Question: In July, I will be 54 and mortgage-free on two properties. Between them they have a value of $1.25 million and I aim to rent them out for $500 a week each. My KiwiSaver balance is $60,000 and I aim to contribute $10,000 a year.
One property will be paying off a $100,000 loan on my new home — a self-contained, off-grid caravan (plus towing vehicle), which I will use to tour the South Island.
The other property will finance insurances, rates, taxes, KiwiSaver and spending. I live frugally yet comfortably.
I know the challenges of caravan living. Having just had four months travelling in a van, I loved every minute. Any money I earn, be it fruit picking, cafe work, or anything else I can pick up, will be a welcome bonus.
In five years, I intend to sell the caravan to raise funds for an extended Europe trip, before returning to New Zealand for more motor homing and a graceful retirement.
Am I missing a major something or am I, in fact, on to a good thing?
Mary Holm: The subject of your email was "midlife crisis", but it should have been "got it sorted".
Many people would struggle with living on $500 a week, given that you plan to pay insurance, rates, tax and nearly $200 a week to KiwiSaver out of it. But you're expecting to pick up jobs along the way, and it sounds as if you know how to budget.
A key feature in plans like yours is to have an "out" if it doesn't work. Let's say one of your properties needs expensive maintenance work. Or you develop health problems that make caravan living difficult.
No worries! You have two valuable mortgage-free homes behind you. And in 11 years you will receive NZ Super. It's hard to imagine a scenario that will find you in financial difficulties.
What's more, you've tried the nomadic life before buying. Go for it!
More CGT complexities
Question: I don't have a problem with broadening the New Zealand tax base and making it fairer, provided any change is not overly complex. The Tax Working Group capital gains tax proposal seems to fail this test.
While the family home is excluded, presumably to avoid creating a barrier to changing or upgrading housing, the proposal doesn't even meet this objective for many.
Pages 12-14 of Volume II of the Working Group final report proposes that owner-occupied homes will, in part, be subject to CGT where the homeowner earns income from boarders or flatmates, Airbnb-type accommodation, or where there is an attached flat, home office or home business premises.
To avoid the CGT, the alternative offered is that such homeowners give up the expenditure deductions currently available to them.
In my street of 38 houses, I know of at least seven owner-occupied houses that will be captured by these provisions.
Mary Holm: You're quite right. And this hasn't received a lot of publicity.
If the Working Group's proposal becomes law, people who use part of their property to earn income, while also living in it, have two options:
●If the property is used more than 50 per cent as the person's home, they can choose to treat the whole property as their home, so it won't be subject to CGT. But they won't be able to continue to deduct costs relating to the property, such as a portion of their rates and mortgage interest. And they will still be taxed on the income they earn from the activity.
●If they want to keep deducting the costs, or if they fail the 50 per cent rule, when they sell the property they will be taxed on a portion of their gain. The portion will depend on the floor area used for income earning versus private purposes, and how long the property has been used for income earning.
The section of the report that you mention gives examples of people in different circumstances.
I can understand why the Working Group has included this in its proposals. If other business assets are subject to a CGT, it's not really fair to exclude an asset just because it's used partly as a home. If gains on the whole home were taxed, that would be unfair. But it will be just the portion used for business.
Nonetheless, as you say, this does make the system more complex. Many people who currently have flatmates, a home office or similar, will have to choose between deductions plus CGT, or neither.
That choice might depend on comparing their current financial situation with how well off they expect to be in the future — a tricky prediction.
Here's a scenario that could be worrying: A person uses 50 per cent of their home to produce income, and they choose to keep deducting their expenses. When they sell their home, they've made a gain of $400,000, of which 50 per cent, or $200,000, is taxable. If they are in the 33 per cent tax bracket, they will pay tax of $66,000.
That means they have $66,000 less to buy a new place. If they haven't got other money, they may have to move to a smaller or less appealing property.
Hopefully, though, they will have savings from their business to help with a new purchase. Or they might be happy with a smaller home if they no longer plan to use part of it to earn income.
Hide and seek I do not understand how "the wealthy can hide income in various ways". I realise this is not your quote, but in your last column you said: "But it's probably true of the richest 10th of New Zealanders — the people the quote was referring to."
I don't think it is possible to "hide income" legally. Yes, you can negative gear or simply gear a business, shares or property. But the interest costs and principal repayments have to come from tax-paid earnings. So those wealthy are still paying a lot of tax.
