A student may learn more from investing in shares than in some lectures. Photo / 123rf
OPINION
Question: My 18-year-old son is off to university next year. For his 18th birthday, he got about $1000 in gifts. He is using a shares app to invest it.
While pleased he isn’t spending it on fripperies, and that he’s on board with shares being a long-term investment, we are concerned. We’ve talked about cashflow and that he may be okay for his first year in halls, but he may need to cash in that money within the next four years at a disadvantageous moment in the cycle, as he won’t be showered with money from his parents.
Do you have any advice for him please, as he may listen to you. Or perhaps we should just let him get on with it? At least it’s not bitcoin!
A: I would let him do his thing.
You’re right, of course, that it’s not wise to put money into shares if you expect to spend it within about 10 years, let alone just a few years. On the other hand, it’s a great chance for him to learn about investing. If, instead, he did the sensible thing and invested in bank term deposits, he’d learn little.
Later, if he finds he’s short of money because he’s made some bad investment moves, presumably he can add to a student loan or work part-time. After all, we’re just talking about $1000.
In the meantime, he may learn not only about short-term and long-term investing, but also:
· How diversification reduces risk – not just by owning shares in many companies, but by spreading share ownership across a range of industries and a range of countries.
· How it doesn’t work to try to time when to buy and sell shares. He might do well at first, but nobody keeps winning from timing. Buying and holding works better.
In the end, this education may be worth more than what he learns in some of his lectures.
Q: A capital gains tax is a total nonsense. It’s nothing more than a tax on inflation. The only reason house prices are rising is because of the devaluation of your money. So it takes more and more dollars to purchase the same old home.
Look at it this way: if you saw a $1 coin 20 to 30 years ago on the pavement, and you picked it up, you actually could buy something with it. Now it’s hardly worth the effort to pick it up.
So why should you pay tax on house inflation?
A: I agree that it seems unfair to tax the gains we make when we are simply keeping up with the cost of living.
My ideal capital gains tax (CGT) would take into account general CPI inflation – which measures rises in the prices of the goods and services we most commonly buy. People would only pay tax on gains above inflation.
However, house prices have risen much more than general inflation.
Over the last 10 years, CPI costs have grown 30%, but house prices have doubled, the Reserve Bank’s inflation calculator tells us. And over the last 40 years, CPI costs have quadrupled, while house prices have grown more than 14-fold.
Let’s assume here that people wouldn’t be taxed on gains on their family home – which is what happens in most countries. This is because when someone sells their home, they are usually moving into another home – perhaps in another town, or they’re switching to a larger or smaller place. Taxing their gain at that point would leave many people unable to afford to move to a home of similar quality.
But when someone has invested in other properties – or shares or gold or whatever – I don’t see why they shouldn’t be taxed on gains over and above CPI inflation. Remember, they would still keep most of their gain. Nobody is talking of taxing gains at anything like 50%.
Income tax should also be adjusted for inflation. We would then pay higher tax only to the extent our taxable income was growing faster than inflation.
Adjusting income tax for inflation would, of course, reduce how much money the Government receives. And while that might sound appealing, we wouldn’t be so happy with all the cuts in government services that would follow. So tax rates would have to be increased to compensate.
But – and this is an important point – if we introduce a CGT, income tax rates could rise less. In recent years, the discussion about taxing capital gains has always assumed the change would be “revenue-neutral”. That means income taxes could be lower than they would otherwise be, so the total tax take is unchanged.
A CGT would inevitably take effect gradually, probably applying only to items bought after the tax came into effect. So income tax couldn’t be reduced by much in the first few years. But that would gradually change.
The total effect of all this is people whose income rises faster than CPI inflation would pay more tax – whether the income is from work or gains in the value of assets when sold. But people who are going backwards, because their income doesn’t rise as much as inflation, would pay less. I don’t call that nonsense.
Q: OMG! The comments last week about Infratil shareholders simply banking the gains and selling the shares when “they need cash” surely is the biggest single piece of literature ever published supporting the need for a comprehensive capital gains tax!
A: Some shareholders already pay tax on their gains. While New Zealand’s current law about taxing gains on investments that were bought with the “intention or purpose of reselling them” is vague, at least frequent traders in all investments usually end up being taxed.
But a good, comprehensive CGT would cover all investments in shares.
Q: You may be interested in us. See www.capparty.org.
A: I am indeed interested. Apparently you’ve formed The New Zealand Capital Gains Party, which has just one policy, to introduce a CGT. “We are a coalition party,” the website says, “so we will join with other parties and they will manage all other policies.
“The top 10% of Kiwis own roughly 60% of all the wealth and the report below [IRD research] tells us they are roughly only paying 10% tax when everyone else is paying 20%. It is them we are targeting.”
Your website makes some wise responses to various objections often raised about CGT. Good on you!
Q: The inability (or unwillingness) of Government to fund what many would see as essential services such as ferries and hospitals focuses on the conundrum that we all want a certain standard of care but we can’t or don’t want to pay for it.
