I also have approximately $280,000 in a private super scheme and my wife has about $40,000 in KiwiSaver. We also have about $70,000 in the bank which was inherited, and $10,000 in shares and Bonus Bonds.
I'm obviously not worried about leaving my wife in the lurch financially. However, anything to do with the renters and financial stuff, she just finds a bit overwhelming.
Because I don't want to leave her with a mortgage, and to simplify things for her, I was thinking of selling the townhouse (maybe worth about $500,000) and paying off the Australian mortgage.
I'd prefer to sell the Oz house (maybe worth A$545,000). But we bought it for A$580,000 about a year and a half ago, so at the moment we'd lose money on it. It was intended to be a long-term investment. I was going to sell it when I retired at 65. What do you think?
Difficult times for the two of you. It's good, though, that you are comfortably off, and that you're thinking about how your wife will cope.
I strongly suggest you sell the Australian house. You've got into a way of thinking that is really common, even among professionals — dwelling on how much you paid for an investment.
Of course you'll take an interest in how your investments are performing. But your main focus should be on your present situation. And in that context, it's irrelevant what you paid for an asset.
As of today, you have a list of investments, and you want to simplify them. It will clearly simplify things more to get rid of your overseas property than to sell your local property.
You bought the Gold Coast property as a longish-term investment — although I would rather you had planned on holding it for at least 10 years, given how volatile property can be. Anyway, circumstances have changed. If that means you sell at a loss, so be it.
Your wife has enough else to contend with. I expect she'd be glad to get the Oz property off her list of worries.
While you're at it, perhaps you should also sell the New Zealand townhouse, given your wife doesn't like dealing with tenants.
What should you do with the proceeds? I recommend the two of you find a financial adviser you both feel comfortable with.
While I would love to see you helping your wife learn about money, I expect she might still want someone who can help her with decisions in future.
The Adviser page on www.maryholm.com has a list of advisers who charge fees as opposed to accepting payments from financial providers and are therefore much more likely to have your interests at heart. Check out the websites of several, then go and meet a few that appeal to you.
Interview them as if you are hiring an employee — which in effect you are. Keep going until you find someone who seems trustworthy and will keep your investments straightforward — someone who speaks your wife's language.
I hope things go as well as possible for you both.
Balancing equality
It surprises me that you quote the Tax Working Group justification of a CGT (capital gains tax) based on inequity arguments when 10 per cent of New Zealanders already pay 70 per cent of the tax, plus charges such as doctors' visits, living costs for children while at tertiary education institutions, etc.
If CGT is about inequity, then the family home should also be subject to CGT — after all, income is income however it is generated.
Also, how is it equitable that someone living in Auckland has no CGT to pay on, say, a $400,000 capital gain on their home, whereas in Timaru your capital gain will be one tenth of that — that is, $40,000.
You raise some good questions.
Let's look first at the idea of 10 per cent of people paying 70 per cent of tax. Others have come up with similar numbers, for example the top 3 per cent of earners paying 24 per cent of tax. These calculations usually look at "net tax", which is the tax you pay to the Government minus the money you get from the Government — in benefits, Working for Families and so on.
Another perspective comes from the website inequality.org.nz:
"The richest 10th of New Zealanders pay 47 per cent of all income tax, but that's hardly surprising when they earn 34 per cent of all the income. Declared income, that is — a lot of income for the wealthy gets hidden in various ways.
"But even that doesn't give you the whole picture, because it's only measuring income tax, and leaves out two other key parts of the tax system — GST and capital gains."
The article goes on to consider the proportion of people's income that they pay in tax.
A graph looking at income tax and GST combined, "shows that the very rich don't pay that much more of their income in those taxes than the poor do".
That's largely because GST hits low-income people harder, as they spend most of their income while richer people save some of theirs.
And if capital gains were included, "since those capital gains will go largely to the richest 10th, the truth about tax in New Zealand is that the rich almost certainly pay less of their income in tax than the poor do", says the article.
