Take a stepped approach to investing or withdrawing money - Mary Holm

A stepped approach to investing or withdrawing money can help you avoid disappointment if the market drops. Photo / 123RF

Opinion

OPINION

A step at a time

Q: I made a large withdrawal from my KiwiSaver in July to help a family member bridge their finance for a home purchase.

They have now repaid that loan, but the unit price in the interim has risen by 13c per unit. I have been sitting on the money not knowing whether to put it in a term deposit and wait to buy in again at a lower price or just take the loss, which is around $13,000. Do you have any advice for me?

A: Obviously you are over 65, and so able to withdraw that money. And it’s great you could help a relative with a short-term loan – and that they repaid it promptly!

It’s not a good idea to wait for the unit price to drop back. It might never go that low again, and meanwhile you’re missing out on what are likely to be higher returns than in term deposits. Or, if the price does drop soon, you might find yourself waiting to see if it drops further. Nobody, not even the experts, can predict what’s going to happen next.

In these sorts of circumstances – or in the case of anyone who has a lump sum to invest - I think it’s best to use steps. Basically, you want to get back into the fund quickly, to get the probably higher growth. But if you move the lot now, and the markets and unit prices drop tomorrow, you’ll be unhappy.

So I suggest you make the move in, say, three steps – deposit a third now, a third in a month or two, and the last lot a month or two later. You could use term deposits in the meantime.

This also applies to withdrawing money from any volatile investment. If you’re not in a big rush, taking it out in steps avoids the chance of selling the lot at what turns out to be a low price.

Fighting tax

Q: You may be interested in a comment I received in an email from my nephew in UK, who owns a substantial chartered accountant practice: “I am in the middle of lots of corporate finance work, as a number of clients seem to be running scared of the impending CGT rises in the Budget at the end of October, and are selling up or reconstructing to avoid the worst of it”. UK increasing, NZ fighting the introduction!

A: Some New Zealanders would indeed oppose a new capital gains tax. And if it’s introduced, they would put lots of effort into reducing their tax. But what’s new? People do that under the current system too.

Meanwhile, others would welcome the change. While a comprehensive CGT would complicate life a bit, it would be fairer.

Valuation Day

Q: In your many discussions around a capital gains tax you frequently assert that “A CGT would inevitably take effect gradually, probably applying only to items bought after the tax came into effect”. However, this seems to be not what our bureaucratic masters envisage. Section five of the Tax Working Group’s Future of Tax report openly envisages a “Valuation Day”. The rules for taxing gains would apply to gains and losses that arise after the implementation date (Valuation Day).

This approach would require taxpayers to determine the value of the asset as of Valuation Day and calculate the increase or decrease in value from Valuation Day when the asset is sold or disposed of. Thus, contrary to your expectations of a gradual implementation, everything already owned would be captured in the tax net right from the start.

A: That’s a really good point. In the past, other proposals have suggested taxing only items bought after implementation day. But I suppose we should assume that, if we adopt a CGT, it will be similar to the Tax Working Group’s 2019 recommendations.

The use of a Valuation Day would prevent reluctance to sell assets people had bought earlier. As the Tax Working Group said, that reluctance “would magnify lock-in effects, reduce the revenue raised by the tax and create an unfair distinction between people who bought assets before and after the introduction of the tax.”

Under the Group’s proposal, people would have five years from Valuation Day to determine the value of their assets on that day - unless they sell sooner, in which case they would have to do the valuing by then. If they didn’t comply, there would be a default rule. Inland Revenue would be encouraged to develop tools to make this easier for everyone.

By the way, the Tax Working Group also recommended no inflation adjustment to CGT. This was partly to be consistent with the rest of the unadjusted tax system. “Inflation indexing the tax system is complex,” their report says. “This complexity creates high administration and compliance costs and is the reason why no OECD country currently comprehensively inflation indexes their tax system.”

That doesn’t stop me from wishing, though. Last week I said ideally both income tax and CGT would be adjusted for inflation. There’s nothing wrong with dreaming…

Complications ahead

Q: I’m not against CGT, but having moved here from Canada long ago, I have some insights to share. CGT is not simply paying tax on the difference between the sale and purchase price of a house.

Owner-occupied homes are exempt in Canada, but CGT applies to all other assets including shares, ETFs and managed funds. In the case of funds, an investor cannot figure out what is income, what is gain or loss, or foreign exchange gain or loss, without the year-end statement from the institutions every year. Things get really complicated when someone has held onto assets for a long time. For example, for shares or properties that were purchased 20 years ago, one has to be able to show the original purchase price or appraisals, take into account share splits and consolidations, etc. It gets really messy. The compliance cost is high. Accountants are sure to benefit hugely.

A: There are ways to cope with these issues. For example, you would probably be paying tax on managed fund sales at the end of the tax year, when you “do” your taxes. So your year-end fund statements should be available then.

