Being pushed up into a higher tax bracket could be compensated by other changes
Last week John Key announced a treat for pensioners of an increase in superannuation of 2 per cent to compensate for GST increases.
I have just been informed that my tax rate will increase from 19.5 per cent to 21 per cent as I earn more than $14,000.
The government appears to be taking from the average income earners to give once again to the wealthy.
John Key had a wide grin on his face and looked as if he was handing out a huge gift.
The grin might have been a bit overdone. The GST rise will, after all, push up many prices. Still, it does sound as if superannuitants won't lose from the various tax changes - unless they are landlords. Some might even be a bit better off.
In John Key's speech to North Shore Grey Power members - the one about the 2 per cent NZ Super increase - he said the following: "As a government, we are working to ensure the extra money in people's pockets would be greater than the increase in prices. If we can't ensure that happens for the vast bulk of New Zealanders, we won't be increasing GST."
For "the vast bulk of New Zealanders" I think we can read "pretty much everyone - including superannuitants - except some owners of rental property".
Before we look into this further, though, let's address your April 1 tax rise from 19.5 to 21 per cent. That is quite separate from the government's current plans.
Odd though it may seem, it's the result of tax cuts - brought in by the Labour government - that took effect October 1, 2008. They would have reduced the tax you pay on your NZ Super, but you may have forgotten that by now.
It's all a bit complicated, but what it amounts to is this: While your total taxes would have decreased, you should really have been paying 21 per cent on bank interest since October 2008. However, withholding tax rates were not updated when personal taxes were reduced in 2008 and 2009, because Inland Revenue and the banks needed more time to work out the easiest way to apply the new rates to customers' accounts.
Now this has been sorted out, withholding rates are moving to where they should have been for the last 18 months.
While I appreciate that if you are on a low income, every dollar counts, your withholding tax increase is not huge. On $1000 of income, it amounts to $15 a year. And, if we look at all tax changes over the last few years, you are better off.
Hopefully, too, the changes the government is considering will find you better off still.
Let's go back to Key's Grey Power speech. If the government raises GST to 15 per cent, cuts personal income taxes across the board, and increases payments including NZ Super, this is how Key described the situation for people like you:
"First, superannuitants would get an income tax cut, which would apply both to superannuation payments and to any other income they receive, for example from interest, dividends or part-time work.
"Second, and in addition to their tax cut, superannuation payments would be increased up front, by just over 2 per cent, to reflect the general rise in prices. What I mean by 'up front' is that the increase in Super payments would be immediate from the day GST went up, without waiting for the usual annual inflation adjustment.
"This double-whammy increase means that under an income tax/GST switch, superannuitants would have their incomes lifted quite significantly, and by an amount that exceeds the increase in prices," said Key.
The double-whammy claim may be overkill. NZ Super payments are raised every April 1 anyway, firstly by inflation. Then the government checks to see if the payments to a married couple are at least 66 per cent of the average after-tax wage. If not, the government is committed to putting NZ Super up to that level.
Under this commitment, Social Development Minister Paula Bennett actually just announced that NZ Super payments will rise by 2.31 per cent from this April 1. Again, that has nothing to do with the tax changes the government is considering.
And that's my point. Without Key's second change above, NZ Super payments would rise to reflect the GST boost, plus other inflation, the following April 1. All he's saying is that superannuitants won't have to wait until the next April to get the extra money.
Still, it's good news. While the Government hasn't said anything about timing, if GST were raised this coming October 1, superannuitants would be glad to see their payments rise at the time prices go up - and six months earlier than they otherwise would.
It's also good to note that the 66 per cent commitment is about the average wage - after tax. That means that if the average worker gets a bigger proportionate tax cut than lower-income superannuitants, they will benefit from whatever the average worker gets.
It all looks reasonably comforting from your point of view.
I suggest you hang about and see - with fingers crossed. If, after the Government's plans are announced in the May Budget, you reckon you will be worse off, get back to me. The same goes for any other superannuitants - except owners of rental property. But that's another story.
