This article was published on 14 June 2008. Some information may be out of date.

Q&As

  • KiwiSaver naysayer is the one who is “light on fact”.
  • Self-employed KiwiSaver must contribute 4 per cent of pay when he takes a job — but he won’t starve.
  • Inland Revenue “clarifies and expands” its position on mortgage interest deductions after a family home is rented out.

QI found your article on KiwiSaver and the ‘benefits’ in last week’s Herald to be full of theory but light on fact. KiwiSaver is so far a dud, and will continue to be because of one simple fact that all the ‘experts’ (yourself included) conveniently overlook. KiwiSaver IS NOT government guaranteed.

So that magical $3000 per year can, and has to date, been made to disappear by all KiwiSaver plan companies. NOT one of them has even managed to maintain the original amount of money invested, let alone actually show a profit for the consumer.

And of those who could possibly come even close to breaking even they then take most of the money as ‘administration fees’. This is extremely unlikely to change in the foreseeable future.

KiwiSaver is currently the most obscene, legal method of stealing taxpayer money off the government. It is safer and more lucrative for the KiwiSaver investment companies than robbing banks!

So please, in your column tell it how it is, not how the theory says it should be. Customers can and are, currently losing not only their money, their employers’ contribution, but also your and my taxpayer contributed funds.

Until the government backs this in blood, the financial companies will continue to steal from all of us, it’s that simple. Even Gareth Morgan said the same thing at his investment seminar last Wednesday night, and he’s in it for the $$$!

KiwiSaver in its current form is daylight robbery in anyone’s language.

AI’m not so sure that I’m the one who is “light on fact”. Let’s start with whether money in KiwiSaver has disappeared. It certainly has not. There are many millions of dollars still sitting in people’s accounts.

Nor have all the funds suffered losses. It’s true that the higher risk or “growth” funds did, because of market downturns during the first six months of the scheme. That was bad beginner’s luck, and history tells us that it will almost certainly change. What, in fact is “extremely unlikely” is that those funds won’t perform well over any ten-year period.

Note, too, that because people drip-feed money into KiwiSaver, the market downturn at this early stage is good in some ways. Savers can now buy more shares and bonds with their money than they could six months ago.

It’s also important to remember that because every KiwiSaver member receives the $1,000 government kick-start after three months, and many have also received employer contributions, very few people’s accounts will have fallen below the amount they themselves have put in. Most will still be well above that level.

What’s more, contrary to your “not one” statement, all the conservative KiwiSaver funds have grown — and can be expected to pretty much always grow. As stated in this column a few weeks ago, several have reported six-month returns of more than 4 per cent — an annual rate of more than 8 per cent.

But perhaps you didn’t read the paper that day, or the times I have discussed the lack of a government guarantee, along these lines:

  • What would happen if the government did guarantee that nobody would lose any money in KiwiSaver? Everyone smart would invest in the riskiest funds they could find, knowing that on average they give the highest returns. Then, when some of those funds performed badly, the government would bail out those investors. And who would pay? The taxpayers. Everyone else would subsidise the big risk takers.
  • Why should the government guarantee KiwiSaver investments in preference to any other investments? You talk about KiwiSaver providers getting a good deal; a guarantee would make it a fantastic deal.
  • There’s no need for a guarantee. Anyone worried about losing money in KiwiSaver can invest in a conservative fund. Many of them are as safe, if not safer, than bank accounts.

As for quoting economist Gareth Morgan, he tells me that “This is what I did say in the recent roadshows: One, KiwiSaver is not government guaranteed. Two, over the first six months (October to March) almost all growth schemes have lost money. Everything else of what this chap has said is all his own work!”

In the end, being in KiwiSaver is a bit like using a car. If you don’t want to risk being in a crash, stay off the roads. But your life will be much more limited.

Oh, and thanks for your share of the taxpayer money that is helping all of us KiwiSavers to build up our retirement savings.

