COMMENT:

Your correspondence last week about fairness and the tax system finally inspired me to write in.

As I see it, if you die having paid more in tax than you have received in benefits or services from the Government, you've had a pretty good life.

You've had up to 13 years of education, possibly more. You've had a decent income. You haven't had a long-term disability or illness that limits your potential to work. You've lived in a country with a relatively low crime rate and beautiful national parks and good roads.

And you've helped people less fortunate than you. What is there to complain about?

I totally agree — to the point where I've made the same point in this column before.

Anyone who is still feeling hard done by might want to check out www.globalrichlist.com.

You fill in your country — so the calculator can take account of your currency — and type in either your approximate income or wealth. The calculator tells you where you rank in the world's rich list.

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For example, if your income is $50,000, you're in the top 1.04 per cent of people in the world.

Saving hard

With all this capital gains tax talk (and I know it's just talk at this stage), I feel compelled to write. People who conscientiously save for the future are always penalised. There is no incentive to save money in this country. With the CGT, saving in any way now means paying more tax.

It also irked me when you talked about the "wealthy" last week. You said "a lot of income for the wealthy gets hidden in various ways".

I wouldn't classify myself as wealthy, but through grit and determination I have a good job and live in a mortgage-free home and am saving for my retirement. But my place is in a first-home buyers' area and is nothing fancy. I have been a salaried employee for 30-plus years and have paid tax, hiding nothing anywhere.

My neighbours have just bought an $80,000 boat (on their house ATM, of course). I have the crappiest car in the company I work for. Many of my workmates are renovating their homes or going on overseas holidays (on their house ATM, of course). They won't be affected by CGT because they haven't got any savings!

And then there's me. Sensibly saving. And now being told there is a strong possibility that CGT will be brought in and I will be penalised.

I'm seriously starting to think I might as well sell up and use my savings to upgrade my house, buy a new boat and car and go on a trip overseas. What's the point of saving any more? If I run out of money in retirement, the Government will look after me anyway.

Could you really go on such a spending spree? I suspect you would worry too much about your future.

The world is made up of savers and spenders. While the ideal life plan, according to economists, is to even up your consumption over your lifetime, spenders are likely to have to cut back in retirement.

Savers have a much better chance of spending equally throughout life. So if you envy your neighbours and workmates now, you could well have the last laugh.

Governments tend to encourage saving because it's good for the economy — although the economy would also struggle if too many spenders abruptly stopped spending.

Our Government's big plug for saving in recent years was the introduction of KiwiSaver, which, contrary to what you say, does give people incentives to save.

And, as discussed in the next Q&A, the Tax Working Group's proposed changes to KiwiSaver would improve the scheme for most people.

However, beyond KiwiSaver, if a CGT is introduced, it will make rental property and some other investments somewhat less lucrative.

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So perhaps you're right. If the wrong mix of recommendations is adopted, that might discourage some forms of saving. The Government should keep that in mind.

By the way:

• I wasn't the one last week who said "a lot of income for the wealthy gets hidden in various ways". That was a quote from www.inequality.org.nz. But it's probably true of the richest 10th of New Zealanders — the people the quote was referring to.

• Some readers might not understand what you mean by "on their house ATM". It refers to people with revolving credit and similar mortgages, who can reborrow mortgage money they have paid off. Some of these mortgages have loan limits that reduce over time, and I hope lenders include that feature for any borrower who is not using their mortgage responsibly.

• You may be comforted a little by the thought that spenders pay more GST than savers do.

Finally, a suggestion. While splashing out on spending probably wouldn't work for you, perhaps spend a bit more on fun.

Creating division

I have read that you suggest dividing your retirement savings by 25 and assuming that will be a potential annual income you can enjoy in retirement. I understand it's a guide rather than a strict method.

But will you be revising that figure if capital gains tax, as supported by over 70 per cent of the Tax Working Group, reduces our KiwiSaver balances? Will the future figure be closer to dividing by 30, for example?

First, a comment about dividing your savings by 25. That assumes you want to spend the money over 25 years.

But if you retire at 65, I would suggest you do a 20-year plan. By 85, many people say NZ Super is enough. And if you retire at 70, a 15-year plan should work.

Also, note that in the first year you divide your balance by, say, 20, but in the next year it's 19, then 18 and so on. In the 20th year you spend the lot — if you want to. In most years you will have an increasing amount to spend, because of returns being earned on your money.