On long-term assets, they would be valued on Valuation Day, and the owner would keep records of that, and any share splits and so on since then. I’m sure there would be online tools to help with that.

Still, compliance costs would indeed grow, and accountants would no doubt pick up business. As I said above, that’s a price we would pay for fairness.

‘You got two things wrong!’

Q: As a reader of your columns for over 25 years I rarely disagree with your answers or comments. Now twice in one column!

Firstly, your correspondent wrote. “A pension on the other hand is given to everyone who qualifies at 65, and this makes it simple to administer. While wealthy people may not need a pension, they are nevertheless entitled to it just as they are entitled to the same health care as others.”

You comment: “a fair point”.

Neither you nor your correspondent acknowledges the fact that today’s taxpayers are paying for the pension (as it is unfunded) and have no chance of receiving the same pension in their retirement, for demographic reasons. You are both approving a Ponzi scheme.

Secondly, you state: “A good comprehensive Capital Gains Tax would cover all investments in shares.”

Mary, can you see that investment in shares is totally different from residential property investment? Property investment distorts the economy by pushing up house prices, but investment in (New Zealand) shares provides much-needed capital to the local economy. And if CGT excluded NZ shares it would do much to right a distorted NZ economy.

A: Sorry to suddenly shake up your confidence in the column.

On the first issue, I think the reader meant that over 65s are legally entitled to receive NZ Super. Whether it’s fair in terms of what different generations receive or will receive is another question.

But the outlook for NZ Super is not nearly as bleak as many think. The amount may be cut a bit, and the starting age may be later, or annual increases may keep pace with inflation rather than wages, which would usually mean smaller rises. But knowledgeable government number crunchers are not predicting radical change. No government would dare!

Also, current Super recipients didn’t benefit much from KiwiSaver, with its government contributions, government-imposed employer contributions, and financial regulation making it a pretty rock solid investment. KiwiSaver will certainly help younger people retire more comfortably.

There are, of course, many other factors to take into account when looking at “generational equity”. But I don’t think this column should get into all that at this stage. We’ve got enough correspondence to and fro on CGT right now, and I want to leave room for other personal finance questions.

Furthermore, we don’t need more issues dividing New Zealanders into us and them. It seems to me that most people care not only about their own financial wellbeing but also that of their grandparents, parents, children, grandkids, friends and neighbours of all ages.

On investing in shares versus rental property, yes, they are different in many ways. But much of the money invested in shares doesn’t actually end up with the company. Sure, it does when there is an initial public offering, or IPO. But after that, when someone buys a share the money goes to the seller, not the company.

Also, if NZ shares were exempt, that would encourage overinvestment in that chunk of the market, pushing up share prices artificially. So I’m not sure this is the best way to support local companies. And it works better to keep taxes as simple as possible.

Meanwhile, I think you’re too harsh on rental property investment. Landlords do provide housing for a big chunk of the population. And while some are exploitative, others are reasonable.

Tough for 15-year-old

Q: At the age of 15 and one of five children when my father died aged 54, I was at a loss to understand why the community took half what my parents had worked so hard for as death duties. Tax should be less rather than additional taxes. The bureaucrats need to tighten their belts. Concentrate on the core needs of our country. Not waste taxpayers’ money as they have been doing.

A: You’re referring to a Q&A last week suggesting we tax inheritances rather than capital gains. And gosh, that sounds really rough in your childhood. Clearly a new death duty would have to allow for those sorts of situations.

On government spending, it’s always easy to say some of it is wasteful. The trouble is your waste is my essential government spending, and vice versa. Having said that, though, of course it’s always good for a government to question what it’s spending on.

But what’s the answer?

Q: Thank you for your “donate it to a charity” suggestion last week, in reply to a reader who says he doesn’t want to receive a property he has been told he may inherit.

But just in case, what is the answer to the original question? Which was, in fact highlighted under your name at the top of page C1 of Saturday’s Weekend Herald, “Do I have to accept an inheritance?”

A: Okay! I asked Rhonda Powell, a barrister whose work includes estates. “The relative can simply disclaim the gift,” she says. “He cannot be forced to accept it.”

In anticipation of your next question, I then asked Powell, “What would then happen to the gift? Presumably if the will leaves residual assets (everything not given to somebody else) to someone, they would get it. But what if it doesn’t?”

Powell’s reply: “That’s a question I can’t answer in the abstract. Depending on the wording of the will, the gift may become part of the residue and pass in accordance with any residuary gifts, or there may be an intestacy or a partial intestacy.”

Intestacy is when someone dies without a will. So if that applied to the property, it would first go to the deceased person’s spouse or partner and/or children, and failing that to another relative. If all else fails, the property would go to the Government.

P.S. I don’t write the promos for the column!

* 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.