Money Matters: Live a little - but don't forget about tomorrow

By MARY HOLM

Q. I was interested in reading the letter concerning home ownership as opposed to investments (Money Matters, July 8).

If people made every decision in life based on economics, we would all be driving Ladas and living in low-cost housing.

Everyone chooses to spend his or her money in a different fashion - some on overseas travel, others pursuing a sport or hobby.

My philosophy is: when your children are financially dependent it is necessary to be careful with your money. Secure a home, pay your debts and save for your retirement.

Once your children are off your hands, you are then able to live a little. As in all things, it is a matter of balance.

What are you saving your money for? If you don't enjoy spending your money, your children certainly will.


A. You're absolutely right. There are people out there who put too much emphasis on keeping costs down, and too little on enjoying life.

But there are too many who tip the scales the other way, in favour of having toys, holidays, flash houses and good times now, and "we'll worry about retirement later."

What's more, they're not just spending instead of saving. They're borrowing to spend.

Somewhere down the track they'll have to pay back that debt, and the interest that's accumulated on it, before they can begin to build up a strong financial backing for retirement.

A recent Reserve Bank paper shows that, from 1978 to 1987, household debt stayed below half of personal disposable income. But then, within a decade, it more than doubled.

The paper goes on to say, "The pace of household borrowing slowed somewhat from 1996, but surged in 1999 after interest rates fell sharply late in 1998."

On the savings side, it says people sometimes challenge the accuracy of New Zealand data. "There is no dispute, however, that our household saving rate is low, or that the trend is it has been falling" in the 1990s.

It amounts to this: we're borrowing more and saving less. It doesn't sound as if too many people are following your philosophy on what to do when your kids are little.

And if they don't do that bit, they're not in much of a position to do the kids-off-your-hands bit.

As for home ownership versus investments, the Reserve Bank paper says New Zealanders have a much stronger bias towards housing and away from financial assets than people in Canada, Sweden, Britain and, in particular, the US.

There's nothing inherently wrong with that. The trouble is that most people, in retirement, don't want to live in a lower-quality house than they've become used to.

They might be happy with a smaller place, but they probably also want it to be low-maintenance, close to facilities and with easy access.

Demand for this type of housing is growing, as Baby Boomers start to retire. Often, such a house costs as much as the family home they're selling.

The result: they go into retirement with a home but little money.

I'm not saying we should all live in dumps. In the July 8 column, I acknowledged that the more money you put into your home, the more pleasant it will be. And that's great.

But I worry about people borrowing huge amounts for a lovelier home than they need, spending much of the rest of their working lives paying off the mortgage, and retiring with little else.

In short, if everyone followed your philosophy, we'd be fine.

But that might mean, for some, a spell in Ladas and low-cost housing. They can still have good times. Beaches are free.

Q. Recently I read your article of June 24, entitled "Under the glitter lurk Gold Coast turkeys."

Please allow me space to respond.

I am an associate member of the NZ Institute of Chartered Accountants and hold a full Queensland real estate agent's licence.

I live in Queensland, and for the past 10 years I have specialised in marketing investment properties to Australasian taxpayers.

There are several methods used in funding the acquisition of investment properties.

The principle of "caveat emptor" applies regardless, especially in a market with which the buyer is not familiar.

I have delivered seminars in New Zealand, accompanied by a New Zealand tax specialist to answer questions.

Reliable agents/marketers will give prospective buyers ample opportunity to "do their homework" before being asked to make any commitment.

Investors who do their research and have appropriate conditions included in the contract of sale covering finance, property inspection and valuation should not agree to settlement until all these conditions are complied with.

Negative gearing works best when the buyer intends retaining residential property for, say, 12 to 15 years.

It's really a matter of applying the same rules as you would if you were buying residential investment property in New Zealand.

Our division is helping many Kiwis buy Queensland investment properties, as they recognise the opportunities here for capital growth.

However, they must be prepared to be patient and invest with the long term in mind.


A. Okay, you got the space - more, in fact, than the 200 words most people get. But publishing your contact details?

Sorry, but I don't do free ads.

Basically, you're right that investing in rental property is the same in Queensland as in New Zealand.

There are, though, several extra tax complications that I went into in the June 24 column.

And while we're on taxes, it's interesting that you market to taxpayers, rather than investors.

You're an accountant. You must know about the dangers of tax-driven investments, in which people get so caught up in deductions that they don't notice that the investment itself isn't great.

But do the people in your audiences know that?

You're also right that investors should do research and carefully draw up their contracts.

But that can be tricky when the investment is in one country and the investor in another.

Though you might have a New Zealand tax specialist and lawyer at your seminars, investors should always hire their own experts, rather than counting on those connected with a seller.

And it might not be easy for New Zealanders to find an independent expert familiar with Queensland conditions.

All in all, you seem to be saying that an investor who takes care and stays in for the long haul can do well in property in your state.

But that applies to many types of capital-growth investment - in property, shares and so on.

You've yet to convince me that there's enough magic about Queensland property to warrant all the hassle New Zealanders must go to if they want to invest soundly there.

And, if they don't bother with the hassle, too often it's "gobble, gobble" time.

Q. Your article on May 27 noted that a sale of rental property at a profit required that all depreciation must be shown as taxable income.

When I bought a rental property in 1988 this requirement applied only if the property was sold within 10 years of the purchase.

Is this not still the law?


A. Sorry, but no.

In July of the very year you bought your property, the law changed, says Ernst & Young tax partner Michael Stanley.

Before then, there was no "recovery for income tax purposes" - otherwise known as a clawback - of ordinary depreciation claimed on buildings. And that was generally true regardless of how long you owned a building, says Mr Stanley.

The 10-year rule you refer to applied only to special depreciation of certain types of buildings. In any case, that's all history now.

When the law was changed, bringing in the clawback, it applied to all buildings (other than temporary buildings) sold on or after July 29, 1988. It doesn't matter when you bought.

That might be bad news for you.

But you have to admit it's fair.

If you have claimed an expense that - as it turns out - you didn't incur, why should you get the benefit of it?

You still gain, by getting the use of the money from the tax break in the meantime.

Arguably, the Government could charge you interest on that. But it doesn't.

So you are still doing pretty well on the deal.

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