Mum and Dad don't have to wait to offer financial support. Photo / Getty Images
COMMENT
Q: I would like to give money to my son on a regular basis but am unsure about the tax implications.
Due to health problems, he works casual part-time hours and is never secure in his income. He is in his early 50s, lives alone with no dependants, has no student loan and receives no Government benefits. He is not in a position to have flatmates.
We are elderly parents with more than enough money for our own simple lifestyle and would be happy to assist our son with a small, regular cash payment to meet his basic needs and take away some of the stress associated with his irregular income.
Can you advise what the tax situation is in regard to gifts of this nature?
It is very unlikely that we would ever need to call upon Government subsidies towards future rest home fees if such were required.
As our estate will eventually go to our son, it would give us more pleasure to start improving his circumstances now, than knowing that he will be comfortably off after our demise.
A: I quite agree. Let's get the happiness happening as soon as possible. And you've got the green light from Inland Revenue!
"Cash gifts are not taxable income for income tax purposes even if paid regularly and assuming they are not distributions from a trust, or a pension, etc," says a spokesperson.
"There is no gift duty and the parents cannot claim a donation tax credit or tax deduction for the gifts."
She adds: "Essentially, a gift needs to be voluntary, not be a contractual arrangement and must be made with no expectation of the donor (in this example the parents) getting something material, such as services, in return.
"Therefore, so long as the son hasn't agreed to provide or do something in return for the parents making the payments, and the parents are not legally bound in some way to make the gifts (so they are voluntary), then we can't see a problem."
Q: I have been reading your column for about 15 years and, as a result, I have been investing in KiwiSaver from the beginning, and ETFs in recent years.
Probably, I do not need this money for my future retirement. I was wondering how I can give these investments, which are under my name, as gifts to my children in the future.
A: See the Q&A above. You won't be able to give your KiwiSaver account, as such, to your children, and it would probably be complicated to transfer your other investments.
But you should be able to withdraw money from the ETFs (exchange-traded funds) whenever you want to. And you can access your KiwiSaver fund from age 65. Give the children that money and perhaps suggest how they invest it.
There's one other issue about giving away money that doesn't apply to the above correspondent. She says she and her husband are unlikely to need the residential-care subsidy that the Government pays for long-term care in a hospital or rest home. But you — and other readers — might need the subsidy later on.
When someone over 65 applies for the subsidy, their assets must be below a certain level — which varies depending on circumstances.
To prevent you from giving away lots of assets to make yourself eligible, the Government may include in your assets any gifts you've made above a limit.
Here's the deal. You and your partner can give away, without affecting your eligibility:
•Up to $6500 of assets each year in the five years before you apply for the subsidy.
•Up to $27,000 a year for assets given away more than five years before.
What this amounts to:
•If you're comfortably off and don't expect to need Government help with care, don't worry about this.
•If you might need the subsidy later on, but probably not in the next five years, it would be wise to limit your gifts to $27,000 or less a year.
•If you might need that help within the next five years, it would be wise to limit your gifts to $6500 or less a year.
For more on the subsidy see tinyurl.com/ResCareNZ.
Q: I was looking at KiwiSaver providers over the weekend.
I see that Simplicity has phenomenal returns on its conservative fund. Too good to be true? The returns for the low-risk option appear to be much too high.
Should I be asking these questions of some official overseer of KiwiSaver?
A: Hold your horses — although I must admit I did a double take when looking at the table you sent me.
It showed the Simplicity conservative fund's return for the year ending May 31 was 7.94 per cent after fees but before tax, and for two years it was 7.38 per cent a year. Those are good returns for a high-risk fund, and seem to be way out of line for a low-risk one.
But they are correct. And it's worth looking into why, because what has happened affects investors in most KiwiSaver or non-KiwiSaver funds.
The unusually high returns reflect three things, says Simplicity managing director Sam Stubbs:
•"Always being fully invested — that is, very low cash holdings.
•"The collapse in global interest rates, which has made higher returning investment-grade bonds more valuable.
•"None of our funds holds any fixed interest below investment grade. While investment-grade bonds rose in value because interest rates fell, sub-investment grade bonds fell in value as investors worried about whether they would get repaid."
On the first point, the Simplicity conservative fund holds 76 per cent bonds, 22 per cent shares and just 2 per cent cash. As we all know, cash — term deposits and the like — have paid pathetically low interest for a while.
