Kiwi Saver, Mary Holm financial writer and columnist

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Weekend Herald

Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.

NZ Herald March 7 2009

Q&As: Don't try to time markets. Stick with your regular retirement savings, although you may want to modify where you save.
Teen's worries are unfounded about how Dad's income would affect KiwiSaver first home subsidy - but other subsidy issues still undecided.
Tax-wise, it's better to borrow for taxable activities than to buy a family home.
Plus: Clarification on the taxation of interest on loans between family members.

Question: I am 61. Am in a private pension fund. Over the last two years I have lost more than I put in.

Should I cease my contributions and place those in a savings account till the times get better and then put them back in the persion fund?

Answer: Your plan sounds so easy, but it is virtually impossible because you are trying to time the markets.

The fact that your account balance has gone down suggests your fund holds quite a lot of shares and/or property. And nobody knows when those markets will turn back up again.

As superb share investor Warren Buffett, one of the world's richest people, said in a recent letter to his shareholders, he's certain "the economy will be in a shambles throughout 2009 - and, for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall". Shares may have done their dive already.

What's more, the market might rise for a while, only to slump again. And if you wait until it has risen over quite a long period, you will have missed out on the upturn.

It's far better - as well as easier - to just keep contributing, regardless of what the markets are doing. That way, you'll get the good with the bad.

What's more, if you put the same amount in regularly, you'll buy more units in the fund when prices are low than when they are high, so your average price will be lower than the market average price.

For example, if you contribute $100 a month when units cost $10, you'll get 10 units. But when the unit price rises to $20, your $100 will buy only five units.

The average of $10 and $20 is $15. But you got 15 units for $200, so your average price is only $13.33. It's a bonus from regular investing - sometimes called dollar cost averaging.

If you stick with your fund, over ten years or more you can be pretty confident you'll do well - provided, of course, the fund doesn't charge ridiculously high fees.

There's another issue to consider at your age, though. If you are planning to spend the money within less than ten years, you may be in too risky a fund. There's always a fair chance that a fund with considerable share and/or property investments will fall over a few years.

If that applies to you, I suggest you switch your new contributions into a lower risk fund, and gradually move the rest of your money into that fund. You might, for example, move a quarter now and a quarter over each of the next three years.

If your fund doesn't have a lower risk option, consider moving to one that does.

Question: Would my husband's salary, of more than $100,000, be taken into account when our son applies for a KiwiSaver first home subsidy?

Our son (now aged 17) has a KiwiSaver account and is likely to apply for the subsidy in about 6 years time. For this period he will probably be living at home to save on accommodation costs while he finishes high school and completes a three-year course at Auckland University.

During this time he also plans to work part-time during college holidays, to help with living expenses and save towards the down payment on his first house.

My concern is that if 'household income' includes his father's income, my son will be penalized and therefore not qualify for the government subsidy ($5,000), even after careful financial planning.

I would be grateful if you could check with the relevant government department and clarify.

Answer: The news is good for your son - who, by the way, should be congratulated for his planning, and for making the most of the KiwiSaver first home subsidy, which is well worth having.

He might not realise, too, that as long as he has been in KiwiSaver for three years, he can also put into his first home all his own contributions, any employer contributions and all the returns earned in his KiwiSaver account up to that point. If he hadn't been in KiwiSaver, he wouldn't have those employer contributions or the returns on the extra money.

His $1000 kick-start and tax credits will have to stay in KiwiSaver. But that's also money he wouldn't otherwise have, and it's still his - sitting there accumulating for his retirement.

On your question, officials at Housing NZ Corp, which runs the first home subsidy, say, "The maximum household income for the deposit subsidy is $100,000 per year (for one or two people) or $140,000 per year (for more than two people)."

But, they add, "These income caps apply to the person or people buying the house only. If there are other adults living in the home (who did not buy the house) their income is not taken into account."