QI am a high-income self-employed taxpayer who commenced with KiwiSaver 1 October 2007 at the minimum contribution amount to ensure I receive the government subsidy and tax credits. I have now moved into a high-income employment situation and will remain with a small self-employed income also.

What is my situation? Do I now have to pay 4 per cent contributions via my employer (and get their 1 per cent) or am I able to continue with my smaller contribution via my self-employed income?

I had not intended for my contributions to be as much as 4 per cent of my new salary, which is about seven times my minimum self-employed contributions.

AIf you are in KiwiSaver and you become an employee, 4 per cent of your pay will go into the scheme — unless you’ve been a member for a year or more, in which case you can take a contributions holiday and put in whatever amount you like.

In your case, you’ll have to live with the 4 per cent contributions until 1 October, when you can take a holiday.

But look on the bright side. As long as you contribute 4 per cent, your employer must also contribute. If you were on a contributions holiday, your employer wouldn’t have to. So you’re getting money you might not have otherwise received.

And it doesn’t sound as if you will starve because of the contributions. Relax in the knowledge that it’s not like a tax. It’s your money going into your account, and in just a few months you can slow the flow.

However, you might want to rethink your situation by April 2011, when 4 per cent from your pay will be matched by your employer.

QI agree with the comments made by the second correspondent in your May 24 column, to which you replied “Nice try… but it still doesn’t wash with the Inland Revenue”.

The IRD view that the reason for the loan is the relevant issue — when deciding whether mortgage interest is tax deductible if a family home later becomes a rental property — is not backed up in well known tax cases, Pacific Rendezvous Ltd v CIR and CIR v Brierley. They clearly established that the relevant issue is how the borrowed finance was used or employed, not the purpose of the borrowing.

So yes, “…the loan relates to or stays with anything dealing with the house”. The fact that there was no assessable income when the loan was originally taken appears to be irrelevant in deciding if any interest is deductible if the house is subsequently let.

AYours was one of several readers’ letters I forwarded to Inland Revenue on this subject, and they have since “clarified and expanded” their position. Here is what they say:

“Whether or not mortgage interest is tax-deductible when renting out a family home depends very much on the circumstances of the rental situation.

“In some circumstances, if the owner of a family home decides to move out of that home and rent the house out to a third party, mortgage interest can be deductible as a rental expense, and the owner does not need to transfer the home into another entity in order to claim mortgage interest deductions.

“Case law has determined that the interest can be deductible when it is connected to an income-earning process. The courts have said that it is relevant to consider the use of the borrowed funds.

“The Court of Appeal said in the Banks case in 1978 that the test is to examine how the capital was employed during the period when the interest claimed as a deduction was incurred, not how the capital was employed when first borrowed.

“This means that the test for interest deductibility is to consider whether there is a sufficient link between the interest being deducted and the use of the borrowed funds. From the point in time when the taxpayer uses the house to derive rent, the borrowed funds are used to finance the rental property and the interest is deductible from that point.

“If there is some uncertainty as to whether rent was in fact being paid, or over the use of the property, then the taxpayer would have to clearly demonstrate that there had been a fundamental change from a private to an income-earning use.

“The fact that the mortgage was initially taken out on the family home does not alter the fact that the interest on the mortgage can be tax-deductible, so long as it has been taken out expressly to buy the home, and does not contain later borrowings (or top-ups) for other purposes.

“Circumstances can differ in various cases. For example, there is the situation in which a person may own a family home freehold and then borrows and uses the borrowed funds to buy a second property. The loan is secured over the first property.

“The taxpayer moves into the second home and rents out the family home. In this case, the taxpayer cannot claim the interest on the mortgage incurred on the family home as tax-deductible. The interest on the borrowed money is not deductible as it is not connected to an income-earning process. The fact that the loan was secured over the first property which is now earning income does not make a difference.

“Individual circumstances can vary, and we suggest that anyone who has queries about their own situation either contacts a tax advisor or calls the department.”

To which I add, “Amen”, and an apology to correspondents and readers who were confused by the material in the earlier columns.

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.