Mary Holm on investing

Mary Holm is a personal finance writer

Mary Holm: Health cover cost is killing client

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One way to keep insurance costs in check is to limit cover to what's vital and switch to a higher excess.

Self-insuring for minor mishaps while maintaining coverage for the really bad stuff usually works well. Photo / Paul Estcourt
Self-insuring for minor mishaps while maintaining coverage for the really bad stuff usually works well. Photo / Paul Estcourt

In your comments on taxes last week you omitted health insurance. As a member of Southern Cross since 1986 I not only assist the national scheme but also pay GST for the privilege. Am I mad? The increasing costs of this are killing me.

There's something ironic about health insurance killing you.

But seriously, have you thought of cutting back to coverage for just hospitalisation and perhaps specialist care? That's a fair bit cheaper. And if you are healthier than average for your age - and unlikely to be at the doctor's surgery every second week - you'll probably come out ahead.

However, you have to be prepared to take it in good grace if you end up paying for a lot of minor uncovered medical costs.

One way to cope with this is to take the same attitude to all your insurance. Unless you're a terror on the roads, switch to a high excess on your car insurance.

Unless you are unusually careless, switch to high excesses on your house and contents insurance. And unless you seem likely to develop a long-term illness, switch to a long stand-down period before you are paid under income protection insurance or similar.

In all cases, you'll reduce your premiums in exchange for reduced cover. And you're unlikely to suffer heaps of uncovered losses in all the different arenas - on the road, at home, and in your health. "Self-insuring" for minor mishaps while maintaining coverage for the really bad stuff usually works well.

By the way, I wasn't the one who listed all the taxes last week, it was a reader. (It worries me when people get that wrong, given the crazy things some readers write.)

Taxing questions

I have worked in the tax field for over 20 years so I can comment on the issue in last week's column. If you are going to impute morality into taxation, it becomes a slippery slope, which works both ways. For example:

* If I break the law (by speeding, for example) while earning my income, the IRD states that I can't deduct the fine on public policy grounds. This is on the basis that a fine is meant to be punitive and I should not get a tax benefit from it (despite there being no explicit reference to public policy in the tax legislation).

* A drug dealer makes $100,000 from selling drugs and incurs $40,000 of expenses. The $40,000 is tax-deductible. Why doesn't "public policy" apply to this situation? Should the Government benefit from the criminal activity, or should the tax instead go to victims of the activity?

* When the IRD starts an audit, it doesn't check whether the taxpayer has assets to pay tax that may arise from the audit. I understand that IRD auditors are measured based on tax re-assessments they issue, not tax actually collected. So if the IRD can't collect the tax debt, a large amount of taxpayer money has been wasted. Is it moral of the IRD to do this? If Inland Revenue auditors' remuneration is linked to the successful raising of re-assessments, is this moral conduct?

The IRD's Charter states that it "will apply the law consistently ..." However, I have seen the IRD adopt a tax position with one taxpayer but then take the exactly opposite position with another. The only apparent explanation is that it suited the IRD as part of the audit "strategy". Is this moral?

These are a few examples of why tax and "morality" are dangerous companions. The IRD has a statutory obligation to "use its best endeavours to protect the integrity of the tax system" which includes "taxpayer perceptions of that integrity". The above examples question whether this statutory obligation is being met.

In my experience, many taxpayers (and their advisers) who are audited by, or in dispute with, the IRD come away with a damaged perception of the integrity and "morality" of the tax system. The IRD auditors seem oblivious to the damage they cause as they are driven by maximising revenue collection. So it is not surprising if those same taxpayers lose respect for the tax system, or opt out of it altogether by moving overseas.

I'm struggling a bit with a slippery slope that works both ways. The top of a mountain ridge? Never mind.

Let's start with whether fines should be deductible. I say "no". Who wants to see habitual speeders happily adding up all their transgressions at tax time?

But what about criminals' expenses? The Income Tax Act "makes no reference to the legality or otherwise of activities as a result of which income is generated and expense incurred," says Inland Revenue. "Therefore the same tax rules apply to criminal trading activities."

However, IRD adds that criminals, like all taxpayers, must "be able to support their deductions with the necessary evidence". It's a bit hard to picture a crook keeping all his or her receipts in a tidy file. A lot must go undeducted.

Still, a case could certainly be made for ending criminals' deductions. In the meantime, let's hope that if they get caught the justice system deprives them of their ill-gotten gains anyway.

