Labour's tax on Super
Q: Can you advise if Labour's capital gains tax will be applied to my KiwiSaver savings? I have already been taxed on my contributions since I am self-employed.
Now, at 66, I have a greater incentive to remove all I have invested in KiwiSaver and spend the lot before I lose 15 per cent to Labour.
A: You wouldn't be looking for an excuse to blow the money on a world trip or something, would you? Sorry, but it won't work!
As explained above, Labour's capital gains tax plans won't affect KiwiSaver. And it's hard to imagine any other government taxing KiwiSaver withdrawals, unless the change is part of a wide-ranging overhaul.
There are three points at which any savings can be taxed: when the money goes in, when it earns interest and other returns over the years, and when it's taken out. Different countries tax savings at different stages. Here's how tax is applied to KiwiSaver:
• Contributions from everyone — employees, the self-employed and non-employees — are taxed, in that they are taken out of after-tax income. And employer contributions are also taxed. However, the annual tax credits of up to $521 have the same effect as a generous tax break on contributions.
• Returns earned by KiwiSaver funds are taxed. The tax on gains that Parker refers to above is part of that. And funds are also taxed on other income, such as interest — albeit at a lower rate than on some other investments because KiwiSaver funds are portfolio investment entities, or PIEs.
• By the time you withdraw your KiwiSaver money, it's all yours, in the same way as bank savings are all yours.
There are frequent suggestions that the middle tax — on KiwiSaver returns — should be cut. And just this past week the Financial Services Council, Consumer NZ, the Taxpayers Union and Age Concern launched a Fair Tax for Savers Campaign. It asks political parties to consider reducing this tax on KiwiSaver, as well as tax on term deposits.
The argument goes like this: "Each year we're paying tax on the interest earned. And then on interest on the interest re-invested. That means KiwiSaver earnings are almost cut in half by tax! A wage earner saving for 40 years would end up with over $100,000 more if KiwiSaver earnings were subject only to effective tax rates, the same as the standard marginal tax rates!"
On term deposits, the campaign argues that only interest over and above inflation should be taxed. If the interest rate is 5 per cent and inflation is 2 per cent, tax should be levied on 3 per cent.
The campaign asks people to sign online petitions and send postcards or emails to politicians supporting the proposals. It points out that the 2011 Savings Working Group recommended such changes. I was part of that group, and I support the campaign. For info, see fairtaxforsavers.org.nz.
The big question, of course, is how the Government would cope with a considerable revenue cut. "As improvement in the Government's books allow for tax reductions, we suggest savings taxes are reduced," says Peter Neilson of the Financial Services Council. Revenue would also be gained by allowing businesses and property investors to deduct only the after-inflation component of the interest they pay.
The fact is, though, that a future government might argue that if taxes are reduced on KiwiSaver returns, it wants to introduce a tax on the money as it's withdrawn. Still, I would expect such a change to be introduced carefully, so that people at your stage of life — who wouldn't benefit much from new tax breaks on returns — wouldn't be hit by a withdrawal tax.
I'm afraid you're back to being sensible and spending your KiwiSaver money gradually.
New car depreciation
Q: In last week's column, you quoted Clive Matthew-Wilson saying new cars lose about 40 per cent to depreciation in the first year. I found that alarming as I had understood the rule of thumb was around 30 per cent.
Upon investigation I found some websites quote 20 per cent (Cars Direct and Trusted Choice), while others, such as the trusted AA, say it varies by the size of the vehicle.
To quote from the AA website: "For used car values, as a rule of thumb in today's economic climate, small cars do not suffer as heavy depreciation as large, uneconomic models.
"For examples, assuming New Zealand's average mileage of 14,000km a year, a 2010 Suzuki Swift GLX that had travelled 28,000km would have a retail value today of about $18,000, against a new value of $24,000. A similar age and mileage Holden Commodore SV6 would have a current value of about $35,000, versus a new price of approx $55,000.
