Mary Holm: Capital gains cause for confusion

A while back, you responded to casual share traders regarding trading shares as a business and the attitude of the IRD.

I am a tax agent, and have offered similar advice to clients, but mainly regarding rental properties. There are no clear guidelines, so I advise that should they sell, they must satisfy the IRD that they sold for reasons other than capital gain. In fact, all aspects of a tax return must satisfy the IRD, and an explanation must be available for any question that may be asked.

Regarding rental sales, the IRD do not appear to follow guidelines anyway and probably leave it to staff to decide.

I once had a husband and wife in the rental property business. The wife was a nitpicker, wanting to claim biscuits, part of the kitchen, part of the toilet, etc, as home office because an office has these things. Being recent immigrants didn't help, as I viewed them as milkers of the system.

They sold a property after about eight months' ownership for a reasonable gain. Generally I let it go, but this time I decided to ask the IRD how to treat the capital gain, as I was not a fan of this couple.

The IRD woman I spoke to looked for a reason not to apply the capital gain and eventually suggested the reason they sold was that "they did not regard the property as a suitable rental, and that is how it would be treated".

What if they had sold a second property? Would it be the same, or do two sales equal a business? Who knows? Useless guideline - why have a rule if not applied?

The couple are no longer on my list, having maybe found an accountant more compliant and less open to suggestion.

The IRD readily jump on, say, a new company being established which has a residual income tax exceeding $2500 in it's first year, laying on penalties and interest backdated to the first payment date. This is easy - like speed cameras. But when there is no hard and fast rule, the IRD takes the easy option.

Those clients I have with rentals are happy to pay only the interest on mortgages to maximise losses and tax savings. Even though the property is a millstone around their necks, the invariable response is that they will recover these losses and more when they sell.

They bought to make a non-taxable profit, period. And although times are tougher now, provided they did it intelligently, they will succeed. And as things stand, who can blame them?

This all sounds back to front and inside out. We have a tax agent arguing that their client should be taxed, and Inland Revenue deciding not to. But perhaps that's no stranger than the law itself in this confusing area.

An Inland Revenue spokeswoman responded to your comments by saying, "Staff are required to follow relevant legislation and supporting policy in all instances. What can be more challenging is how this is applied to an individual's circumstances, particularly where there may be subtle but important variables that must be taken into account."

She went on to say, "When deciding whether or not you should pay tax on the profit from the sale of a property, we look at your intention when you bought it. If you bought the property with the firm intention of selling it when prices rise, that is, to make a gain from the increase in the property's value, then the profit is likely to be taxable."

As you say, that's exactly why all your landlord clients bought their properties, but often they don't end up taxed.

Is that because, as you suggest, Inland Revenue takes the easy option? Not always, according to the spokeswoman. Over the past five years, she says, "an average of $127 million a year in additional tax has been assessed from property-related Inland Revenue investigations, and the Inland Revenue has taken a well-publicised approach to educate and promote compliance by taxpayers involved in property."

This includes the publishing, in late 2007, of booklet IR313 titled "Buying and selling residential property". You can download it from www.ird.govt.nz by doing a search on "residential property". "The booklet provides a number of case studies to help people compare their situation with the examples given and help them decide if they need to consider a tax position from the buying and selling of property," says the spokeswoman.

She adds that there's further information on tax and property transactions at www.ird.govt.nz/toii/property.

So - we have rather different stories from you and the department. Which is right? It's impossible to judge. While it's hardly fashionable to feel sorry for Inland Revenue, I don't envy its task of enforcing a law that hangs on people's intentions when they make purchases.

The Victoria University tax working group is considering whether to recommend changes to the law on how capital gains are taxed. I hope that whatever they come up with - whether or not it's tougher than the status quo - will at least let landlords and Inland Revenue officials know where they stand. And then, of course, we've got to get the Government to turn the recommendations into law.

With reference to your recent columns, independent financial advice seems to have been something of an oxymoron here for several decades.

