Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 18 May 2013
Q&As: When are capital gains taxed?
- Should separated father's income count when applying for a student allowance?
- Too much in this column on KiwiSaver?
- The government's thinking on income in family trusts
Question: Last Saturday you raised the issue of taxation on rental properties and shares, and I hoped that I would find an answer to a dilemma, but no!
Briefly, my wife and I are retired, but not yet 65, paying our way via a portfolio of investments from the usual pool of assets. We have two rental properties, shares and various fixed interest assets. Our properties and shares have significantly increased in value and it may be appropriate at some time in the near future to realise some of this value. However, the tax situation is not clear to me.
My questions are: What constitutes a "regular trader" in terms of the taxman? How many properties and shares would you have to "trade" say in a year to be considered a trader and become liable to pay tax on the capital gain?
Answer: Did you notice that I said last week "And - unless a shareholder is a regular trader - they don't usually pay tax on capital gains"? And the same for property investors?
I chose words such as "usually" carefully. There was enough for readers to think about without going into the complexities of tax on capital gains. And the main point last week was that shares and property are treated the same as far as capital gains are concerned.
But now that you've asked, let's look at New Zealand's rather peculiar law on the tax treatment of gains. We have no capital gains tax as such, but if someone's gains on any investment start to look more like income, they are taxed like income.
The key point is not how often you trade, but your intention when you bought the investment. If you intended to sell later at a profit, you should pay tax on your gain.
You might well ask why else anyone would buy an investment, but some say they buy shares for the dividends and property for the rent. If they happen to sell later at a profit, that wasn't the main object of the exercise.
While I don't know what goes on at Inland Revenue, it seems that they often accept this. But if an investor is buying and selling frequently, and yet saying they didn't buy with the intention of selling at a profit, that starts to look like a rather tall story.
So when is a trader a trader? What's the cut-off point? Sorry, but there isn't one.
Writing about residential property, Inland Revenue's website www.ird.govt.nz says, "There is no time limit. If you buy a property with the firm intention of resale, it doesn't matter how long you hold it - the gain on resale will be taxable (and any loss may be tax-deductible)."
Furthermore, "There is no set number of properties you can have before they become taxable. In some cases the first property bought and sold may be taxable if you bought it for resale. In other cases there could be a number of factors to take into consideration, such as having a regular pattern of buying and selling property, before a property is taxable.
"The factors that may be looked at will vary because each taxpayer's circumstances are different. For example, buying one property every two years may be considered a regular pattern for one individual and not another."
For more on this, see www.tinyurl.com/nzpropgains.
Inland Revenue confirms that the rules are similar for shares and other investments.
It's a rather unsatisfactory situation for someone like you. But it's not the IRD's fault. Blame the legislators - and perhaps lobby to get the law changed.
Meanwhile, though, it would be a pity for you to sit on assets, when you would like to spend the money, for fear of paying tax. I suggest you talk to an accountant who can advise you, taking into account your circumstances.
Some other readers also sent in letters about the great rental property v shares debate. There'll be more on this next week.
Question: After reading your last column I am wondering if we have been given misinformation and my daughter may be eligible for a student allowance. She is not living at home and my income is $52,000.
I have been divorced for a long time and her father does not contribute financially, so his income has no relevance to her. Who can help me check if she is eligible for assistance?
Answer: Usually, if a student is under 24 and has no children, the government looks at the combined income of the students' parents to calculate their student allowance.
If the parents' total income is below $55,028, the student gets the full allowance. If the parents' income totals more than $83,622 and the student lives with the parents, or if the income totals more than $90,771 and the student lives elsewhere, they get no allowance. If the parents' income is in between, the student gets a reduced allowance.
However, according to www.studylink.govt.nz, "A one parent test may be approved if you have only one living parent or if your parents are living apart and:
• "There is a breakdown in the relationship between you and one of your parents, and contact with that parent would have a detrimental psychological effect on either you or that parent, or
• "You are or have been subjected to severe mental cruelty by one of your parents, or
• "A parent (or their spouse) has physically or sexually abused you, or
• "The other parent is in prison or in full-time care under the Mental Health (Compulsory Assessment and Treatment) Act 1992, and is unable to be responsible for you, or
• "You have other special circumstances that demonstrates that the relationship has so broken down that you should be considered independent from the other parent - For example: the other parent's whereabouts are unknown."
Clearly they don't want to give different treatment to every child of separated parents. However, if none of the above applies, your daughter may still be eligible. "If you have other special circumstances please talk to us about it," says the website. It may well be worth a try.
For more information, see www.tinyurl.com/allowanceparents.
Question: This is an appreciation for your comprehensive reply on the taxing of rental properties last week. This was so much needed given the damaging nonsense on the subject written by others recently.
Secondly we are also pleased to see that your page is no longer being swamped with queries about KiwiSaver. By and large KiwiSaver is a no brainer because of the tax credit. It is sensible for the majority of wage earners to join as a means of saving. For people with queries there are web pages on the subject and a dedicated column in the Herald by Helen Twose.
It has been a little bit much over the last few years the way other important money matters have been squeezed out. It's a pleasure to see balance returning to your page at last.
Answer: Thanks for your kind comment. But I'm afraid I will keep on answering plenty of questions about KiwiSaver.
On the one hand, there are still something like two million eligible people not in the scheme. It may seem a no brainer to you and me, but there are many yet to be convinced.
On the other hand, the couple of million who have joined include many people who know little or nothing about investing and need help. As long as about a quarter of them are in default funds, for instance, I will keep pointing out that they might be better off in a different fund.
There are also many KiwiSaver issues not covered by the various websites.
This is partly because almost all the websites are run by either the government or KiwiSaver providers. And in Helen Twose's column, the replies come from people in the industry.
Officials and financial people don't always see things from the point of view of scheme members, or think of all the situations in which people find themselves. I reckon we need someone to take the ordinary member's perspective, and in the absence of anyone else....
Actually, I probably write too little about KiwiSaver. A quick count shows that in 2011 25 per cent of the Q&As in this column were about the scheme. Last year it was 28 per cent - boosted by letters from people able to withdraw their money in retirement for the first time. So far this year, it's 19 per cent. That's not exactly "swamped".
But please keep reading. Every week there has always been - and I promise there will always be - at least one Q&A about something else, and often several.
Question: Re your last column, you quote a spokesperson from the Ministry of Social Development: "In 2011 the definition of income was broadened to include 'attributable trustee income' from family trusts as part of the income tests for parents" etc.
I cannot find any such definition especially in section 3 of the Social Security Act or section 3 of the Student Allowance Regulations where I would expect it.
My question is: where is this definition stated, and does it apply to any benefits other than student allowances?
While we are at it. would the Ministry please provide publicly through you a legal definition of a 'family trust'."
Answer: I haven't got a reply in exactly the form you requested. But the following, from a Ministry spokesman, should help.
" 'Family Trust' is a common term which is used often in various situations. Family scheme income is defined for student allowances and that includes income from trusts.
"For the Ministry's purposes when testing for deprivation, there are sections in the Social Security Act 1964 which provide that, when clients deprive themselves of assets or income, the Ministry may assess assets and income, including the income from assets transferred to family trusts, as if that deprivation (or transfer) had not occurred."
The spokesman goes on to say that the deprivation doesn't need to have happened "in order to receive a benefit or increased benefit - it just needs to have that effect."
He adds that the Ministry "is able to test for deprivation for all asset-tested and income-tested benefits including student allowances and for residential care subsidy."
As I said last week, that seems fair enough. I'm sick of people getting money from the government that they wouldn't otherwise get if they hadn't set up a trust.
* 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 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 email@example.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.