If any tax or other changes affected the size of your savings at retirement, that wouldn't change the rule of thumb. Your one-twentieth — or whatever — would simply be a bigger or smaller amount.

For more on rules of thumb about retirement spending, see my new book, Rich Enough? A Laid-back Guide for Every Kiwi.

But your letter raises another issue — how the Tax Working Group's proposed changes would affect KiwiSaver.

The working group recommends introducing a CGT on New Zealand and Australian shares. The current different rules for shares beyond Australasia wouldn't change. That means returns on every KiwiSaver fund that holds some Australasian shares would be lower.

However, the working group also made four other recommendations about KiwiSaver, as follows:

• Increase the tax credit from 50c per dollar to 75c per dollar of contributions. This would raise the maximum tax credit from $521 to $781.50 a year.
• Reduce the tax rates on KiwiSaver for those on lower incomes from 10.5 to 5.5 per cent, and from 17.5 to 12.5 per cent.
• Refund taxes on employer contributions for some members — so that the money goes back into their KiwiSaver accounts. The full tax would be refunded for people earning up to $48,000 per year, and part of the tax would be refunded for those earning $48,000 to $70,000.
• Give members on parental leave the maximum tax credit regardless of their level of contributions.

What would be the effect of all these changes?

The bottom three recommendations — excluding the tax credit increase — "would ensure that, as a group, people earning less than $70,000 per year would have improved KiwiSaver outcomes if the Government adopted the group's recommendations for extending capital gains taxation," says Sir Michael Cullen, the working group's chair.

He adds that if all four recommendations are adopted, "KiwiSaver members earning over $70,000 would also, as a group, be better off. While some individual KiwiSavers might not be fully compensated by the group's measures, for the most part, KiwiSavers would most definitely be better off."

KiwiSaver provider Simplicity crunched the numbers for its scheme and came up with 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.

This assumes providers make no changes to their investments. They might, however, invest more in global shares and less in Australasia, which would improve investors' outcomes.

Overall, then, the tax group's package would boost most KiwiSaver members' retirement savings. The Government might not adopt all the recommendations, but I would be really surprised if its final version would make most KiwiSavers worse off.

While we're on KiwiSaver, Parliament this past week passed the following changes. Unlike the Tax Working Group's recommendations, these are definitely going to happen:

• From April 1, employees will be able to contribute 6 or 10 per cent of their pay — in addition to the current rates of 3, 4 or 8 per cent.

• Also from April 1, contributions holidays will be renamed "savings suspensions". And the maximum holiday will change from five years to one year — although you will still be able to renew your holiday each year. Currently, almost 84 per cent of those on a contributions holiday take a five-year break, rather than a shorter one. The hope is that if they have to renew the holiday annually, that will prompt them to start contributing again.

• From July 1, people over 65 will be allowed to join KiwiSaver. Also, people who join after turning 60 will no longer be "locked into" the scheme — unable to withdraw money until five years after they join.

Wins and losses

I don't understand why everyone is assuming the proposed CGT will be a flatly applied tax. Here is how I would structure it.

All things are included in the tax except the person's main residence (family home) and depreciating assets such as cars and boats. If you exclude things (farms, iwi assets, etc), then you just create a tax-free haven asset which creates other problems. Also, losses are included to balance the structure.

Then you step the tax from its full amount in year 1 to zero tax in year 10.

If you own an asset for less than 12 months, you pay 33 per cent on the profit/gain. If you own it for 12 to 24 months, you pay 29 per cent. And on and on until you pay no CGT if you have owned an asset for 10 years or more.

This means most farms and businesses and long-term shares or investment properties are effectively excluded and all speculator activities are included — no arguments. What do you think?

It depends on why we want a capital gains tax.

If the aim is to tax people who are really earning an income from their gains — so they pay income tax just like employees and others — a system like that would certainly help.

It's a bit like the bright line test, which taxes people who sell rental properties within five years of buying them.

But if we're looking at broadening the tax base so that we tax gains quite separately from income, I'm not sure why people who are able to hold an asset for longer should get better treatment than those who hold it for just a few years.

Sure, the gain will usually be bigger over a longer period. But the longer-term holder will pay tax less often.

Tax questions

Some of the many questions readers have sent me about the Tax Working Group's report will be answered in a series of articles that will run in the Business Herald starting later this month.

- 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 mary@maryholm.com. 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.