It's an industry crying out for better public information, transparency and professional regulation.

The major issues seem to be a lack of financial literacy among potential investors and our reluctance to pay for truly independent advice, leading to a business model reliant on commissions to be viable, which then risk biasing the advice given. As always, no such thing as a free lunch.

New Zealand could certainly do a lot better on the financial advice front. There are shocking examples of bad "service" - including one I'm researching at the moment. Watch this space.

Meantime, I agree with your two major issues. When conversing with a doctor it helps if you understand the basics of staying healthy. In the same way, it helps when conversing with an adviser if you know something about what she or he is talking about.

Furthermore, whereas doctors presumably have our best interests at heart, that's not always true of advisers. Too often they have at least one eye on how much commission they will get if their clients invest this way rather than that way. That's all the more reason why it's important for clients to know enough to ask questions.

Which leads us to your second issue. If challenged about why they don't charge clients by the hour and rebate all commissions to the clients, many advisers say what you have said, that New Zealanders are reluctant to pay.

However, there are fee-charging advisers who have proven that wrong. The rebated commissions help cover their fees, and in any case their clients don't mind paying if they know the advice they get is sound and unbiased.

The good news is that help with financial advice is on the way. The Financial Advisers Act is expected to come into effect by the end of 2010. "The act aims to ensure consumers can have confidence when they deal with a financial adviser that that person is professional and meets appropriate standards of competence," says the Securities Commission.

There's more information on the act on www.seccom.govt.nz. That website also has some good tips on how to find a financial adviser.

Used to really enjoy your Saturday column. However, all I read about over the last few months in your articles is this thing called KiwiSaver.

How about dropping any ref to KiwiSaver (let the young ones work it all out for themselves) and let's have some real human stories and situations as your articles used to be.

Just the very name sends shudders and makes me delete your column.

I hope the publishing of your own letter, which contains the dreaded word, hasn't made you hit the delete button before you read this.

Does KiwiSaver dominate this column? Certainly not lately, but I confess there was a spurt of KiwiSaver Q&As a few weeks ago, when you wrote to me.

To be fair, let's look back at all of 2009. Of all the 152 Q&As, 63 per cent were not about KiwiSaver. And of the first Q&As in each column - which are the subjects of the headlines and pictures - 83 per cent were not about KiwiSaver.

Even the ones that were about the scheme often included issues of interest to non-KiwiSavers, such as the performance of shares, managed funds or property.

In light of the fact that 87 per cent of the population - more than 3.76 million people - are under 65 and therefore eligible to join KiwiSaver, and less than one-third of them have, I probably should have written more about it. What's more, many over-65s joined before their 65th birthdays or are helping family members participate.

Other than bank accounts, I can't think of any product of such broad interest. So I'm afraid KiwiSaver will stay in the column mix. Warning: You may want to stop reading now.

I am about to be made redundant. I had been contributing to a company superannuation scheme during the time I have been employed with the company. I had also recently joined KiwiSaver, so was contributing to both.

When I leave I will receive a payout from the company super scheme. I can either pay that money off my mortgage or transfer it to my KiwiSaver account.

Are there tax advantages to transferring the money from my company scheme to my KiwiSaver account?

Good on you for joining both the company super scheme and KiwiSaver. Many people don't realise that it's usually well worth it to be in both.

Generally there are no advantages - tax or otherwise - to transferring super money or any other lump sums to KiwiSaver. You'd be better off repaying your mortgage.

The only exception is if you won't end up putting $1043 into KiwiSaver between July 1 2009 and June 30 2010. If that's the case, top up your contributions to that level to get the maximum KiwiSaver tax credit.

The great advantages of KiwiSaver are the tax credits and, for many people, the employer contributions. But any extra contributions you make - beyond what is needed to get those bonuses - are just like other savings. And given the money is tied up in KiwiSaver, it's best to avoid putting extra savings there, unless you worry that you would otherwise spend the money.

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.