This article was published on 13 January 2007. Some information may be out of date.

Q&As

  • Options for a newly retired couple with $200,000 and no home include part-time work, buying a home with a flat attached, an interest-only mortgage and equity release.
  • Two Q&As on which investments are affected by the new tax law on international shares, and how it will work for investors.

QAs regular readers of your column, we would appreciate your comments on our situation.

My husband is 65 years and myself 61 years. We have had busy careers, my husband with a large company in Auckland and myself a nursing career as a registered nurse.

We sold our Auckland property this year and have invested $200,000 of the funds with a trading bank. As this is all the capital we have — due to second marriages for both of us — and we are receiving the pension, which totals $276 a week, we are wanting to make our next move a wise one.

In the meantime, family have been very kind in letting us stay with them.

Do we go right out of Auckland and purchase in a town where we know no one; or do we buy on the outskirts of Auckland and have a small mortgage and I work part time; or do we rent?

We both are home lovers and enjoy having our own abode. Any suggestions?

AYour second to last sentence clinches it. Don’t rent.

Most people like the security and certainty of owning their own home in retirement, and you are clearly amongst them. With the means to own at least a modest home, why not?

The next question is: Auckland or elsewhere? Again, your comment — “where we know no one” — seems to clinch it.

While some people make a real go of meeting new people when they move to a new town, if the prospect is dismal for you, you probably shouldn’t take it on.

That leaves outer Auckland with mortgage and you working. I wonder if your husband could take on part-time work, too. While you may not relish further work, more and more 65-and-ups are working, including about a quarter of 65–69 year olds.

Some continue with their careers full-time or part-time. Others teach their work skills or hobbies — perhaps through a local high school’s adult evening courses, or mow lawns, alter clothes, bake special cakes, or become a home handyman.

Think about whatever you do for others. There may well be a buck in it.

To keep your mortgage payments manageable, Brian Berry of Mortgage Works in Tauranga, former chairman of the Mortgage Brokers Association, has a few suggestions:

  • Look for a property with a self-contained flat, to give you some extra income.
  • Consider an interest-only mortgage. Obviously, it would be preferable to get rid of the loan over the years, but if that is just not affordable, some banks will offer you a ten-year interest-only loan, says Berry.
  • In ten years or so, or whenever part-time work is no longer an option, you might consider an equity release mortgage.

Let’s say you buy a $300,000 home with a $100,000 interest-only mortgage. If the house value grows by 3 per cent a year, it will be about $430,000 in ten years.

At that point you will be 71, and eligible for an equity release mortgage of 26 per cent of the property value, which is about $105,000. That would tidily pay off the interest-only mortgage with a bit to spare for, say, home maintenance.

From then on, you would make no more mortgage payments. But the equity release mortgage would grow, over the years, to be repaid when you leave the house — perhaps to go into a rest home or when you both die.

At current interest rates, an equity release debt doubles about every 6.5 years, says Berry. But your house value should also increase over the years.

The end result: Having such a loan will reduce the inheritance you can leave to family. But you’ve already said your family is supportive. Hopefully they will appreciate that this is a way you two can live where you want to.

By the way:

  • Once you turn 65, your NZ Super payments will rise. The current rate for two spouses who both qualify is $406 a week.
  • Your comment about having low capital because you are in second marriage is a thought-provoking one.

If everyone who goes through a divorce gets half the assets, two halves should make a whole about as big as any other couple’s assets.

The trouble is that lawyers sometimes end up taking a big bite out of the apple.

QI have a portfolio of shares directly invested in overseas companies. As a consequence of the new tax law coming into force I will be reducing the portfolio substantially.

However, I am uncertain when the law will be passed by parliament and what are the dates/ financial years when these investments would be assessed under the new law.

Is it still 1 April 2007, i.e. the value of my portfolio at that date would determine my tax liability for the 2007/2008 financial year?

Thank you in advance for any help and clarification you might be able to provide.

AThat’s a pity that you’re planning to reduce your portfolio.

Generally New Zealanders don’t have enough invested in offshore shares — in terms of reducing their risk by spreading their money into different investments. And I don’t think the new tax rules are harsh enough to warrant most people’s getting out of international shares.

Still, I don’t know your circumstances, and it may make good sense for you.

The law has already been passed, and will apply from April 1 2007 for people whose tax year runs April 1 to March 31, which is most individuals.

Note, though, that the rules don’t apply to investments in Australian resident listed companies, or if the total original cost of your non-Australian offshore shares is $50,000 or less.

If the rules do apply to you, when calculating your 2007/08 taxes, start with the value of your offshore shares next April 1.

You will pay tax on 5 per cent of that value, unless the shares have yielded less than 5 per cent — in dividends and share price rises. In that case, you will pay tax on the yield amount.

QThe new overseas tax legislation will affect many investors. Perhaps you could answer a few points for your readers eg:

  • Will investors now have to give a statement of assets each year to the IRD?
  • Personal investors have an exemption of $50,000 of the original cost (not current valuation) before the tax is payable. What happens if a married couple each are close to this exemption level and one dies, leaving their assets to the survivor (trusts and estates have no exemption)?
  • Does “overseas investment”, ie beyond Australia, mean just shares or does it include assets like property, bonds and cash?
  • Are all companies listed on the Australian stock exchange exempt or are some still caught by the tax rules, as are UK investment trusts listed on the NZ stock exchange?
  • If tax due is accrued is it still to be wiped upon death?

ASome good practical questions, which David Carrigan of Inland Revenue has answered as follows:

  • Not all investors will have to give a statement of assets — only those to whom the new rules apply. Those people will have to list their relevant offshore share investments.
  • The $50,000 applies separately to each investor. If one spouse dies and leaves their assets to the survivor, and that causes the survivor’s portfolio to exceed the $50,000 limit, the surviving spouse will then be subject to the new rules.

    Carrigan adds, “The NZ$50,000 exemption does not generally apply to trusts and estates. However, the exemption will apply for a limited period to trusts created on a person’s death, so that trustees have sufficient time to deal with the deceased’s estate under the will.”

  • The new rules generally apply to shares only, although they will also apply to interests in some offshore superannuation schemes and life insurance products. They don’t apply to offshore property, bonds or cash.
  • The Aussie exemption doesn’t include companies that are not resident in Australia, even if they are listed on the Australian stock exchange. Nor does it include investments in Australian unit trusts listed on their stock exchange. They are all taxed under the new rules, as are New Zealanders’ investments in UK investment trusts listed in New Zealand.

    Offshore share investments by New Zealand-based international share funds, such as WiNZ, will also be subject to the new rules. However, investors in these funds won’t have to deal with the new taxes on their tax returns. The funds will handle the changes. All investors will see is lower returns.

    Just to complete the picture, NZ-based share funds that invest only in Australian listed and based shares will not be subject to the rules.

  • Under the earlier version of the tax bill, taxes could be carried forward into future years. But the rules have since changed, and there is no longer any situation in which taxes will be carried forward.

    The normal rule applies, of course, that when someone dies taxes are paid on their income in the year of their death.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and 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 [email protected] 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.