My wife and I are 26 and 27. We have saved up $80,000 and plan to go overseas for a couple of years to get better jobs in the health sector and see some old stuff.
We wonder what to do with the $80,000 - buy a house, bank it, put it in the stock market, etc.
I am leaning towards buying a house in the $300,000 to $350,000 bracket, which would hopefully only need a modest top-up of $100 to $120 per week if it was rented out.
What option would you support and why?
Let's assume you would like to own your own home when you return to New Zealand. If that's the case, buying a rental property now is, in some ways, a low-risk strategy. You are in the market, so it won't matter what happens to house prices while you are away.
On the other hand, in some ways owning a rental property from another country is pretty risky.
You'll need to pay someone else to manage it, unless you have family who will help. And if something goes wrong - you get bad tenants, or no tenants for a period, or there are maintenance problems - can you rely on people here to take care of it? We don't want your enjoyment of the old stuff spoilt by worries about what is going on back home.
You need to also allow for possible rises in mortgage interest rates, insurance, rates and so on. And what if you are unable to send the top-up money back here for a while?
Only you can weigh up the likelihood of bad things happening. But err on the pessimistic side. Running through a realistic worst-case scenario - and how you would handle it - is a really good idea.
If you decide against buying a property, stay away from the sharemarket. Two years is way too short a time. The chances of your $80,000 shrinking are uncomfortably high.
Instead I suggest you shop around for good rates on bank term deposits. You might put half your money in a shorter-term deposit that you will roll over, and half in a two-year deposit. That way, whatever happens to interest rates you will have half the money in the right place.
I happened to read the following in your column recently re KiwiSaver: "Any New Zealand resident under 65 can join. If you're not an employee, you miss out on employer contributions. But you still get ... the tax credit, which matches your contribution up to $1043 a year. It's well worth having."
I rang ING to see if I could get the tax credit for my infant son, but they say this only applies to those over 18. I'm assuming ING is right?
You probably didn't mean to suggest that under-18s could get the tax credit (since the original letter was about "a wife"), but it might be worth clarifying in your next column.
ING is right. The tax credit starts at age 18. Sorry to mislead. It's just that if I repeat every detail in every column, I'll bore many readers.
Some time ago I enrolled my grandchildren in KiwiSaver.
My 17-year-old granddaughter has had a part-time job during the holidays which she hopes to continue with during the year, before going to university in 2011. Is it to her advantage to invest $1043 of her hard-earned savings into the fund, and if so when should it be invested by?
What a good granny!
I recommend that parents and grandparents sign up the kids for KiwiSaver, to get the $1000 kick-start while it's still there. But don't contribute after that because - as stated above - under 18s don't get the tax credit. I suggest you save for them elsewhere, so the money can be used for their education or setting up a business.
However, if an under-18 KiwiSaver takes a PAYE job, 2 per cent of their pay will go into KiwiSaver - unless they take a contributions holiday. Encourage them not to take a holiday, as it sets up a habit that will help them save for a first home and later for retirement.
After 18, when the tax credit starts, it's great if the young person - perhaps with family help - can get enough into their account in each July-June year to maximise the credit. Their total contributions include payments made directly to their provider by the end of June and money they contribute through work - but not employer contributions.
Your granddaughter will be turning 18 either within this KiwiSaver year, ending June 30, or the following KiwiSaver year. She will be eligible for the tax credit for the portion of the year that she is 18.
To work out her maximum tax credit that first year, multiply $1043 by "days"/365. "Days" refers to the number of days between her birthday and June 30. For example, if her birthday is on June 1, her maximum tax credit will be $1043 times 30/365, which comes to about $86.
In the following KiwiSaver year, she will get the full $1043 tax credit as long as she contributes that much. She shouldn't have to tell anyone she has turned 18. Her provider should take care of that.
Mary Holm is a part-time university lecturer, consumer representative on the board 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 (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