"As you can see, the small car has depreciated about 25 per cent in two years but the large car has fallen about 36 per cent."
I believe the AA figures to be more realistic and would prefer to use them as a guide — even though this is a two-year average.
As a further comment — and something I noted the AA mentioned — by good negotiation you can reduce the on-the-floor price and thereby reduce the size of the depreciation.
For example, if you purchase a new vehicle at the end of a month, or quarter, dealers are often more likely to reduce their price as they often want to quit stock and boost their sales figures.
A: Thanks for this. Good to have another perspective. But the main point is that cars do depreciate a lot in the first couple of years — regardless of the exact numbers.
Other reasons to buy
Q: The buying of a new car for many may be more than just about money and operating costs. Some of us buy a new car for quality, enjoyment, pride, safety, etc. Not everyone wants or needs to be preoccupied with cost.
A: Indeed. For an example of what you're saying, read on.
Five years of benefits
Q: I have read the comments on buying a new car against a second-hand one, and in the past I have done exactly what your other correspondents have done.
But four years ago, getting a little older and a bit better off financially, my wife and I decided to treat ourselves to a new car. For four years we have had trouble-free motoring, servicing and fee-free warrants of fitness. I have never put a drop of oil in the engine.
I have just done a deal to trade in my Toyota Corolla for a new slightly upgraded model. I am happy with the price, and this time I get five years' free AA road service, five years' platinum warranty, five years' free servicing, five years of warrants and free tyres for life.
Most of all my wife and I own a brand new car. We are both elderly, we do not go out much and the car is part of our pleasure.
Your correspondents should realise if no one bought a new car they would not be able to buy a low-kilometre model cheaper car.
A: Good on you for doing what brings you pleasure. And I loved the bit about buying a new car so others have used cars to buy. You're doing the rest of us a service!
Dysfunctional Super
Q: Recent contributors have expressed frustration over the entitlement by "recent arrivals" to NZ Superannuation — particularly as the contributors "have paid taxes all their working lives in New Zealand" and expect corresponding financial recognition of this.
There are two things critically dysfunctional about the NZ Superannuation scheme:
• Unlike almost all OECD countries, the scheme is based on residence — not on financial contribution. In other countries, one receives a proportionate payment based on number of years' contribution as a proportion of a designated "working life maximum".
• Remarkably, residence requires you only to have lived in New Zealand for 10 years (five of which must be beyond the age of 50).
Consequently, New Zealand's approach could fairly be described as a "legislated Ponzi scheme" given that no "input" payments are actually required yet outgoing payments are open-ended until death.
NZ Super is reliant upon the fresh investment by complacent lifelong income-earning, taxpaying contributors in order to fund the shorter-term contribution (or non-contribution) of "residence qualifying" superannuitants — which includes the permanently unemployed.
So both retiring overseas arrivals (in forfeiting their home country state pensions) and lifelong New Zealand workers are equally "economically disadvantaged" in terms of their relative return on investment, having paid lifelong taxation against income for state pensions when all that is required is 10 years' New Zealand residency.
Which political party will have the courage to allow Treasury to correct this imbalance?
A: It wouldn't be up to Treasury but Parliament to change NZ Super. Should Parliament do that?
It depends on what you think the aim of the system is. As you point out, some people get a much better "deal" than others from NZ Super, in that they get out much more money than they paid in taxes over the years. But that, many people think, is one of the beauties of the scheme.
It means people who haven't worked for some or all of their adult lives — whether because of health problems, caring for children or other dependants, or for some other reason — receive the same as everyone else.
You could argue that some of these people have been lazy and don't deserve NZ Super, but you should probably walk a mile in their shoes before making that judgment.
As I've said before, I would far rather put more money into government than I take out over my lifetime. It means I've had a pretty good life. I do agree, though, that the 10-year residency requirement is open to debate. Perhaps it should be longer.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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 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.
