Partying and fun veil pressure to give to ‘worthy’ cause and could be classed as illegal pyramid schemes in US.
I have a friend who would like to join a women's gifting circle for $7000.

The idea is that people gift the money so it is not considered taxable. Eight people gift one woman who organises the circle and she then has $56,000.

How would this be taxed if at all? I understand this is a pyramid scheme — gifting dependent on membership and new recruits rather than for services. Still, I would like to know how this income is treated by the IRD.

First, let's look at what a women's gifting circle is, and whether they are legal.

From what I can gather online, eight people give one person money, as you say. The recipient then donates all that money to a worthy cause. Then each of the givers can set up her own circle — if she can talk eight people into giving to her. And so on.

There's a lot of partying and "fun" around it all, and pressure is applied because "you want to help out worthy causes, don't you?"

Or, as an American lawyer called Samuel Owen says in an online article, "They also tell you some wild story about how she is going to save the lives of three Afghan war orphans with diabetes living in abusive Taliban homes, but you aren't supposed to tell anyone. It's a secret."

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I recommend reading this article here. And if you do an internet search on "women's gifting circles", there are lots of other worrying articles.

One of them points out, "Your friendships are reduced to commodities, an asset to trade on in order to get more money into the system."

Owen concludes that gifting circles are illegal pyramid schemes in the United States, but what about here in New Zealand?

"There isn't enough information in that letter for us to comment either way, sorry," says a spokesman for the Commerce Commission. "Obviously gifting money to charity or some sort of cause is perfectly legal, so if that is the purpose and outcome then that is great.

"Generally speaking, pyramid schemes do occur in New Zealand and are illegal, so if anyone believes they have uncovered or become involved in one they should get in touch with us."

The key issue here seems to be whether somebody — other than a worthy cause — is making money from the scheme. According to the Commerce Commission website:

"A pyramid scheme can take many forms, but has the following essential elements:

• "It offers a financial return based on the payments made by new recruits.

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• "The return is dependent primarily on the continued recruitment of new members, not sales of a product or service."

Why are pyramid schemes illegal? Says the website, "Many participants will always be at or near the base of the pyramid and will not achieve the promised return on their 'investment'. Only the few initial participants at the top of the pyramid are likely to make money, since the number of possible new recruits in any community is limited."

I suggest that if your friend does get involved, she keeps a close eye on where all the money goes — and is prepared for disappointment if the whole thing peters out before her big day.

Okay, on to tax issues. You seem to be concerned about someone having to pay income tax, but there is no tax in New Zealand on gifts you give or receive. On the contrary, there are probably some tax breaks involved.

"Based on the information that you have given me this is our perspective," says an Inland Revenue spokesman. "So we're working here on the lines that the person who gets the $56,000 is going to donate it to 'a worthy' cause — charity.

"If that was all that was involved then if the recipient of the gift donates the $56,000 to charity she is likely to be able to make a donations tax rebate claim of $16,800 (assuming the donor is entitled to the full amount of the rebate claim)." These claims are 30 per cent of donations.

"On the other hand, if the person who wrote to you to ask you this question made the gift of $7000 directly to the 'worthy' cause, they could get a rebate of $2100 themself."

If it were me, I would far rather give the $7000 directly — knowing it will get to the cause I want. The idea of being able to donate much more — somewhere down the track — is exciting. But it might well never happen.

Inheritance investment

My husband and I have about $200,000 (from inheritance and savings) we wish to invest.

We met a financial adviser from our bank and he suggested that we invest in a balanced growth investment managed fund at the bank. Is this a good way of investing or should we seek an independent financial adviser?

And second, is now a good time to put in a large lump sum into a managed fund, given that the sharemarket appears to be on an upward trend that may be peaking?

Third, as our dollar is historically quite high against the Australian dollar, should we focus on buying international shares in Australia?

It's funny how often an adviser says that the "best" fund for someone just happens to be one offered by the company the adviser works for. It's possible that really is best for you, but is it likely — given all the other funds and other investments out there?

Authorised financial advisers (AFAs) are supposed to put investors' interests first. But I'm wary of any adviser who works for a company that offers investments. You will usually find that you pay them nothing, because they're on a salary from the company or get commission or a combination. Regardless of how they're paid, it seems to be not in their best interests to put your best interests first.

That's why I recommend using an adviser who charges fees, and passes on to you any commission they happen to receive from an investment they put you in. Okay, you'll probably pay more upfront. But in the long run you're going to be much better off if you're in the best investment for you.

For a list of advisers who charge fees, see the Info on Advisers page on www.maryholm.com. Please read everything on that page. I'm not recommending the listed advisers as I don't know most of them, but the way they are remunerated is a good starting point.

On your second question, nobody knows where the sharemarket will go next. So it's not a bad idea to drip feed your money into a fund that holds shares — perhaps $50,000 now, and then $50,000 more every three months. Then you won't put the lot in right before a plunge, if one happens.

But experts say not to string this out over too long a period because, in the meantime, you're probably not earning as high a return on the rest of the money — which you've probably put into bank term deposits.

The main point is that you shouldn't put money into shares or a share fund unless you don't expect to spend it for 10 years or more. That means if there is a downturn, you can ride it out. And you must promise yourselves you will indeed ride it out, and not panic and bail out if the market drops.

Moving to your third question, the answer is "no". It's really risky to try to guess what will happen to foreign exchange. It's good to invest offshore, but the simplest and best way for most people is via a New Zealand-based fund that holds international shares.

If you go to an independent adviser, they should be able to help you decide whether such a fund should be hedged or not. That depends on your circumstances.

KiwiSaver's Aussie move

I am leaving New Zealand to work in Australia, but will possibly come back to work here again in a few years. I know I can transfer my KiwiSaver to a super plan over there, but would prefer to leave it here in the event that I return to work here.

If I contribute the annual $1043 to my KiwiSaver account, will I still get the $521 tax credit, even though I am a non-resident?

I'm afraid not, unless you are a New Zealand government employee working overseas or a New Zealander volunteering overseas — or working for a specified charity for token payments. They get special treatment.

Still, you might want to keep contributing to KiwiSaver just because regular savings do build up over the years.

Revolving credit mortgages You recently wrote about revolving credit mortgages. There is one other trick with them that you may like to mention. That is to have the earners' wage or salary paid weekly if possible.

I had my mortgage revolving, and was paid monthly for many years. When my employer was taken over the new company allowed fortnightly payments, and I saved bucketloads in interest.

Another thing to do is to try to manage spending. It's good if a purchase can be delayed by a couple of days so that when payment is made it is just after, rather than just before, the wage/salary going in the bank. This is especially important if the person is on a monthly salary.

I doubt if many employers give people the choice of how often they're paid. But yes, if someone can switch from monthly to fortnightly pay that will get roughly half the money into the account earlier each month. Given that you pay interest on the daily balance in a revolving credit mortgage account, the more you have in there each day the less the interest paid. On your second idea, basically it's best just to delay any payment as much as possible regardless of when payday is.

Back when I had a revolving credit mortgage, the first items on each month's credit card bill were bought around the 10th of the month and the last ones early the following month. So I would try to make large credit card purchases around the 10th to the 15th of a month. That meant the payments didn't come out of my bank account until a month later than if I had bought early in the month.

I also paid all my regular bills by automatic payment, so they came out of my account on the last day. It all became a bit of a game — get money in fast and out slowly.

• 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 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.