Money matters: Super tax break isn't so super

Q: For two years my husband has contributed $1700 a month to Tower FreedomPlan registered superannuation scheme.

He earns over $60,000 a year. With the law change last year, we were looking forward to the new 33 per cent tax rate on this contribution.

We obtained all the forms from Tower and filled them out and he took them to the pay office.

They have, however, flatly refused to deduct his contribution at source because it is not the recognised company scheme (to which he does also contribute a smaller sum).

We have found this to be a very frustrating experience, and would be interested to know if the law passed last year compels employers to cooperate, or if there is some other option open to us.


A: Not only does the law not compel your husband's employer to cooperate, it does not even allow your husband to do what he wants - or at least not in the way you're describing it.

Since last April, when the top tax rate rose to 39 per cent on income over $60,000, people affected by the change have been able to lessen its impact via work superannuation schemes.

Employer contributions to these schemes can still be taxed at the old 33 per cent rate, even when the contributions are made on behalf of people in the 39 per cent tax bracket.

It's important to note, though, that this applies only to contributions made by employers, not by employees.

For your husband to take advantage of the tax break, he needs to ask his company to reduce part or all of his salary over $60,000, and instead contribute that money to the recognised work scheme or the Tower FreedomPlan's "salary sacrifice option."

Tower says it has a guidebook for companies on how to set up its plan. It is a personal superannuation scheme, but it can be run alongside a company super scheme. Perhaps your husband should get a copy and give it to his bosses.

In the end, though, if the company doesn't want to cooperate, it's too bad.

You should also know that there is a new law designed to stop people in the 39 per cent tax bracket from using the tax break unfairly.

Generally, for instance, if your employer raises its contributions to your scheme, and you then take that money out other than when you retire, suffer hardship, or leave the job after more than two years, there's a 5 per cent withdrawal tax. That would more or less wipe out what you've gained.

And, in the two years before you retire, you can't boost your contributions by 50 per cent or more a year.

It sounds as if your husband and his employer haven't been communicating well on this topic. Get talking, you two.

Q: How do you find WiNZ investment performance?

Is it hiding in Weekend Money's managed investments section? Where? Many more are listed near the share prices. However, I can't find WiNZ! Can You?


A: I certainly can. Stop looking near the share prices, and look at the share prices.

WiNZ, a fund that holds the shares in an index of the world's largest companies, is listed on the New Zealand Stock Exchange. Look for it in the daily share table under "W."

In many cases, keeping track of a share's performance just by looking at changes in the price can be misleading. That's because most New Zealand shares also pay dividends - often quite handsome ones.

But the international companies held by WiNZ tend to pay lower dividends. In turn, the dividends paid by the fund itself are low by New Zealand standards.

What's more, AMP, which runs WiNZ, takes its fees out of the dividends. In most cases, this cuts the dividends to zero.

This means that to see how well an investment in WiNZ has done over a certain period, you can just look at the change in the prices listed in the paper.

Q: Have you any thoughts regarding the reweighting of the MSCI (world share index)?

It appears that index funds will be disadvantaged because the active fund managers will know what the index funds will have to buy and sell and will take advantage of this.

How will this affect WiNZ and TORTIS-International?

Should holders of these funds sell before and buy after the changes take effect ?


A: No, it probably wouldn't be a good idea to sell and buy back.

For one thing, Inland Revenue might decide that such trading makes you subject to tax on your capital gains. While index funds don't, themselves, have to pay that tax, individual unit holders may.

Also, you'll have to pay brokerage or fees when you sell and buy.

In any case, there might not be much harm done to WiNZ and TORTIS-International. The people who run those funds certainly don't seem to be panicking at this stage.

For those who don't know, the two New Zealand-based funds hold the shares in modified versions of the Morgan Stanley Capital International, or MSCI, world index.

The WiNZ and TORTIS-International indexes include the biggest companies in the US, UK, Japan, Germany, Canada and Australia - countries that were chosen for tax reasons.

The MSCI world index is due to be changed in two stages, in November 2001 and May 2002. Details of the changes are expected to be announced in June.

After the changes, each company's weighting in the index will depend on the number of shares available for trading, not the total number including rarely traded shares.

For example, the new index will allow for the fact that a big chunk of the shares in many telephone companies around the world are held by Governments that don't intend to sell them.

About 20 per cent of the shares in the MSCI world index will change, says Martin Pike of Tower, which manages TORTIS-International.

US companies are expected to rise from 51 to 55 per cent of the weighting in the index; Japanese companies are expected to drop from 11.4 to 9.4 per cent; and UK to rise from 9.5 to 11 per cent. There will also be other more minor alterations.

The WiNZ and TORTIS-International indexes will be affected by these changes.

TORTIS-International may have to buy and sell some shares at the time of the MSCI changes, says Mr Pike.

Such timely trading is one of the conditions under which the fund got its Inland Revenue ruling that says it doesn't have to pay tax on capital gains.

For WiNZ, though, "the changes will be made at slightly different times, because of the way the index is constructed," says Andrew Brockway of WiNZ fund manager AMP.

Regardless of the timing, both men point out that many world index funds based in other countries are not constrained by their tax departments. They are likely to buy and sell shares over several months.

With different index funds making their moves at different times, and with so many other factors affecting world share prices, it's not immediately obvious how active share funds - which are freer to buy and sell shares as they see fit - will be able to cash in on the index changes.

"The active funds have flexibility, but they don't know when to trade," says Mr Pike. "They could still get it wrong. They've just been given another option they can make or lose money on."

An example of the sort of confusing thing that can happen: when the dates of the MSCI changes were announced in December, prices actually rose on several shares whose weightings in the index were going to fall, and prices fell on some shares whose weightings were going to rise.

Investors had apparently already anticipated the index changes and done their trading early. With the announcement that the changes would not take place for almost a year or more, traders may have felt they had acted too soon.

What happens between now and November is anybody's guess. "I started discussions with my colleagues in London about this last December," says Mr Brockway. "However, until we get some more details from MSCI, it's difficult to work out what the impact will be on WiNZ."

The message for now, then, is: hang in there. Generally speaking, WiNZ and TORTIS-International are good investments. I doubt if the index changes will turn them into bad investments.

* Mary Holm is a freelance journalist and author of the book Investing Made Simple. Send questions to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.

Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.