Mary Holm: Beware 'hands-off' investments

Offers to invest in foreclosed homes in the US for many will be a morally unpalatable option. Photo / Thinkstock

What's your view on buying foreclosed properties in the US for prices like US$35,000 ($44,500)? I've done some internet research on a company running workshops about this, but couldn't find anything negative about this company or the people.

After watching Michael Moore's movie Capitalism: A Love Story, my moral side says to ignore this, as it's making money off other people's dreadful losses and circumstances.

I'm also wary of property investments where a company has contacts they use to manage everything for you, creating a hands-off investment.

It's not just my moral side that's wary. The promotion materials you sent remind me of investment warning lists.

There's pressure to sign up fast, promises of receiving "insider knowledge" and a $1000-plus ticket price - but it's free if you sign up now.

We're told this is not "just another 'Hyped-Up' seminar". But the following hardly qualifies as soft selling:

* This will be "an international feeding frenzy for smart New Zealand investors!"

* "Here are 10 hefty reasons why you should crawl over broken glass on bare hands and knees to be in this room - no matter what."

And on the way, you get a few giggles:

* The seminar will enable you to "SAFELY Enter This RED-HOT Time-Sensitive Market Right Now - And laugh all the way to the bank!!!"

* And all you need is a "small micro-deposit that'll probably make you laugh when you hear it".

You're quite right to worry about hands-off investment of this type. Everyone who works on your behalf will want their piece of the action. And you're unlikely to be in a position to judge how well they perform.

Good on you for researching the people on the internet. That's a good start. But the fact you found nothing proves nothing.

Ask yourself: "If the deal is that good, why are they sharing it with strangers?"

If any reader has ever gone to a seminar run by an unfamiliar organisation that led them into an investment they are happy with, please tell us about it. Let's expand it to anyone who has been approached by a stranger - via phone, internet, mail or whatever - who led them into a good investment. I've asked this before, and never had a response. Funny, that.

The promo says: "This knowledge could dramatically shift your personal wealth enormously."

In which direction? I, for one, wouldn't want to find out.

Top up KiwiSaver?

I'm self-employed and looking at putting another $1100 into my KiwiSaver before the end of June this year.

With the Key Government cutting contributions in the tax credits in this Budget, is it still worth me doing this?

The Government's proposed changes won't affect contributions you make before this June 30. The changes won't happen until after the November election - if National is re-elected.

The issue for you now is how much you have already contributed since July 1, 2010. Aim to get a total of at least $1043 into your account before June 30, because the Government will match that with its tax credit - probably between July and October.

If you contribute more than $1043 in the KiwiSaver year, that's fine. But you don't get any incentives for that extra money, and it's usually tied up until you reach NZ Super age - although if you lack savings discipline that might be an advantage.

Next week's Budget will affect whether you should keep contributing in the 2011-12 KiwiSaver year. We'll see.

Banks over-loaning

Two weeks ago you stated that banks lend their deposits only, retaining a small fraction to meet depositors' unexpected calls.

Here is a short rundown from Westpac Bank for the first six months of its current year: net loans $49.8 billion, deposits $31.6 billion. The bank has on loan $18.2 billion more than it holds on deposit.

You cannot claim that a bank only lends a proportion of its deposits. I remember that false claim being rubbished way back in the 1930s, and again in a banking study under Sid Holland's National Government about 1954.

I remind you that the OCR is the rate the Reserve Bank charges trading banks when the trading banks create new money to lend to borrowers.

Not being a banking expert, I turned once again to David Tripe, director of the Centre of Banking Studies at Massey University.

Here's his response: "Westpac covers the funding shortfall from deposits by raising or issuing other liabilities, such as commercial paper, borrowing from the parent, etc. Your correspondent does not seem to be aware that funding for loans can be obtained from liabilities other than those designated as deposits."

In other words, banks get the money they lend from deposits and also by borrowing from elsewhere.

Adds Tripe: "The comment about the OCR is completely untrue. The OCR relates to the rate at which banks lend to or borrow from the Reserve Bank and has nothing to do with the creation of new money."