While I was at it, I asked if they yet had answers to some other questions that have been rattling around since KiwiSaver started - some of which may affect your son. They are as follows:

The first home subsidy is $3000 after three years in the scheme, rising gradually to $5000 after five or more years. During that time employees must contribute at least 4 per cent of their pay, and non-employees "about 4 per cent". Are there firmer guidelines for non-employees?

Can you start your three to five years under 18?

Unfortunately, there are no answers yet. The issues are "still being considered by Ministers of Housing and Finance," says a spokeswoman for Housing NZ. "A decision will be made in the near future."

It's the same for a more recent question: whether the requirement for employees to contribute 4 per cent of pay will drop to 2 per cent from April 1, when the minimum employee contribution drops to 2 per cent. That is expected to be answered soon, too.

The spokeswoman also pointed out that the income caps and house price caps for the first home subsidy "will be reviewed again by the Ministers at the end of June this year."

As soon as I know any more on any of these points, I will report it in this column.

Question: You don't often do it, but when replying to the 65-year-old immigrant with a $105,000 mortgage and $125,000 last week, you missed saying that if he does go into business and uses his bank deposit he will still pay tax on the income used for mortgage interest payments.

If on the other hand he takes your advice and repays the mortgage, and then he borrows against the house to go into business (probably even if he borrows to buy shares) he can claim full interest payments against his income.

I know I'm pedantic but I hate giving the Taxman anything I can avoid.

Answer: Good point that it's better to borrow for a taxable activity than to buy a family home, because the interest will then be tax deductible.

But I advised the reader against going into a business that needed capital. At his age and in his circumstances, that seems too risky. As for borrowing to buy shares, that's too risky for most people at any age.

Speaking of taxable activities, read on.

CLARIFICATION ON TAXATION OF INTEREST ON LOANS BETWEEN FAMILY MEMBERS

Some information in this column on February 21 might have misled readers. The situation is not as tough in many cases as was portrayed.

The February 21 Q&A was a follow-up to a Q&A the previous week in which a young couple asked about borrowing from their parents at 6 per cent, so they could repay their 7 per cent mortgage. The parents would earn higher interest than the 5 per cent they were getting in their bank account.

In my response, I said that if the loan went ahead the parents should pay tax on their interest income. And that is not disputed.

But on February 21 I ran a letter from a reader that said the payer of the interest - in this case the young couple - would have to register with Inland Revenue and take resident withholding tax (RWT) out of the interest they paid their parents. They would also have to report on this regularly to Inland Revenue, and give an annual certificate to their parents stating the money withheld.

This applied, the reader said, whenever the interest totalled more than $5,000 a year.

Before publishing that letter, I checked it with Inland Revenue, and they confirmed that it was correct.

However, in last week's column I ran a letter from a tax accountant who questioned the information. He said RWT would apply if the borrowed money was being used "as part of a taxable activity (such as a trade, profession or business...)" or in some other circumstances. But generally it wouldn't apply in our situation - when the money was being used to buy a family home.

At that stage, Inland Revenue said it needed more time to respond to that letter. But it has now broadly agreed with last week's correspondent, as follows:

Whether RWT applies to a loan between family members "depends on whether the borrower has borrowed funds in connection with a taxable activity.

"A taxable activity is an activity - as defined by s6(1) of the GST Act 1985 - that is, among other things, 'carried on continuously or regularly by any person' including such activity carried on in the form of a business," says an Inland Revenue spokesperson.

"So if, for example, the borrower has been lent the money to help finance his or her business, then he would have to deduct RWT if the $5,000 threshold is exceeded.

"If the borrower in a family situation asked for the loan for some private purpose such as to buy a residential house or to fund private study, then the borrower would not be making the interest payments in carrying on a taxable activity and so would not need to deduct RWT."

So - a message to our original couple, and any others considering loans within families when the money won't be used for a business purpose: There are lots of issues to weigh up - as outlined in the February 14 column. But you wouldn't have to get involved with RWT. Phew!

* Mary Holm is a seminar presenter, part-time university lecturer 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.

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