Interest paid on newly issued bonds has also fallen, but that's where Stubbs' second point comes in. Bonds can be bought and sold. And when interest rates fall, bonds that were issued several years ago — and therefore have higher interest rates — become more desirable. So their value rises.
In the past couple of years, this has happened dramatically, with interest rates hitting all-time lows. Even if a KiwiSaver fund doesn't sell its older higher-interest bonds, it takes into account their changing value when it values its units. In this case that means a big jump in unit value.
The third point is about the quality of the fund's bonds. If nothing else was going on, the value of bonds below investment grade would also rise when interest rates fall. But in troubled economic times — like now — that is more than offset by people's fears that the issuers of sub-investment grade bonds might default.
Says Stubbs: "Many other fixed-interest funds over this time have sought to compensate for high fees by taking on more credit risk to drive up returns. This has impacted their returns."
Still, Simplicity is not alone in reporting unusually high returns on funds heavily invested in bonds.
Although that provider topped Morningstar's list of conservative KiwiSaver funds for returns over one year and three years ending March 31, many other bond fund managers have also done well.
That's great for investors in KiwiSaver and other funds with heavy investments in high-quality bonds. But what does the future hold?
"Going forward, investors should expect lower returns, reflecting lower interest rates," says Stubbs. "We have been careful to forewarn investors that future returns are unlikely to match those of the recent past — that is, the past one to two years."
What's more, just as bond values rise when interest rates fall, so does the reverse happen.
"The issue going forward is that the traditionally safe haven of bonds will not provide protection for investors if, and eventually when, interest rates rise," says Andrew Lance, chief operating officer of Simplicity.
"There is no sign that this will happen in the foreseeable future.
"One day, however, it seems likely that rates will rise and fixed-interest investments will be negatively affected. The losses are unlikely to be anything like the losses you see from shares in a bear market, but bonds will not protect conservative investors in the way they traditionally have."
Because of this, Lance says Simplicity is "working on prudent alternatives to traditional bond investments, such as our recent investments in floating-rate mortgages."
No doubt other KiwiSaver providers are also addressing this issue. But still, investors in funds with lots of bonds should expect future returns to be lower — and perhaps negative at times if interest rates rise fast.
Almost all KiwiSaver funds — except low-risk funds invested fully in cash and high-risk funds invested fully in shares or property — hold some bonds.
To find out how much of your fund is invested in bonds, use "Check your current fund" in the KiwiSaver Fund Finder on sorted.org.nz.
But that doesn't tell you about the quality of the bonds. You could also email your provider and ask what percentage of their bonds are high-quality "investment grade".
Q: About five years ago, you alerted readers to the Social Security Act 1964, under which a person's NZ Super is deducted pro-rata if their partner receives a pension from overseas, in a process called spousal deduction.
I was then a 60-year-old Kiwi and my American partner was considering moving here permanently to live with me.
Following up on your advice, I confirmed that indeed I would not be eligible for any of my NZ Superannuation if he did move here. Regardless, we now live here together and I would qualify for my NZ pension if I was not disqualified by that Social Security Act!
I was therefore somewhat excited to read in a recent Herald article: "Part of the deduction policy which allows a person's pension to be deducted due to what their partner receives from overseas is due to be scrapped soon."
Could you please advise what this means? Is the Government about to have a change of heart and let me collect my NZ Superannuation?
A: Good news.
The bill that would allow you to receive your own NZ Super, regardless of your partner's pension situation, "is still going through the House and the proposed date of implementation is November 9," says a spokesperson for Minister of Social Development, Carmel Sepuloni. She adds that she can't comment further at this stage. But it looks good for you.
Q: In your last column you stated that you can apply for NZ Super up to 12 weeks before you turn 65.
I am in this time frame so naturally I had a look. Here is a cut and paste from the MSD website: "You can apply for NZ Super from eight weeks before you turn 65 to avoid missing out on payments. If you apply after you turn 65 your payments may only start from the date you apply."
Has this recently been changed?
A: Twelve weeks is correct.
"Clients can apply for NZ Super or Veteran's Pension from 12 weeks before their 65th birthday," says Kay Read, group general manager of client service delivery at the Ministry of Social Development. "This includes paper and online applications."
After I got your letter, I found two places online that said eight weeks, but Read says these have now been updated. Good on you for drawing the Government's attention to this.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. 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 mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
How many people had paid deposits was not stated but pre-sales said to be 'strong'.