A final comment about fines versus criminal expenses: crooks probably get more than their fair share of non-deductible fines.

Inland Revenue also had comments on your other points, as follows.

On whether the department checks a taxpayer's assets before doing an audit: "It is important for the integrity of the tax system that ... a taxpayer can't just choose to spend or dispose of their gross income or, say, the PAYE deductions withheld on behalf of employees, and then not be held accountable purely on the basis they now have no money or assets to make good."

IRD also says that in many complex situations, "it is difficult to determine a taxpayer's true financial position, and therefore their ability to pay any tax, without first conducting an investigation".

The department acknowledges that auditors' work is judged partly on "successful raising of assessments". But it says that investigators "are actively required to engage with the taxpayer on the importance of securing payment of amounts assessed as a result of their investigation, including negotiation or facilitating instalment arrangements".

If an investigator becomes aware that a taxpayer is disposing of assets or taking other steps to prevent the collection of tax, they will "work proactively to secure assets".

On treating taxpayers the same, Inland Revenue says its commitments to apply the law consistently "are taken very seriously, and we have robust procedures in place to ensure as far as practicable that consistent treatment is applied across taxpayers".

Total consistency must be tricky when each situation is a bit different. And as the department points out, it has limited resources. Still, maybe it could do better.

Turning to your comments on the experiences of taxpayers who are audited or in disputes and their advisers, IRD says: "We require investigations to be conducted according to established principles, reviewed by senior staff, and often subject to legal review." It adds, "The 'damage' referred to is often serious non-compliance by taxpayers to the detriment of all, requiring Inland Revenue to act to protect the integrity of the tax system."

I don't suppose we expect audit "victims" to come away loving the IRD. Nonetheless, the department says, "A high proportion of businesses that have been subject to an investigation believe their investigation was conducted in a reasonable manner and the investigation was handled well."

So where are we? You've had your say, and so has Inland Revenue. Readers will have to draw their own conclusions.

But quite a lot of what you raise - such as whether crime proceeds should go to victims - is up to politicians not the IRD. Let's hope to see you asking some tough questions at election meetings next time around.

Slow response

Thanks for your comment last week: "phone or email other providers that appeal to you. The speed and clarity of their responses will indicate whether you're likely to get good service from them in future". That certainly made me rethink the decision I made a week earlier to switch from Gareth Morgan to OnePath KiwiSaver.

My friend and I were comparing our KiwiSaver balances. Given that she joined a month before her 65th birthday - as I did - and she pays $90 a month whereas I pay $100, I was quite surprised that her balance at the end of March was $11,700. Mine was $9400.

Even taking into account she is six months older and therefore ahead in the number of contributions, OnePath has clearly done well for her.

Recently I decided to look at changing to OnePath, but couldn't find a transfer form online. I phoned its free phone number but gave up after 30 minutes on hold. I

then decided to email it and got an auto response promising to get back to me ASAP. Here I am a week later and, having left a message on its answering machine this morning, I am reluctantly taking your advice. However, where to now?

I intend to cash in my KiwiSaver funds in two years and give it to my three grandchildren for when they are older.

I already save monthly for them, and when the amount is enough I put the sum into a term deposit. Obviously the more I can earn in KiwiSaver the better (even if it wasn't for them.)

A woeful story. I'm sure OnePath would say this is atypical, but given your multiple attempts to reach it, I don't blame you for looking elsewhere.

Many people don't need to contact their KiwiSaver provider while everything is flowing smoothly. But as you approach withdrawal time, you're more likely to want help, and that's when communications matter.

Two factors will explain the difference between yours and your friend's balances: fees and investment performance - the latter reflecting each fund's choice of investments and the slightly different periods you are looking at.

But I wouldn't get caught up in comparing investment performance. It varies all over the place. In the next period your fund might well do better than your friend's.

It makes more sense to look into fees, which don't vary and do make a big difference to balances.

Try the KiwiSaver Fee Calculator on www.sorted.org.nz to find a few providers that charge low fees for the type of fund you want. Then test those providers' communications, as I suggested last week.

PS. Lucky grandkids. One little tip: If there's a possibility of more grandchildren to come, don't forget to allow for gifts for them. There's nothing like unequal treatment to cause family rifts.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. 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 mary@maryholm.com 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.

- NZ Herald

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