Money: Passive funds get vote

By Mary Holm

Money matters


Q: I am interested in your advice as to where to invest my savings.

I am 37 years old, and earn $85,000 per year. I own a half-share in two rental houses and I own my own flat with no mortgage.

I contribute $600 per month to my company super scheme, which last year returned 8 per cent after tax.

The super fund is invested as follows: balanced fund 80 per cent; international share fund 10 per cent; New Zealand share fund 10 per cent.

Should I increase my contribution to the super scheme or invest in a share fund?

From what I've read, I believe that over the long term passive funds outperform active managed funds. So my preference would be a passive fund.


A: Spot on. A passive (or index) fund, which invests in the shares in a market index, would be my choice, too.

You're well placed financially for someone in his or her 30s.

Given your assets and your high income, and the fact that you've got decades to go before you'll need to retire, you're in a strong position to go into riskier investments.

And given that you're already heavily invested in property, the obvious area for you is shares.

The company super scheme may be more than half invested in shares. The balanced fund will, no doubt, have quite a large share holding, as well as other assets.

But such schemes have to be fairly conservative in their choice of investments. Members include people who are just a few years off retirement and people who would feel uneasy if the scheme came up with a negative return one year.

So the people running company schemes typically hold quite a lot of fixed-interest investments, to make sure there's some money coming in even in a down market for shares.

Such conservatism has its price, though. Over the years, returns don't tend to be as high as on an investment purely in shares.

You'll probably be better off, then, in a share fund. And passive funds are a great choice. Not only do they outperform most active funds, but they usually charge lower fees. Also, they get favourable tax treatment.

Having said all this, I take it back if your company super scheme includes a generous subsidy. Some schemes put in a dollar, on your behalf, for every dollar or two that you contribute. That boosts the return on your money so much that it's hard for any other investment to match it.

So if you're lucky enough to be in a scheme like that, use it to the max.

Q: Prior to retirement, I made several investments for both myself and my wife. We individually own about equal amounts and we currently have the same tax rates.

What advantages would there be in putting these investments in our joint names?

On the death of one of us, does the half-share automatically pass to the survivor, without the trustee company as executors of our wills becoming involved and charging fees?

Also, would any gift duty be charged?


A: You're wise to look before you leap.

There are pluses and minuses in what is legally called joint tenancy - which means you both own the whole lot.

Yes, it's correct that when one of you dies, the other spouse automatically owns jointly held investments. This is simpler than having the survivor inherit the other's investments.

But the executor would still have to identify the jointly owned property. So it might not make a huge difference to the executors' fees, says Sean Garelli of law firm Kensington Swan.

Whether gift duty would apply if you transferred your investments into joint ownership depends on the source of the money, he says.

If it was matrimonial property (which includes income earned during the marriage), there would be no duty. But if one of you inherited the money or received it as a gift, that money belongs to the recipient spouse.

If more than $27,000 of it was moved into joint tenancy within a year, gift duties would apply, he says.

You could get around that, though, by entering into a matrimonial property agreement that would declare the inheritance or gift to be matrimonial property.

Each spouse would need a separate lawyer to do this. Still, Garelli assures me, it would be "quite straightforward".

Another consideration is asset testing. If your investments are jointly owned, their total value would apply to each of you in any calculations concerning rest-home subsidies and the like.

Also, take care if there's any likelihood that someone could make a legal claim against one of you. If your investments are jointly held, they're all fair game, Garelli says.

For these reasons, quite a lot of couples are actually doing the opposite to what you're proposing - transferring their assets out of joint tenancy and into separate ownership.

Q: I would like to refer to your reply to a letter in last Saturday's Herald, which was incorrect. The query was the last in your column regarding overseas tax credits.

The problem with the return is the Westpac dividends. The withholding tax taken from these dividends is paid to the New Zealand IRD at 33 per cent and is therefore claimable in full.

It would appear that the correspondent has declared the dividend in the overseas section in his return when he was entitled to include it in the local dividend section.

Even though the dividend comes from Australia, it comes via Westpac in Wellington, which then pays the tax to our IRD. He should write to the IRD for the refund.

The rest of our reply was, of course, correct, but I felt you had missed the essence of the query. I hope you don't mind my pointing this out.


A: Not only do I not mind, but I appreciate your pointing out something that I, and the accountant and Inland Revenue man who helped me, all missed.

None of us realised that there is a rather unusual tax treatment of Westpac dividends.

We should have been alerted by the 33 per cent figure. No more than 15 per cent of Australian tax should be withheld from Aussie dividends being paid to New Zealanders.

What you say is largely correct.

Westpac Banking Corp is Australian, but it has a branch registry in New Zealand.

That branch converts dividends due to New Zealand shareholders into Kiwi dollars. At that point, it deducts New Zealand resident withholding tax, and sends it to our IRD.

How much it deducts depends on whether Westpac's dividends are franked or not. (Franking is the Australian equivalent of imputation.)

If the dividends are fully franked, no Australian tax is deducted from them, and the New Zealand tax is deducted at 33 per cent.

If they are not franked at all, 15 per cent Aussie tax is deducted. The New Zealand tax is then 18 per cent, bringing the total to 33 per cent.

Sometimes, an Australian company will hand out one franked dividend and one unfranked one so, for the year's total dividends, the numbers are in between.

Westpac tells New Zealand shareholders how much Australian tax has been withheld and how much New Zealand.

New Zealanders, when filling in their tax returns, claim credit for the Aussie tax with other overseas tax credits.

They claim for the New Zealand tax in the same way as they would for tax withheld from New Zealand dividends with no imputation credits.

You're right in suggesting that last week's correspondent should write to the IRD, explaining the mix-up.

He might not, though, be in for too huge a refund. It depends on timing, how the IRD adjusted his return and so on.

Still, it's worth a go.

* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; fax: (09) 480-2054; or e-mail: maryh@journalist.com.

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