Mary Holm: How to soothe a guilty conscience

Some people with new everythings have made shopping one of our favourite pastimes while others prefer op shops. Photo / Duncan Brown

My husband and I have had a change in financial circumstances. My husband has a new business and it has taken off over the last year, consequently we have more income than we need.

We have upped our payments to pay off our mortgage in a few months and then we will carry on with saving 30 per cent of our income for retirement/investment. We still have excess money left over.

I have always been frugal and my husband has accepted my frugal ways in the 10 years we have been married. Where can I go to learn about how to make healthy choices with our money for the family's benefit, as I am still an "oily ragger", have a 20-plus-year-old car, go to op shops?

Now that we don't need to always go "budget" when shopping, I feel out of my depth as to how to make sensible choices.

In addition, spending money is tied up with a bit of guilt.

Can you recommend some books or seminars that may help?

Being mainly a reader of novels, I don't know any books along those lines, nor seminars. In any case, I wonder if they might be a solution looking for a problem.

There's nothing wrong with being an oily ragger in second-hand clothes driving an old car. You sound much more interesting than all those people with new everythings who have made shopping one of New Zealand's favourite pastimes.

Sure, it's good to buy quality, not junk. I recommend membership in Consumer NZ, which gives informed independent advice on what's best across a wide range of goods and services, and what features you might want to look for. I check what they have to say before buying anything significant and many small things. See www.consumer.org.nz.

Beyond that, though, how about making some serious donations to charities? Lots of research - as well as just looking around - shows that people who give away money tend to be happier than those who buy stuff.

New things give you a buzz for a while, but then they just become the norm and you're no happier than before. But knowing you have helped people - or animals or the environment - genuinely in need leads to long-term contentment.

And you'd have no problems with guilt. The opposite!

Taxation truths

Your article last week regarding corporate boxes as tax deductible is incorrect. In your example spending $1000 does not reduce your tax bill by $280, it reduces your tax bill by the full $1000.

For someone who claims to be a finance guru you should really try to be much more prudent, especially with such simple taxation.

I'm much too nice to respond that you should really try to get your facts right before writing.

Let's say Tiny Co's income is $2000. On its tax return, it subtracts deductible spending of $1000, to give it net income of $1000. With the corporate tax rate at 28 per cent, it pays tax of $280.

Without the deductible expense, its net income would have been $2000, so its tax would have totalled $560.

Having the $1000 deduction reduced its tax bill by $280.

It's an important point that people sometimes miss. For example, a landlord might say, "I'm spending $500 a year on insurance, but I'll get that back because it's deductible." In fact, they get back - in the form of a lower tax bill - way less than half what they have spent.

Given your attitude, I doubt if you will trust me to get this right. So - just as I did last week with the Q&A about corporate boxes - I've had this checked for accuracy by PwC partner Scott Kerse.

Savings and subsidies

Mr and Mrs A have a house worth $600,000, a car worth $55,000 and savings of $115,000 - a total of $770.000. If either needs to go into care, based on MSD's $115,000 cash cut-off (excluding the house and car) they would be eligible for the subsidy.

Conversely Mr and Mrs B have a house worth $400,000, a car valued at $20,000 and savings of $350,000. They would need to spend $235,000 of their savings until the subsidy applies.

Is this correct? And is it fair that people can hide their assets in housing and a motor vehicle?

Yes, it's correct, says the Ministry of Social Development - assuming that when one spouse goes into care, the other is still "in the community".

Is it fair, given that the two couples have the same total assets? Well, it doesn't seem so. The As' children are likely to inherit more.

But it might be the only practical way to run a system that does both of the following:

* Requires a couple to spend all but $115,000 of their cash before getting a government rest-home subsidy for one of them.

* Allows such a couple to keep their house and car and still get the subsidy. Both seem reasonable, until we consider scenarios like the one you've come up with.

However, to get around the unfairness, we would have to either force the As to move to a cheaper house - which seems harsh - or give the Bs a subsidy even though they have more than a third of a million dollars in savings - which might upset long-suffering taxpayers. Policy-making is not easy.