New Zealand political history is full of claims and counterclaims about banks and the creation of money. We could probably fill this column with letters about it - I've already received several. But something tells me most readers would find this less than captivating. I'm content to give David Tripe the last word on it.

Go easy on trusts

Mary you said last week, "... but I don't like seeing people using trusts to pay less tax, get extra from the Government, or wriggle out of paying their way if they end up in a rest home."

Mary, you are perpetuating a myth and misinforming your readers.

First, the tax rate on all income in a trust is 33 per cent. The highest tax rate on income for an individual is 33 per cent. If a person's income is reduced below $48,000 then more tax will be paid in a trust than if all the income was held personally.

Secondly, trust income is now part of the calculation when assessing government assistance.

Thirdly, Work and Income has for a very long time been able to unpick family trusts when it comes to rest home entitlement, not to mention other entitlements.

When Working For Families was inflicted on this country, IRD was the only agency that did not seem to do this, leading to the law change leading to the second item above.

The major problem with family trusts is the ability for the self-employed (such as builders) to avoid their responsibilities when they build defective products. Sadly, this is never mentioned. It is only "rich pricks" that are criticised. You have been brainwashed like everyone else.

Perpetuation of myths! Brainwashing! Hang on a minute, this is just a column.

To be sure of my ground - especially after such charges - I went back to our trust expert, John Bassett of Bell Gully.

He says the alignment of the top individual and trust tax rates at 33 per cent "reduced the scope to achieve tax savings through the use of trusts". It had been easier when trusts were taxed at 33 per cent and people at up to 38 per cent or 39 per cent.

But that's not the end of the story. "Income may still be taxed at a lower rate if there is a trust beneficiary aged over 15 years who is not on the top 33 per cent tax rate. In that scenario income under $48,000, for example, need not necessarily be taxed at the 33 per cent trustee rate."

This can apply in various types of investments, including rental property and PIEs, says Bassett. "The whole area of tax rates on income is one coloured more in shades of grey rather than black and white."

On your second and third points, the Government is clamping down on the use of trusts to qualify for Working For Families, rest home subsidies and so on. But - in the case of rest homes in particular - such use definitely still goes on.

When my friend's mother recently moved into a rest home, the manager expressed surprise that the mother didn't have a family trust - and therefore qualify for a subsidy. "Just about everyone else here has one," she said.

On your point about builders and the like, Bassett says, "The comments concerning the use of trusts to avoid third-party claims should recognise the developments which have occurred over time.

"There previously was general optimism that trusts could be successfully deployed as a defence to the inquiries of Government agencies and creditors. In more recent times attitudes have hardened. Law changes have been made and closer scrutiny is being applied by Government departments, creditors and the courts.

"Where these trends will end up remains to be seen, so it is a case of watch this space."

In conclusion, trusts are indeed still used in the ways I described last week - albeit probably not as much as in the past. And trusts are also still being used by people such as the builders you describe - but again, not as much as in the past. More on trusts in next week's column.

New Zealand worth it

I thought that your responses last week about the housing prices in Auckland and the "Big Question" were somewhat related.

I recently read an international report on housing affordability. As an American who's now a permanent resident in New Zealand, I would say that, with only a few exceptions, none of the "affordable" or "moderately unaffordable" markets (all of which are in the US or Canada) are places that I would ever want to live. Also, the main reason those areas have cheaper houses is urban sprawl and people being willing to commute three or four-plus hours a day.

So, as much as people complain about the cost of housing in New Zealand, it seems pretty justified to me. New Zealand has nice, compact cities, which are more expensive to live in. That combined with the great quality of life, the wilderness and beaches that you mentioned, made moving to New Zealand a pretty easy choice for me.

It's unfortunate that so many Kiwis, with help from the media stirring the pot, get upset over the differences in wages or GDP between New Zealand and Australia or other OECD countries. Most trained economists are the first to admit that there is a lot more to life and happiness than is captured by GDP differences. Good on you for pointing that out!

And good on you for writing. We don't know how lucky we are. Hey - that might make a good song.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director 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 (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.