Mary Holm: Don't put baby on the family payroll

Eating and crying are not the sort of work the IRD has in mind for genuine employees. Photo / Thinkstock

Your correspondent last week who has invested money in his children's names raised another question that I have been pondering.

We have a 3-month-old baby and have opened an account in her name to start saving for either her education or a general financial kick-start to her adult life.

Is there any reason why I can't list her as an employee of our company, so that the money we are putting into her account each fortnight is tax-deductable for us (but she will pay tax at her rate)?

This is not "our" money in her name - it's always going to be her money, although we parents will be signatories on her account until she's a bit older.

You've got to be kidding - in more than one sense!

But just in case you're not ... "In general," says an Inland Revenue spokesperson, "a person intending to employ his or her child should ensure that the payment is made in respect of genuine work done in the operation of the business."

Let's see now, how could a 3-month-old earn her pay? She's a bit young for chimney sweeping. And something tells me that while eating and crying might be hard work for her, you might have trouble explaining how they help your business.

Continues the spokesperson: "The wage must be at a market rate for the work/services performed, and the wage must actually be paid (it is not enough to simply raise a journal entry).

"There is a specific anti-avoidance provision in the Income Tax Act 2007 (section GB 23 and GB 4) to prevent a deduction for excessive remuneration paid to a relative (that is where the amount paid does not relate to work/services performed, or the rate of remuneration is excessive for the work/services performed)."

I've seen this applied when one spouse runs a business and employs the other to do the paperwork. The couple has to be able to show that the second spouse actually did the work. I'm sure there are teenagers on their parents' payrolls, too. But you are really pushing more than the pram here.

The department adds: "Taxpayers who do claim a deduction in respect of payment for which no work/services were performed, or who pay an excessive amount for any work/services performed, are likely to face penalties for tax evasion. Inland Revenue would suggest that taxpayers considering employing their children should discuss the matter with their tax adviser."

But before you bother, it might be an idea to at least let bubba start school.

Rude awakening

Congratulations on your robust response to the query from the blatant tax-dodger in your last column.

Your reply to someone who was prepared to publicly seek advice on such practice was considered, appropriate and backed by superb quotations. I suspect that a similar tone might provide an equally rude awakening to members of the dreamland Occupy Wall St movement.

My wife and I work hard to repay mortgages on three houses that we hope may help provide us with a comfortable future. We consider ourselves part of the so-called "99 per cent category".

However, rather than being concerned that our efforts are lining the pockets of the other 1 per cent, I think it more likely that the taxes on our toil are being used to fund Franklin D. Roosevelt's "organised society" for those who choose to abstain from contributing, along with the welfare benefits of those who lament their circumstances by protesting.

One of my own favourite philosophies is that, rather than seeking greener pastures elsewhere, the grass at one's own feet can be made green through the application of fertiliser.

Thanks for your kind comments, but I'm afraid I can't lump protesters in with tax-dodgers. While I'm not camping out for the cause, I have some sympathy with the Occupy Wall St protesters' arguments.

Even if I didn't, I think of another quote - from French philosopher Voltaire. Written in the entrance to the Chicago Tribune, where I used to work, it reads: "I do not agree with a word you say, but I will defend to the death your right to say it". It's good that people can protest; it's bad that people dodge taxes.

What's more, you seem to be implying that, firstly, all protesters are welfare beneficiaries, and secondly, that beneficiaries may not be worth supporting. On both counts, some are and some aren't.

Still, good on you for working hard, and for making the most of what New Zealand has to offer. You probably deserve your comfortable future.

Own home a priority

We are 62 years old, renting, sadly, due to our poor property investment decisions.

Thankfully my husband has just got a job after being out of work for some time. We were barely surviving on my small business earnings.

My parents both died within 11 months of each other and I have been left a small legacy. I feel a huge responsibility to use this opportunity for us in the best way possible.

It would be great to have some feedback from you.

Regardless of your history, I suggest you buy a home - even if it it's just a modest unit.

For most people, it's not a good idea to go into retirement without your own home. You never know when a landlord might kick you out because they've decided to live in the place themselves or to sell it.

