By Mary Holm
Money Matters
Q. Recently you commented on having some fun while investing sensibly.
A savings investment of $20,000 has recently matured. My husband and I are in our 60s, we are debt-free and have sufficient income from a careful mixture of Government stock and equities.
Thus I am looking for one to three investments, probably - but not necessarily - equities, which are something I can keep a watch on and which are involved in interesting activities.
While I don't want to be reckless, I can afford to undertake some risk. I hope you can comment.
A. Put on your adventure gear. And bring along your glad rags, ready for later.
After a little chat with Steve Ellis of stockbroker Ellis Bros, I've planned a day for you to inspect your holdings.
In the morning, you can choose between the Mt Cavendish Gondolier in Christchurch or Rainbow's End in Auckland (both owned by listed company NZ Experience).
After lunch, it's Kelly Tarlton's or Treble Cone ski field, travelling in a Maui Campervan (Tourism Holdings).
As evening draws in, sip on a beer (Lion Nathan or DB Group) or glass of wine (Montana or Nobilo's), followed by dinner at KFC or Pizza Hut (Restaurant Brands).
Then it's a movie at a Village Force or Village Rialto theatre (Force Corp).
You'll round the night off with a quick whirl at the casino (Sky City), and fall asleep to music on Radio Pacific (Radio Works). Happy?
Neither Ellis nor I are saying these shares are necessarily good investments. But the companies do make fun products.
Spread your money around a few of them and, with luck, you'll do well.
In any case, you can have a good time boosting "your" companies' revenues.
There's nothing like being able to justify extravagance by claiming that you'll benefit as a shareholder.
Q. If having a mortgage through a "company" is legal, why is it not common knowledge? Why are we (mortgagees) all not doing this? What are the legal ramifications?
I have only just become aware (and I have been around the block a few times!) of a vehicle to avoid/evade tax.
Briefly, you set up a company, the company gets a mortgage, and you as individuals pay rent to the company. This I understand allows the company to claim all legal costs, mortgage interest payments, maintenance and depreciation.
Surely there must be some drawbacks?
Appreciate reading your answer (unless you already do this yourself and don't want to upset the apple cart - just kidding - honest!).
A. The apple cart stays upright. No I don't already do this, for a couple of pretty good reasons.
One is that it's likely I'd fall foul of Inland Revenue. The other is that it's quite a hassle, and an expensive one at that. The costs might well outweigh the benefits.
If you decided to plough ahead anyway, you would want to set up a Loss Attributing Qualifying Company (LAQC), says KPMG tax partner Craig Elliffe.
"In an ordinary company, the losses would be trapped in the company. It would be highly tax inefficient."
There's nothing legally wrong with having an LAQC that owns your home. But you might be in trouble if it starts deducting expenses.
The Inland Revenue Commissioner could "examine it with a huge amount of scrutiny," says Elliffe. And the commissioner is likely to "successfully assert that one of the purposes of the arrangement was tax avoidance." The deductions would be disallowed, and you could face penalties.
What if you could come up with other purposes? "It's a bit confusing how far the pendulum swings in terms of tax avoidance.
"But there's a mass of cases that show that there need to be substantial business or family reasons for the transaction to be effective."
An example? "I could envisage it making commercial sense if someone already had a rental business company, and they sold their house and needed to occupy a company property for a short period."
You could, perhaps, say you were setting up the company for protection from creditors.
"But to do so the shares would need to be owned by a trust. The losses would flow to the trust, not the individual. That would negate it all."
Another point: Elliffe says that the company would get a tax break only to the extent that its interest and other costs exceed the rental income. And the company would have to charge a market rental, which the individual would be paying from tax-paid dollars.
Need any more discouragement? Setting up the company would probably cost several hundred dollars. And of that, only the costs of financing and arranging the lease would be deductible.
"The fees for establishing the company and acquisition of the property itself are non-deductible."
Then, each year, you would have to prepare financial statements, file a return with the Companies Office and another with Inland Revenue.
Unless you took that on yourself, you would have to pay an accountant at least several hundred dollars a year to do it.
I don't know about you, but it makes me tired even thinking about it all.
Q. My wife and I have two rental properties on which there is $180,000 owing on a flexible mortgage.
For two years now we have received very good tax rebates due to the net loss we made. Part of this loss was the result of the interest paid on the mortgage.
I am wondering if it makes sense to continue to reduce the mortgage. Once it is paid off we will presumably be making a profit out of our properties and paying tax at 33 per cent on it.
Would it not be better to put any spare money we earn into some other form of investment, paying off the mortgage when we sell the properties?
I am semi-retired and will probably continue for another four years. My wife works full time and will probably continue for a further nine years.
A. Heaven forbid that you should make a profit rather than a loss.
You've got caught up in the tax trap, putting more emphasis on what you write on your tax return than on the money going into and out of your pocket.
If you make a $100 profit, and lose $33 of it in tax, you're up $67. If you make a $100 loss and, therefore, pay $33 less tax on other income, you're down $67.
You'll always be better off without a loss - unless, of course, you're using your money elsewhere, instead, to make a profit that more than offsets the loss.
In your case, that would mean putting your spare money into an investment that brings you a before-tax return of more than the mortgage interest rate.
That's possible, particularly in shares. You could, for example, try one of my favourite investments, an international index fund that holds shares in the world's biggest companies.
In recent years, these funds have performed brilliantly. But they also sometimes have negative returns.
Remember, too, that you would benefit from such an investment only to the extent that your return is higher than the interest you're paying on your mortgage.
If the return turns out to be lower, you're worse off than if you had reduced your mortgage.
At your stage in life, I don't think I would bother with extra hassle that might well do you more harm than good.
I suggest you forge ahead and get rid of that mortgage as soon as you can. As you approach retirement it's great if your real estate - whether it's your home or rental property - is mortgage-free.
It's true that you'll then have to pay tax on your rental profit. And, if your income is more than $60,000, it will soon be at 39 per cent rather than 33 per cent.
Just close your eyes and think of all the good things the Government is doing with those tax dollars. (Now, now. No sarcasm. There must be some Government spending that you approve of.)
Then enjoy the money that's yours, after tax.
* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. We cannot answer all questions or correspond directly with readers.
AdvertisementAdvertise with NZME.
Latest from Business
Market close: NZ stocks head into Easter on a positive note
The uptick came despite a trading halt, voluntary administration and a product recall.