Should Lotto wins be taxed? What about dairy farm capital gains? – Mary Holm

Should there be a capital gains tax on lotto winnings? Image / 123rf

OPINION

‘See how you feel!’

Q: With regard to CGT (capital gains tax). Would you have me pay CGT on a large Lotto win? My view of a win is the payment is a capital payment – from $30 to say $10 million, minus the $30.

I am a retired dairy farmer, after 62 years of farming. I would not do the job again. Too much work and no play. The cash left over after buying a house is now funding a hip replacement, blood pressure issues etc.

Now the question of capital gain is bullshit. A new tractor in 1981 cost about $14,000. A 120hp tractor is now $144,000. The farm cost $400,000, sold for $3 million, bought a house. Not that much left of the farm money.

What good will CGT do? Bugger all. My view: if you want CGT on a dairy farm that’s fine. You get out of bed at 5.30 every morning, milk cows and see how you feel about CGT.

Have a look at my Facebook. It’s a record of our dealing with the Waikato Regional Council and farm staff. Never again. My grandfather said to my father back in 1941 that the increasing population in New Zealand will make life damn near impossible. I think we are there now.

A: That’s a pity that you look back unhappily on your life’s work. I wonder why you didn’t get out years ago, but presumably, that wouldn’t have been easy.

Let’s acknowledge that you and other dairy farmers contribute to society. But so do healthcare workers, teachers, social workers, cleaners, roadworkers, factory workers – some of whom work two jobs to feed their families, and many of whom work unlovely hours. And they don’t end up with a $3 million asset. Is it so bad if a small portion of your gain goes to giving a hand to some of them or their children?

I hasten to add that the gain in the value of your farm should be adjusted for CPI inflation before it’s taxed. And there should be an allowance for improvements you made. We would need experts to work out what’s fair.

On Lotto wins, they are currently not taxed. But I wouldn’t object to that being changed, although it wouldn’t be a CGT, but an income tax.

PS. I actually did get up at 5.30am at one stage in my career, when I was a newspaper subeditor. And I’ve also worked a midnight to 8am shift, and other unsocial hours. So I know what you mean. I hope you now enjoy lots of sleep-ins.

Sell that rental

Q: We are in our 30s with a young family (on one income). We have a rental worth $1 million, with a $600,000 mortgage, and an owner-occupied house, also with a $600,000 mortgage. It’s tough paying both mortgages and we are just scraping by.

We are contemplating selling our rental and paying down our mortgage. I’m worried if we do this, we won’t have anything to fall back on for retirement. Are we best to hold on to the rental, or sell it and try to put any additional savings into something like shares or KiwiSaver for our retirement? I’m not sure what will be better financially.

While it would be great to relieve some financial pressure on our family in the short term, I want to make sure we are covering ourselves long term too.

A: Go ahead with your plan. Selling the rental and reducing your mortgage shouldn’t harm your wealth. And there’s one big advantage – more on that in a minute.

People often think wealth is measured by assets, such as your property, savings and so on. But that means little. Your true wealth is your net worth – your assets minus your debts. You can increase your net worth equally by adding $100 to your assets or by cutting $100 off your debts.

Let’s say your home is worth $2 million. That plus your rental comes to $3m. Subtracting your two mortgages, which total $1.2m, your net worth is $1.8m.

What if you sell the rental and net $400,000 after paying off its mortgage? And you use that to reduce your home mortgage to $200,000?

Your net worth is now $2m minus $200,000, which is the same $1.8m.

It’s true that getting rid of the rental eliminates one possible route to riches. If you borrow to make a property investment and all goes well, you get the gain on the bank’s money as well as your own.

But all might not go well. We’ve seen lately that house prices sometimes fall. What if you find yourself forced to sell the property in a downturn, or you have problems with tenants who don’t or can’t pay, or you discover the property needs big spending on maintenance? Rental property is a fairly high-risk investment.

Instead, you could put money that currently goes into the rental into paying down your home mortgage faster or into a share fund, in or out of KiwiSaver. The average fund returns over the years may not be quite as high as on a successful rental that goes well, but the risks are also lower. Follow the two “rules” in the next Q&A for a few decades and you should retire with plenty.

And what’s the big advantage? You’ll relieve the stress that seeps through your letter. When your children are young, it’s great if you have carefree time to enjoy them.

When to boost risk?

Q: I’m keen to get your thoughts on changing my KiwiSaver to a higher-risk fund. My wife and I spent several years in conservative default funds before moving hers into a growth fund and mine into a balanced, to spread our risk a little. I worry that we are still missing out on higher returns and that perhaps I should also change over to a growth fund. We are both in our early 50s so there is still a bit of time to go before we retire.