And you can decorate and garden your home the way you want to. It's harder to make a rental property feel as if it's really yours - and that tends to matter particularly in retirement.

Your first step should probably be to find out how big a mortgage you can get. It might not be large at your age, but with two incomes you should be able to raise something.

Even if you reduce repayments after you stop work - which might mean the mortgage isn't fully repaid until after you die - at least you've had your own place to live in.

In most parts of the country, now is probably not a bad time to buy a home - which means you can bargain hard. Find something you like and make a low offer. You might be surprised at what's accepted.

If not, move on to the next place. No matter how much you think a certain home is the only one for you, there are always other good ones around the corner.

KiwiSaver returns

I am nearing retirement age and half of my KiwiSaver deposits are put into the ASB NZ Bank Deposit Fund, which returned only 2.8 per cent in the year to March 2011.

On complaining, I was advised that the bank was paying the inter-bank/OCR rate on this fund, not the "on-call" or term deposit rate paid to regular retail bank depositors.

I consider this an abuse of the KiwiSaver money deposited by savers. ASB are taking advantage of KiwiSavers. They should be paying at least a six-month term deposit rate, as the money is deposited long-term and only a small amount is able to be withdrawn. Inter-bank funds are short-term loans.

This fund started in October 2007 and has a return of 4.62 per cent a year. And yet, term deposits of three to nine months over that time have mostly been over 5 per cent, only falling below that over this past year.

Is there a KiwiSaver fund that puts money in term deposits and therefore is as safe as a bank and yet returns what I can achieve from my term deposits?

Alternatively, can you put pressure on ASB to pay what is a fair interest rate on this fund?

First, a couple of clarifications. What you were told, that the fund pays the inter-bank/OCR rate, isn't quite right. Instead, it tracks the ANZ 90 Day Bank Bill Index, which measures returns on short-term wholesale bank bills, says ASB's general manager investments, John Smith. "It is similar to being invested in a rolling 90-day wholesale term deposit."

Second, you've actually slightly overstated the fund's return since it started. As of September 30 this year, the return has averaged 4.49 per cent a year, before tax and after fees.

Your point that the fund should invest in longer-term deposits sounds reasonable.

However, the fund's stated objective is to "provide investors with low-risk returns consistent with short-term wholesale New Zealand bank deposits," says Smith. If you don't like that, I guess you shouldn't be in that fund.

A bigger issue, though, is the fact that the fund is a wholesale investor, because the manager invests big sums.

In the past, wholesale investors tended to be paid higher interest than retail investors like you and me. It was much cheaper for a bank to deal with one manager investing $20 million than 200 people investing $100,000 each.

But that changed when the Reserve Bank brought in new rules, from April 2010, to strengthen banks' financial stability. By looking at a bank's "core funding ratio", the Reserve Bank limits how much the bank can lend out, relative to its deposits.

Under the current rules, if someone has total deposits of less than $5 million in a bank, 90 per cent of those deposits count towards the bank's core funding ratio.

But if someone has deposits of more than $20 million, only 40 per cent of that money counts towards the ratio. The proportion decreases again for total deposits of over $50 million.

"The details of the rule are complex, but the broad principle is that the larger the deposit, the less lending it can fund proportionately," says Catherine McGrath, ASB's executive general manager of strategy, payments and products.

That's because it's much more likely that a big depositor would withdraw all its money at once than that many small depositors would.

The change has made retail depositors much more attractive to banks than the big boys. So how does a bank bring in the little guys? By offering them higher interest rates.

There's not a lot you can do about that, other than to contribute only as much to KiwiSaver as you need to get all the government and employer contributions. Beyond that, save in bank term deposits - as long as you can resist the temptation to spend that money.

You can, of course, move to another provider's cash fund, but it will probably be in a similar situation.

It's unfortunate. But, as McGrath points out, even wholesale interest rates are pretty good these days compared with rates in many other countries.

And because of the KiwiSaver incentives, cash funds are still a good investment.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling author on personal finance. Her website is www.maryholm.com. Her 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.