You could no doubt criticise that way of looking at things. But I'm just saying there are several ways to approach this question.
And in New Zealand, as the graph in last week's column showed, our tax and benefit systems don't reduce income inequality as much as in most countries. A capital gains tax would bring us more in line.
This brings us to the basic question — should we try to reduce inequality in New Zealand.
If you don't think so, you and I are just going to have to agree to disagree! However, we do agree on the family home. In theory at least I think gains on family homes should also be taxed.
Your Auckland-Timaru example is a good one. It would also apply to a person buying the most expensive house in Timaru compared with someone else buying the cheapest Timaru house.
If CGT is brought in, with an exemption for homes, people will inevitably put more money into their homes than they otherwise would.
The fact is, though, that a capital gains tax on homes is problematic.
For one thing, what do you do if you're selling your home and buying another? Maybe we could let you postpone tax at that point if you "roll over" the money into another home.
But in the end you or your heirs might face a huge tax bill. It all gets horribly complicated.
Governments have wrestled with this around the developed world. I suppose that when our Government said the Tax Working Group couldn't consider taxing the family home, it was just being practical.
If people's homes were included, many people wouldn't be able to see beyond their "my home is my castle" attitude and appreciate the fairness of the inclusion.
There would be such an outcry that the whole capital gains tax idea would be doomed. And while I suspect you might like that, I wouldn't!
Tax worries
I read with interest your article last week about the proposed capital gains tax on second homes. I have had many sleepless nights worrying about the possibility that I am going to have an annual tax to pay on my modest bach, which is never rented out. I am nearly 65 and on a low income.
I am very worried that this annual or accrual tax will be brought in and I will not be able to pay it. I even have my bach on the market, but so far have had no luck selling it. I feel trapped and see no way out if this unfair tax comes in. Could you please give me any information you may have on this.
Sleep easy. And get that bach off the market if the only reason you are selling is your worry about tax.
The Tax Working Group is not proposing to tax any assets on an annual basis. They are suggesting a "realisation-based tax", which means you pay the tax only after you sell an asset at a gain. The money would come out of your profit.
If the proposed tax comes into effect — and there are several steps to go yet — you would then need to get a valuation of your bach on April 1, 2021, although you would have five years from that date to actually get the valuation done.
Inland Revenue would give you guidance on the valuation — perhaps based on a Quotable Value or RV figure.
Then, when you finally sell the bach, you would pay tax on any gain in its value since April 2021.
In the meantime, I hope you have many more relaxing days in your little piece of paradise.
Price of enjoyment
With reference to the capital gains tax, I'd love an answer to my query. We all know that when one takes out a mortgage, the actual cost of one's house purchase is far higher than the original price.
For example, if I buy a holiday home for $600,000 with a $500,000 mortgage, then after 25 years my actual cost might be $1 million because of the interest involved.
So even if I sell it for $1.5m at that stage, my real profit is only $500,000, which is $1.5m minus $1m. Whereas, as I understand it, CGT will be paid on $1.5m minus $600,000, which comes to $900,000. Am I missing something? PS: I do not own a bach!
You're right, the taxable capital gain would be $900,000.
"The Tax Working Group proposes that interest should not be deductible in respect of a holiday home used for private purposes because the interest is in large part funding consumption — the enjoyment of the holiday home.
As a general principle, spending on consumption is not tax deductible," says the TWG secretariat.
It adds: "However, the Tax Working Group recommended that interest on borrowing to acquire an asset should be deductible where the asset is not used privately (for example where the asset is a rental property, or shares), as is the case under current law."
It makes sense to me. In your example, you pay a $100,000 deposit, but you then enjoy a $600,000 asset over the years. You have a lot more to enjoy than if you had bought a $100,000 bach. The interest you pay is for consuming that enjoyment.
Tax Working Group
I'm being flooded with questions about the Tax Working Group's proposals, so we've sought help from some tax experts to answer some in next week's Business section. Send your brief questions to me and I will pass many of them on to the experts.
- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a 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 mary@maryholm.com. 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.
