Money matters: Look before leaping off the treadmill

By MARY HOLM

Q: We are an "empty nest" couple in our early 50s. Our joint household income is $80,000 before tax.

We want to enjoy life a little more - get off the treadmill and take some time to tour around, see our son in Britain, and spend a year or two on a working tour of Australia in a caravan.

We have a half-share in two small commercial units, our equity amounting to $40,000.

Our house has a market value of $260,000, and we owe $132,000 on it. Our mortgage costs us $2000 a month and will be repaid in seven years.

I have a good super (non-subsidised) worth $45,000. We have little other debt - $2500 on credit cards and an HP.

We are thinking of either:

* Selling the house, taking $20,000 for our travels, and putting the rest ($100,000) into our Tower super scheme.

* Renting the house out, in which case we would send money home to cover the shortfall between rent income and mortgage/maintenance/rates.

We have been in the house for 13 years and are finding it hard to let go.

We don't want to reduce our options when in a few years we will want to settle. We look forward to your advice.


A: I'm not sure that you should look forward to it. It's wet-blanket time.

I think your plans are rather foolhardy - unless you're sure you'll come back to quite a few years on pretty high incomes. Keep in mind that many people in their 50s find it hard to get good jobs.

Your first option of selling your house seems out of the question. You think you'll want to settle in a few years. In what?

Even if you then cashed in your super scheme and sold your commercial real estate, you probably would not have enough to buy a mortgage-free house as good as your present one.

You would have gone through the hassles and expenses of selling and buying houses. Chances are that you would wind up with a mortgage and no savings - not a great look for a couple in their 50s.

Your second option of renting out your house doesn't sound too workable. For one thing, being an absentee landlord doesn't usually work well for long periods, especially when it's your own home.

And can you really be confident of making enough touring around Australia to send money back to cover shortfalls?

One possible plan would be to sell your commercial real estate now, pay off your credit card debt, use $20,000 for travel and leave $17,500 to cover rental shortfalls.

Still, you would probably come back to a mortgage larger than your super. Again, it is a less than lovely look.

Sorry about all this negativity. I love to hear about people enjoying life. So how can we dry out the blanket?

How about getting rid of your mortgage fast, and then taking off? That would put you in a much stronger position on your return.

According to an internet mortgage calculator, if you raised your monthly payments from $2000 to $3000, you would get rid of the mortgage three years earlier.

If you really put your hearts into it, and paid $4000 a month, freedom day would come 15 months earlier again - or three years from now.

Sounds impossible? Making a few assumptions about your tax situation, if you raised your mortgage payments to $3000 that would be the equivalent of cutting your pre-tax income to $62,000.

If you raised the payments to $4000 that would be the equivalent of cutting your pre-tax income to $44,000.

Plenty of families would be happy to live on those incomes. And you would only have to do it for a few years.

And before you do anything else, get rid of that credit card debt - it's a ridiculous money-waster.

Q: We transferred to Australia four months ago, leaving behind a large sum of money in an on-call deposit (6 per cent).

We were hoping that the New Zealand dollar would recover against the Aussie. As we all know, this hasn't occurred.

We think we would be better off putting this money into a managed fund. Although we would have to commit ourselves for a reasonable term, say five years, the chances are that, on past performance, we'll get a reasonable return while awaiting the kiwi's recovery.

Have you any suggestions or recommendations regarding funds?


A: I've got suggestions and recommendations but they're not on which fund you should invest in.

It sounds as though you want the money in Australia. If so, you might as well move it there now.

Trying to time the currency markets is about as tricky as trying to time share or property purchases. The kiwi dollar is just as likely to fall against the Aussie, or any other currency, as it is to rise.

That's certainly the collective view of the experts. How do I know that?

Well, the price of our dollar is heavily influenced by the big financial institutions who trade international currencies.

Those institutions that expect the kiwi dollar to rise will buy lots now - just as you might buy a lot of anything if you thought its price would go up.

If more experts expect a rise than a fall, there'll be more buying than selling.

