effect, already pay tax on gains on overseas shares (outside Australia), and tax on gains on New Zealand and Australian shares and property if they are traders."
This is incorrect. He is right about international shares but wrong on Australian and New Zealand shares - which are exempt from tax on capital gains.
On the IRD website, it states: "Under section CX 44C, gains on the disposal of shares in New Zealand-resident companies and Australian-resident companies listed on an approved index of the Australian Stock Exchange by portfolio investment entities are not taxed." This was one of the major differences for tax for managed funds when the PIE regime started.
A: David Parker, Labour's finance spokesperson, responds, "Apologies, I was misinformed about the treatment of PIEs - your reader is correct on the current treatment. However, this does not affect my response on the substantive point - KiwiSaver will be exempt from Labour's CGT (capital gains tax).
"Our intention is the CGT will neither increase or decrease the tax paid by KiwiSaver funds. The detail will be addressed by the expert working group established to implement the CGT."
KiwiSaver tax query
Q: I am writing regarding the second Q&A in your column last week. I cannot see the logic for the argument, taken from the 2011 Savings Working Group, for the removal of income tax on interest earned on interest re-invested.
Presumably the interest earned in subsequent years on the re-invested interest would also be non-taxable. This would effectively create two classes of capital: one subject to income tax and the other not.
I'm unsure whether the intention was that this apply only to KiwiSaver investments, or to all investments. If applied only to KiwiSaver it would give a huge advantage for KiwiSaver over any other superannuation or investment vehicle.
If applied to all investments it would have significant implications for our accounting, banking and tax systems. Handling this complexity would be an administrative nightmare.
A: Neither the Savings Working Group nor the Fair Tax for Savers Campaign is proposing the removal of tax on interest earned on interest in KiwiSaver - just a reduction in the tax rate.
Under the campaign's plan, "the tax rates would be cut so the effective tax rate on your accumulating KiwiSaver earnings till age 65 will be no greater than the marginal tax rate you pay on your other income", says Peter Neilson of the Financial Services Council. "You will recall the Savings Working Group made the same point and recommended a 5 to 10 percentage cut in each of the KiwiSaver PIR rates to achieve something similar."
The campaign says this change should apply to just KiwiSaver, because "Only KiwiSaver has the requirement to keep reinvesting your earnings till age 65, so in effect reinvesting for compound returns is a compulsory feature, even if joining KiwiSaver is voluntary," says Neilson.
Neilson gives examples of how tax affects KiwiSaver savings.
After 10 years, savings might be 44 per cent less than they would be without tax. And the effect increases with time. After 40 years, savings might be 55 per cent less. These are horribly high effective tax rates.
"The proposals we have made do not give any advantage to KiwiSaver," he says. "They just remove the current overtaxation of KiwiSaver earnings, which creates a more level playing field with other forms of investment."
The campaign also calls for a different tax break for term deposits, which would tax only the interest earned above inflation.
Kickstart would stay
Q: I appreciate your recent comments about the capital gains tax proposals and KiwiSaver. However, no one seems to have yet mentioned other changes that would probably result from Labour's proposal to make KiwiSaver compulsory.
Right now, there is a government grant when you enrol in KiwiSaver. This is obviously intended as an incentive to get people to join.
Can you see this incentive surviving for long under a compulsory scheme? After all, there is no point in offering an incentive if participation is compulsory.
A: Labour has said that the $1000 kick-start would remain, along with the maximum $521 annual tax credit, hardship withdrawals, and first home withdrawals and subsidies.
However, the kick-start would be paid over five years for those compulsorily enrolled, presumably to spread the cost for government.
I take your point, though, that a future government might be tempted to stop the kick-start - although once compulsion had started it wouldn't apply to many people, just employees entering the workforce.
A more tempting target for a government might be KiwiSaver tax credits, which would be a much bigger ongoing cost.
Still, ending either the kick-start or tax credits would be pretty unpopular - unless, of course, KiwiSaver tax breaks such as those described above were introduced at the same time.
Employer rate queried
Q: I wonder about employer contributions to KiwiSaver. I thought that employers were obliged to pay the same amount as employees.
As I pay 3 per cent, I would expect the employer to pay the same 3 per cent. However, my employer (the Ministry of Education, which usually correctly pays me with Novopay, though not always) pays about 2.9 per cent. Is this legal?
A: It certainly is legal. Since April 2012, employer contributions have been taxed - at rates ranging from 10.5 per cent to 33 per cent, depending on the employee's taxable income. So there should actually be quite a lot less than 2.9 per cent going into your KiwiSaver account from your employer.
Also, if an employee chooses to contribute more than 3 per cent of their pay, the employer doesn't have to match that. Their obligation is to contribute 3 per cent.
Q: Firstly, I agree with you that those who are eligible for a state pension from another country that is similar to NZ Superannuation (in that it is universal, equal to all residents of that country and funded by the general taxes of that country) should not get extra benefit. The overseas pension received should reduce their NZ Superannuation, if for no other reason than that while they earned that benefit they were not paying New Zealand taxes.
Examples of this are the Australian, UK and Canadian old age pensions, although the eligibility rules vary from country to country.
However, the New Zealand Government is going beyond that. I have lived overseas, including a period in Canada. I may be eligible for a partial Canadian Old Age Security pension, and understand that this will be clawed back by the New Zealand Government.
However, Canada has a further level of pension, the Canada Pension Plan. This is not funded from taxes but purely from payroll deductions. The amount that you receive is a function of the amount that you have contributed - that is, it is a pension based on your personal contributions.
The New Zealand Government, however, claws this income back using the excuse that it is a government-managed pension! Thus money that was deducted from my income will be grabbed by the New Zealand Government.
A: It is indeed complex. I don't envy the people who have to work out how to fairly blend NZ Super and other countries' schemes.
It's true that overseas schemes in which each person contributes from their pay are pretty different from NZ Super. People feel that their payroll deductions are their own money, which they will be able to spend in retirement. And people on higher pay end up with bigger pensions than their lower-income workmates. But should all of that matter?
The main issue is this: if we let you receive your Canada Pension Plan money plus the full NZ Super, you would end up with higher total government-run pensions than people who have lived in New Zealand their whole lives. Ditto for me and US Social Security.
That's not the New Zealand way of doing it. We've decided to give everyone the same government pension. That sits well with me. After all, higher income people are more likely to have mortgage-free homes and much bigger non-government pensions and/or other retirement savings anyway.
For further info on how different countries' pensions affect NZ Super, click here.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.
Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.