This article was published on 13 September 2014. Some information may be out of date.

Q&As

  • How would Labour’s proposed variable KiwiSaver contributions rate work?
  • Labour’s capital gains tax and… shares
  • …public submissions before the tax is enacted
  • …how inheritances would be treated
  • …family homes and baches in a trust
  • …using part of the home for business
  • …its effect on house prices
  • …its effect on rents

QI have tried in vain to get some information on Labour’s proposed KiwiSaver variable savings rate.

The variable rate is being touted as a tool similar to the official cash rate (OCR). I would therefore assume that should inflation rise, the KiwiSaver variable rate would also rise, and consequently bank interest rates and mortgage rates as well.

This would put a homeowner into a particularly vulnerable position, as an increase in mortgage rates would require an increase in weekly payments on floating loans and/or a refinancing to a longer term.

Given the loss of take-home income from an increase in a variable KiwiSaver rate, most middle income earners who are already trying to make ends meet would be forced into a refinancing situation and therefore be financially worse off.

Any insight into this — or even if you would like to publicly state that my logic is flawed — would be appreciated.

AThe idea behind the proposed variable savings rate (VSR) is that, if inflation was rising, the Reserve Bank could raise the KiwiSaver contribution rate instead of raising the OCR. Or it might raise both, but it wouldn’t need to raise the OCR as much.

Raising the OCR directly leads to rises in mortgage and other interest rates, but raising the VSR wouldn’t directly affect interest rates.

It would mean that instead of paying more interest to the bank, people with mortgages would put the money into their retirement savings. While they would lose the use of the money now, they would get the money in the long run.

Presumably, if inflation was slowing, the Reserve Bank might do the opposite and lower the VSR. That would reduce KiwiSaver contributions, but people could always deposit extra directly to their KiwiSaver provider if they wanted to maintain their contribution level.

Labour also says changing the VSR wouldn’t affect foreign exchange rates, which are affected by OCR changes.

The VSR wouldn’t come into effect until after the end of Labour’s planned gradual increases in KiwiSaver contribution rates, up to 4.5 per cent each from employers and employees by April 2021.

National’s Associate Finance Minister Steven Joyce said in May that the VSR wouldn’t be very effective. His rough calculations showed KiwiSaver contribution rates would have to rise six percentage points — say from 9 to 15 per cent — to have the same effect as a one percentage point rise in the OCR.

If that’s correct, your worry is justified. If the Reserve Bank was using both tools — the VSR and the OCR — people might be hit pretty hard, with a rather large jump in KiwiSaver contributions at the same time as mortgage rates rise.

However, Labour’s finance spokesperson David Parker says he estimates that KiwiSaver contributions would have to rise just two percentage points to equal a one percentage point rise in the OCR. That wouldn’t be so hard to live with.

With nearly seven years before the VSR would start, hopefully more research would be done in the meantime.

QI am a pensioner who invests in both share and bond markets, not a trader. How would Labour’s capital gains tax affect me?

A“Share traders already pay tax, and will continue to pay tax at income tax rates (not the lower CGT rate),” says Parker. “People who are not traders will pay CGT on their net gains after the date of introduction at a rate of 15 per cent. Dividends are not taxed by the CGT.

“Overseas shares outside Australia are in effect already taxed on both dividends and gains under the current law.”

QWould the administration have the CGT bill open for public submission prior to it being enacted?

This happened with the FDR tax and the relevant select committee toured the country. Two of us travelled to Auckland to make our submission, but we came away with the distinct impression that their mind was made up and that we and all the others who made a submission wasted their time.

AParker says Labour will establish an Expert Panel “to provide top level advice to guide the design of the CGT, with a view to implementation in April 2016. It will include senior experts appointed from the fields of tax policy, accounting, economics, law and social policy, and be supported by a secretariat.

“There will also be further consultation and public submissions via the full select committee process.”

Hopefully, during that process, people will feel they have been listened to.

QCan you please clarify this statement from Labour’s website: “Treatment of gains at death. Capital gains on inheritance passed on after death will be rolled over to the heir, and not payable until the gain on the asset is realized.”

Does this mean that beneficiaries inheriting my family home, which doubtless will be sold to divide the proceeds, will find that said proceeds attract CGT? If so, is this a disguised death duty? I am a single person with no family, my beneficiaries being my siblings and others. Does this mean my total estate is capital gains taxable?