But is this a bad time to make this shift? I recall over the past few years when KiwiSaver funds had largely stalled, you said it could be a good time to invest in growth funds as the unit prices were low. Now that funds are back in positive territory, does that mean it’s a bad time to switch?

Answer: Oh dear. I probably said that to try to counter the anti-growth feeling at the time, because people’s balances had fallen. While it is, indeed, great to switch to a higher-risk fund when unit prices are down, it’s a really good move at any time, provided that:

• You don’t expect to spend the money for 10 years or more – giving it time to recover from even a big crash.
• You promise you won’t panic and move back to lower risk when the markets fall, making what are temporary paper losses into real losses.

One possible problem with making your move is that you’ll be unhappy if the markets happen to drop right afterwards. It would be like buying some clothes, only to find the shop started a big sale soon after.

The way around that is to move your money in, say, three lots, at monthly intervals – as I described a couple of weeks ago.

Family insurance

Q: On last week’s Q&A about self-insurance, I don’t know anyone whose house was a total loss from fire. Usually, the dwelling is worth only about 20% max of the GV anyway.

In times of families being more indefinitely intact, my father used to advocate family self-insurance, which we never did. But also, we did have voluntarily high excess to not pay for “the trash of the trash”.

A: Interesting idea, an extended family self-insuring against, say, house fires.

You’re quite right that the cost of replacing a house is often a relatively small proportion of the total cost of the property, with the land worth considerably more. Of course, it’s different when the land is damaged by an earthquake, flood, landslide or other disaster, as we’ve seen lately. But we’ll just concentrate on fires for now.

Let’s say 10 related families of cousins – or, even better, 20 families - set up a self-insurance fund. Maybe they could start with an inheritance from their grandparents. Then each family would contribute, say, $3000 a year.

If nobody claimed for quite a few years, it could work well. But what if:

• Someone loses their job or for other reasons just can’t contribute for a while?
• Someone can afford to contribute but just decides not to?
• Someone has a much more expensive house than most of the others, so would make a much bigger claim?
• Someone doesn’t take care with fire prevention? Perhaps they don’t put in smoke alarms. Or they live in a bushfire area and don’t keep greenery away from the house. Or they are careless with garden fires or barbecues or heaters. Or they might have too many drinks and forget the oil heating up in the frypan.

Also, there could easily be disagreements over how the fund invests. Maybe it’s not such a great idea.

On your last comment, that’s a rather nasty way of putting it. But it’s true that if you think you’re less likely than most people to make an insurance claim – let’s say because you’re a careful driver, or you lead a healthy lifestyle – it makes sense to choose a high excess.

Don’t help with will

Q: I’m a retired nurse. I’ve just read your last column where you suggest a mental health worker help a client with their will. I’m not sure if you know this but any healthcare worker is advised not to help clients or patients with wills in any way. This includes witnessing signatures, which you might think is okay. This is to prevent any issues with a family or the client/patient’s will later on. It’s a sensible policy that protects the patient/client at a vulnerable time, and the worker. There is, of course, the option of suggesting a lawyer or the Public Trust.

A: That’ll teach me to wander into an area well beyond my expertise!

I’m not sure that last week’s correspondent is a healthcare worker. She said: “I work in mental health, providing support to people in mental distress and/or are suicidal.” And refers to the person seeking advice about a will as a guest. She might, perhaps, work for a charity.

Still, your warning might apply equally to people in that role. So thanks for writing.

The details

Q: I see in last week’s column you are recommending folk put at least $1042 into their KiwiSaver each year to qualify for the maximum Government contribution of $521.43.

But that is not enough. At the required $20 a week and with 52.142857 weeks in a year, the minimum is $1042.86, as confirmed by IRD – exactly twice the Government contribution of $521.43.

Surely it is better to recommend folk put in $1050 a year to be safe? Otherwise, people following your advice to the cent will miss out on $521.43!

A: Your letter highlights a fairly common misunderstanding. You apparently didn’t notice that I said last week: “If you really can’t afford $30, start with $20 a week, or even less. The Government will still put in 50c for every dollar you put in.” There is no minimum for your contribution.

Another point: you don’t need to deposit money weekly, even though it’s a good way to budget. But if you contribute just a one-off $10 in a July-to-June year, the Government will contribute $5.

You also point out my lack of precise figures, down to the cents. That’s deliberate. Research shows it’s easier for readers to absorb and remember round numbers.

I used to say people need to contribute $1043 to get the Government’s maximum $521, which is more accurate rounding than $1042. But using $1042 makes it clearer, at a glance, that the Government puts in half of what you put in, up to the maximum.

Maybe you’re right, that I should just use $1050. Trouble is, people might wonder why they don’t get $525 from the Government. Gosh, life is complicated – especially for those who use six decimal points on the number of weeks in a year!

* 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 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 click here. 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.