The simple reality is that for essential services to be continued and – especially as the demographic wave mounts – tax revenues need to be increased. There is much discussion on a CGT and a little on wealth tax, but I’ve heard almost nothing as to inheritance taxes.
It occurs to me that the most painless means of wealth extraction is when the owner no longer needs it. In the past, estate duties were avoided by the use of trusts, but that is surely something that avoidance/evasion drafting can rectify.
Anticipating howls of Boomer protests, might I observe that inheritances can still be passed on. Charities might enjoy tax-free bequests and, depending on the tax rate, other beneficiaries would still enjoy the major part of their bequests.
It is possibly worth those poised to express their outrage recognising that much recent wealth arises from spectacular windfall property appreciation, rather than the sweat of one’s brow.
A: It’s an interesting idea, too quickly dismissed by many. Sure, people have dodged inheritance tax in the past, not just by using trusts but simply by gifting money before they die. But as you say, there are ways to curb that. The Government already checks on gifts made when assessing people for the residential care subsidy. See tinyurl.com/ResSubsidy.
I like what two academics have written about an inheritance tax:
· In a 2020 article on The Conversation website, Victoria University lecturer Jonathan Barrett writes of the heirs of home-owning Boomers receiving “a currently untaxed bonanza. Ignoring this unprecedented transfer of wealth from people who no longer need it to people who haven’t earned it would be absurd. But equitable tax policy must first overcome political timidity and rhetoric”.
Barratt says we should focus not on the person who has died, but on the recipients of the wealth.
“Unlike a CGT, which can be perceived as penalising business owners, a CAT (capital acquisitions tax) targets unearned windfalls from an accident of birth. This should make a CAT more politically acceptable than a CGT.”
· In a 2017 Newsroom article, University of Auckland tax expert Mark Keating starts with the history.
From 1866 to 1993, this country had a mix of inheritance and gift taxes, at varying rates and affecting people at varying levels of wealth. The inheritance tax ended in 1993 and gift tax in 2011.
“New Zealand is not alone in abolishing death duty. But all other countries that have done so, including Australia and Canada, impose an indirect form of death duty by taxing the transfer of inherited assets under their standard capital gains taxes,” Keating says.
“This leaves New Zealand alone among comparable countries that impose no tax of any kind on inheritances, regardless of their value. Whatever the quality of the Kiwi lifestyle, New Zealand has become a great place for the wealthy to die.”
Keating adds, “If we are truly concerned about growing inequality, then a broad-based and low rate of death duty would start to rebalance the ledger. After all, death duty may be one of the few taxes that no human can avoid.”
It’s hard to argue with either Barrett or Keating.
Q: I disagree with your comment last week that rich people who get New Zealand superannuation are in a similar position to students who take out a student loan to invest when they don’t need it.
The purpose of a student loan is to assist with higher education needs and is a targeted system. I think it’s dishonest to take money you are not entitled to and use it for other purposes. This, after all, is taxpayers’ money.
A pension, on the other hand, is given to everyone who qualifies at 65 and this makes it simple to administer. While wealthy people may not need a pension, they are nevertheless entitled to it just as they are entitled to the same healthcare as others.
A: A fair point!
Q: My mum was offered shares by her employer in the 2000s. Her first reaction was to decline this offer, but we told her it was silly to turn something down that was free!
Over the years she has received dividend income off those shares. Last year she died aged 88, and the estate has now sold these shares. The estate received nearly $47,000 after the broker’s fee. What a win!
A: Thank goodness you persuaded your Mum.
Q: If someone leaves me something in their will, am I obliged to accept it?
I’m not talking here about some small object, like a horrible vase which one can easily dispose of at the tip. I have a mischievous relly who owns a deplorable lifestyle block in the middle of nowhere. He says he’ll leave it to me in his will, even though I’ve told him not to. The last thing I need at my time of life is to inherit the place and face rate payments and the bother of getting rid of it (no easy task). Am I stuck with it if he goes ahead with his notion?
He has also from time to time asked me to be the executor of his will, even though I have declined and have recommended the Public Trust to him instead. What is my situation if, after he passes, I find he has named me for this task?
A: If your relative leaves you the lifestyle block, why don’t you donate it to a charity? They will then have the expense of selling it, but surely the property will be worth a fair bit more than that cost. And it would give you the chance to direct money the way of an organisation whose work you appreciate.
On being an unwilling executor, you can decline that role, the Law Society says.
“Essentially, they renounce their right to apply for probate. They would need to sign a document to do that.
“If there are no other executors named in the will to continue with a probate application, then the beneficiary [or beneficiaries] with the greatest claim on the estate often take the lead in applying for ‘letters of administration with the will annexed’, pursuant to the Administration Act.”
Or, in ordinary English, don’t worry about it.
* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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 click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
Lower bond yields have helped drive the NZ sharemarket sharply higher at the close.