The main advantage that the "wealthy" have is excess income over living costs.
Therefore they can further invest in shares, property or business. This investment produces even more taxable income (if successful).
Yes, there may be capital growth, but you can only spend capital growth once.
Please explain to me how the wealthy "hide" income.
I'm no expert on this. I don't want to be. But there are all kinds of ways to hide income — especially if you can afford expensive lawyers, accountants and advisers.
Some simple examples — you give income-earning assets to spouses, family members, trusts or companies.
On your comment about spending capital growth only once, surely once is enough if your capital has grown hugely.
Question: I read your last column and I think you are underestimating the effect of a capital gains tax on KiwiSaver.
The Simplicity study was based on a 20-year-old contributing to KiwiSaver over 45 years.
What would be the effect for a 40-year-old, or somebody in their 50s or early 60s, or someone no longer saving because they have retired?
Additionally, you have frequently stated that funds should be chosen based on low fees, and Simplicity have among the lowest fees currently on Sorted. Would other schemes show the same benefit if they were charging higher fees?
Finally, even if the total effect was small each year, say 0.5 per cent, would that not have the same impact on savings as a fund charging 1.27 per cent instead of 0.77 per cent?. It would be an additional drag on returns compounded over years.
Mary Holm: To get other readers up with the play, I said last week that the Tax Working Group recommends a capital gains tax on New Zealand and Australian shares, which would reduce returns on KiwiSaver funds that hold those shares.
But, to counter that, it also recommends: increasing the maximum KiwiSaver tax credit from $521 to $781.50; cutting KiwiSaver tax rates for people on lower incomes from 10.5 to 5.5 per cent, and from 17.5 to 12.5 per cent; refunding tax on employer contributions to those on lower incomes; and giving the maximum tax credit to all members on parental leave.
If all these recommendations are adopted, all members earning less than $70,000 a year would be better off, as would most on higher incomes, says the Working Group.
KiwiSaver provider Simplicity had similar findings. People earning $40,000 would be considerably better off. People earning $70,000 would see little difference, as would those on $100,000 in a balanced fund. But people on $100,000 in a growth fund would be a bit worse off.
I noted last week that this assumes providers don't react by investing more in global shares and less in Australasia, which would improve investors' outcomes.
You're correct that Simplicity looked at what would happen for 20-year-olds taking part in KiwiSaver until 65. The effect on 40-year-olds at the different income levels would be similar but weaker, because they would operate under the new rules for a shorter time. On 60-year-olds it would be weaker again.
For the effect on retired people, see the next Q&A.
On your point about fees, I doubt if CGT would affect high and low-fee funds very differently. If everything else is equal, low-fee KiwiSaver funds will always do better than high-fee ones, regardless of CGT.
Your final paragraph is correct. But given that most KiwiSaver members are likely to gain if the whole Working Group package is adopted, it will have the reverse effect. Although benefits might be small each year, they will compound over the years.
Question: I have tried writing to the Minister for Seniors on this issue but have not managed to get any help so far from her.
I will retire in late 2020 and I need to understand if CGT will mean that I have to take out less money than I can currently expect from my KiwiSaver account.
I read that some savers may well be better off but nobody is talking about seniors. We are not all rich baby boomers and even a small percentage drop in returns each year will compound over the next 20 to 30 years, and my life will be harder because of it.
Do you have any idea (projecting current proposals) how CGT will affect a retired person's KiwiSaver?
Mary Holm: Your letter is one of several asking much the same question. So I'm pleased to tell you all to stop worrying.
First, retirees on low to middle incomes would benefit from the considerably lower tax rates.
Also, people who are withdrawing money from their KiwiSaver account should be in a lower-risk fund — at least for the money they will spend in the next 10 years — because they don't want to suffer from a market downturn while they are withdrawing. And lower-risk funds don't hold many shares, so they will be affected much less by a CGT.
Still, higher-income retirees in higher-risk funds may find themselves somewhat worse off — if all the recommendations are adopted.
That's a big "if" though. The Government has yet to decide what to adopt. And then it has to be re-elected to make those changes into law.
Whatever happens, I can't see a change that would leave at least lower-income KiwiSavers — before and after retirement — worse off.
Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a 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 firstname.lastname@example.org. 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.