If this really concerns you, when you retire you could put most of your savings into a house and car. Keep in mind, though, that most people don't end up in rest homes, so you could well distort your spending for no gain.

I suppose you could wait until it seems likely you or your spouse will need rest-home care, and then switch to a flasher house or car.

The ministry can, however, look at whether a person has recently bought a major asset such as a house.

"Consideration around this is done on a case-by-case basis, as each person's circumstances are different," says a spokesman.

In any case, you might find that trading up a house or car is the last thing on your mind at that stage.

Gifting and subsidies

I refer to your article on September 24 re gifting to family trusts and the add-back by Winz of those gifts for the rest-home subsidy.

I agree with your analysis except for the sentence after you have referred to the five-year $6000-a-year rule.

You say that in the period before the five-year gifting period that you can gift $27,000 a year. What is not stated is that those gifts of $27,000 are added back as part of the deprivation of assets add-back by Winz.

In a recent case with a client of ours 12 years of gifts were added back (this being the entire period since the trust was formed and gifting commenced).

It seems some solicitors are unaware that Winz has the statutory power to do this.

There seems to be a general misunderstanding that once you have passed five years since making a gift that you are safe from add-back of that gift.

This is clearly not correct and all gifts are added back as deprivation of assets.

The benefit of the trust is that if, say, a beach house is put into a trust with a value at the time of $500,000 and at the time of rest-home entry it is worth $1 million, then the increase in value of $500,000 is not counted as the parents' asset. Only the $500,000 original value is added back.

Thanks for your article. It is timely with the "Grey Wave" of an ageing population coming through to rest-home years.

Either you're not quite remembering it correctly or some mistake has been made.

A Ministry of Social Development spokeswoman stands by what was in the September 24 column. The relevant section reads:

"The legislation allows you to give away up to $6000 a year - including 'gifts in recognition of care' - in the five years before you apply for residential care subsidy (the gifting period).

"If your total gifts over the five years exceed $30,000, the excess will be counted back into your assets. In the period before the gifting period, you can gift $27,000 per year.

"The current practice of the ministry is that your spouse or partner can also gift the same amount if they have applied for a subsidy as well," says the spokeswoman.

To clarify the last paragraph, if one spouse applies for the subsidy, the couple could have given away $27,000 a year in the years before the five-year gifting period. Any amount beyond that may be added back to their assets when considering the asset threshold for the subsidy.

If the other spouse also applies later, the ministry then says the couple could have given away $54,000 a year before it adds back. In other words, for each application they allow $27,000 of gifts made in any year outside five years.

In the case you quote, not all the gifting would have been added back, says the spokeswoman. Many couples have - until a recent law change - gifted $27,000 a year each to a trust. If that was the case here, $27,000 of gifts per year would have been allowed and the second $27,000 would have been added back.

Let's say that when your couple applied for a subsidy, they had been gifting to their trust a total of $54,000 a year for 12 years. That comes to $648,000.

The ministry would have allowed a total of $30,000 for the previous five years, and an annual $27,000 for the preceding seven years, bringing us to a grand total of $219,000. Subtract that from $648,000, and you get $429,000 added back.

That's way more than the $115,000 excluding home and car that would have made the couple eligible for the subsidy. It's the same result - no subsidy - as if the whole lot had been added back, so perhaps that's why you misremember.

Your point about the ministry using the value of an asset at the time it is put into the trust is correct.

"However, if the asset loses value over time, the trust may have invested in finance companies where the value of investments were lost, those losses are also not taken into account in the assessment," says the spokeswoman.

She adds a further comment about the paragraph above starting "The current practice". The legislation is not clear on this point, so it's possible a court could rule that as an overly generous interpretation of the law, she says. If that happened, even when the second spouse applies for a subsidy, gifting from the couple of only $27,000 a year would be exempt from the add-back.

All of this just backs up our conclusion. It's not worth it to set up a trust to enable you to receive a rest-home subsidy.

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 bestselling 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.