That pushes up the price of the kiwi - to the point where future price rises no longer look so likely.

If the adjustment is too strong, we get to a point where more experts expect a fall than a rise. Then there's more selling than buying, and the price falls again.

So the price of the kiwi fluctuates around the experts' average forecasts of what it will be worth in the future.

At any given time, then, roughly half expect a rise and half a fall.

Do you, sitting on the sidelines, really think you know more about where the kiwi is likely to go than the experts? There's half a chance you'll be right but there's also half a chance you'll be wrong.

You could wait for years, and end up wishing you had moved your money in what then looks like good old 2000.

After all of this, if you can't quite bring yourself to move all your money now, you could do what I call time diversification.

Set yourself a timetable. Move half your money now and the rest in, say, six months or a year. Or do it in thirds.

That way, whatever the dollar does between now and then, you'll have at least part of it at a relatively good rate.

But do make the timetabled moves when you said you would - regardless of where the dollar is going.

Life's too short to wait for currency moves that might never happen.

Q: In last week's column, you made the comment: "Inland Revenue, in fact, rarely goes after long-term holders of shares. But if you're trading shares regularly, you can't really argue that you didn't buy them with plans to resell."

This comment invites numerous questions. What period is called long term or short term?

If trading takes place irregularly, what intervals are required to make such irregular trading not taxable?

It is my opinion that everybody has at least some vague intention to sell their shares.

If the plan to resell was not there, or if legislation penalised the investor for making such plans, the investor would not come anywhere near a sharemarket!

An investor who decides to buy some shares will always have at least some reason for doing so, but will also have some vague "escape" plan, should this investment turn sour.

Despite the investor's best intentions of becoming a long-term investor, the IRD might not agree with this person's reasoning, plans and intentions, and might hound the person for taxes, back taxes and penalty taxes on back taxes.

Should the IRD be of the opinion that New Zealand investors are not allowed to sell their shares at any time they choose, then it is high time that columns such as yours pointed this out.

The Herald business section could soon close its doors after your column warning has appeared in print!


A: Slow down a minute. The Business Herald is not about to fold because I'm not about to issue a warning.

The IRD is not going to dictate when you can sell shares. You can trade when you like.

All Inland Revenue does is consider whether to tax you on any gains you make on sales of shares or, for that matter, any other personal property.

And that decision does not depend on how long you hold the shares, or your thinking when you sell them.

"The intention of the shareholder when they buy is what matters, not the outcome," says tax expert Steve Henger, of PricewaterhouseCoopers.

Gains on the sale of shares are taxable - and losses are deductible - if:

* Your business is dealing in shares.

* You bought the shares with the "dominant purpose" of selling them.

* You were carrying out "an undertaking or scheme" set up "for the purpose of making a profit."

I agree with you, that everyone presumably expects to sell their shares at some stage - or leave them to heirs who will presumably sell them.

Mr Henger says people can argue that their main purpose for buying shares was to get a regular income from dividends. Selling was only a vague escape plan, as you put it.

If the IRD was challenging such an argument, it might bring up several issues. Perhaps:

* When you bought the shares, you told your sharebroker that you wanted to resell if the share price rose above a certain level.

* You took out a short-term loan to buy the shares and so, presumably, planned to resell after the loan ended.

* The shares you bought pay only small or irregular dividends, or none at all.

* You've done a lot of short-term shareholding in the past.

How long you held the shares is just one more bit of information. "But if you're turning them over in six months, that's not going to look good," says Mr Henger.

It would be possible to hold shares for a matter of days, sell them at a gain, and not be taxed on that gain - if you could prove that wasn't your plan when you bought.

In light of all this, I can't say you're safe from tax if you own shares for any particular number of years.

I can say, though, that Inland Revenue read last week's Q&A before it was published, and didn't object to my saying that it rarely goes after long-term holders of shares.

It's clear that despite your concerns, the possibility of being taxed on gains doesn't seem to put people off investing in shares.

After all, even after you've paid the tax, you still keep most of the gain.

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