A“The CGT is never an inheritance tax,” says Parker. “There is no CGT on inheriting a family home — for the estate or the inheritor. If the inheritors move into the house and make it their family home or sell it, no CGT is payable.”

However, “If the inherited family home is turned into a rental property, it is treated the same as other rental property. And so, if subsequently sold, gains since it became a rental property (not earlier) are taxed at 15 per cent.”

QMy big CGT question is about our home, which is in a family trust. I have not seen anywhere that confirms that the home in a family trust would be exempt from CGT.

Also we have a beach bach in the family trust. So could we decide which is our family home or would they both be liable for CGT?

A“If your family home is in a trust it will be exempt from CGT,” says Parker. “The principal family home is never subject to CGT no matter what the ownership vehicle is.

“Baches will be included as part of the CGT regime, as exempting baches opens loopholes. A lot of ‘baches’ would appear in Auckland suburbs and be rented out some of the time.”

Note, though, that “Because the CGT is never an inheritance tax, where the family bach is simply passed down through the generations, then the CGT won’t ever be paid,” says Parker.

On deciding which house is your family home, “Your family home is the residence where you live most of the time,” he says.

QI am a low-earning music teacher working from home. This home increasing in value is not real money that my partner and I can use — it’s just inflation.

I am worried that CGT on the business part of my home will outweigh what I earn as a music teacher in years of work. Many of my friends also work from home and are worried about this issue.

A“While the full details will be worked out by the Expert Panel, we do not envisage a CGT applying where there is intermittent or partial use of parts of a main residence for a small business,” says Parker.

“Where there is exclusive business use of part of a building (eg a dairy or motel attached to a home) there will be an apportionment.”

QI have heard a commentator argue that a CGT will help move investment towards “productive investments”, that is away from housing and onto shares. But, if I understand correctly, shares will also be subject to CGT. So can we conclude that a CGT will have little effect on house prices?

AAs noted above, you’re right that shares would be subject to CGT.

Nevertheless, Labour says on its website, “Home ownership has become an unaffordable dream for many Kiwis. A CGT would help change that. It should become easier for Kiwis to be able to buy their first home.

“Removing the tax bias towards investment property will reduce speculators’ demand for investment properties, assist in dampening house price cycles and controlling interest rates. This will help renters buy their own home, reducing the demand for rental property.”

You might say that of course they would say that. But Westpac economists seem to basically agree, according to their May Economic Overview.

“Centre/left tax reform would temporarily slow the housing market and spending,” the report says. It notes that both Labour and the Greens propose a broad-based CGT. “Labour further proposes to ‘ring-fence’ losses for residential landlords, meaning losses can’t be offset against other income for tax purposes.

“We support the introduction of a CGT, because it will help right the current misallocation of resources to land-based economic activities, and would lift the rate of home ownership.”

The report adds that a combination of a CGT and ring-fencing “would affect house prices by discouraging investors. We calculate that a 15 per cent CGT would reduce the value to an investor of a given property by 23 per cent, if rents remained unchanged. Even if we assume a 10 per cent lift in rents, the loss in net present value of the house to a landlord is still 15 per cent.

“Similarly, removing the tax-free status of most capital gains would reduce the capital value of farm land. How such a change in fundamentals would affect actual market prices is, of course, unknown. But our suspicion is that the mere announcement of a CGT would have a marked impact on farm and property prices.”

Your point remains — that shares would also be taxed under CGT. But it seems the change from the present system wouldn’t be as big for shareholders — especially if their holdings include overseas shares.

And perhaps there’s something psychological about the fact that people who gradually sell some of their shares will be hit a little at a time, whereas when someone sells a rental property they may well be sending many thousands of dollars to Inland Revenue.

QWith the Kiwi dream of owning your own house in Auckland being just that, a dream, what would be the likely impact of a capital gains tax on rents?

AYou might have noticed Westpac’s “Even if we assume a 10 per cent lift in rents”, above. It sounds as if they think rents might rise under CGT.

But Labour’s website says “The impact on rents is unclear. Landlords said property tax changes in Budget 2010 would push rents up. But it didn’t happen.

“Australia’s experience with CGT is that over time, rents generally have increased at the same rate as inflation. This was in line with pre-CGT rental increases.”

For more information about Labour’s proposed capital gains tax, see tinyurl.com/labourcgt.

Next weekend we’ll return to good old KiwiSaver and other issues not related to the election.

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.