NZ Herald 17 May 2008

AGood on you for working so hard to get rid of those mortgages. Still, you must get sick of the grind.

It’s a matter of tradeoffs. If you rent out your house and become a tenant elsewhere — paying less rent than you receive on your house — that may mean living in a smaller or less pleasant place.

Do a bit of research, perhaps asking a rental agency how much rent you could get for your house, and looking around at how much suitable rental accommodation would cost you.

You might find something different, such as an apartment at a relatively low rent, that would be fun to live in for a few years. And perhaps it would be nearer your main job, reducing transport costs.

There are several things to keep in mind, though.

Firstly, you’ll have to pay tax on any profit on renting out your house, after deducting expenses such as rates, insurance, routine maintenance and depreciation of chattels.

And you won’t be able to tax deduct your mortgage interest. The deductibility depends on why you took the loans out in the first place, and that was to finance your home, not a rental property.

Depreciation is also tricky. It might not be wise to claim depreciation on the house if you are thinking of moving back in later. If the house value grows while you are not living there, you would have to pay back the depreciation when you move back in, says PriceWaterhouseCoopers tax partner Scott Kerse.

Mind you, if you diligently put the money gained from claiming depreciation into reducing your mortgages, you would still be ahead — even if you have to later increase a mortgage to cover a depreciation clawback. That’s because you’ve saved on mortgage interest in the meantime. Note, too, that over the next few years the value of your house might fall, which would reduce or eliminate the clawback.

Clearly, a chat with an accountant would be a good idea before you go too far along this track.

You also need to consider how you would cope with any tenant problems — not paying, damaging the property, long vacancies and so on. Some people take this in their stride, for others it’s a nightmare. You could hire an agency, but that eats into your profit.

I don’t mean to put you off. Your idea is not silly, and once you have things set up it could all work smoothly.

There is a simpler option, though — taking in a boarder or two. If you have one or two boarders and you charge less than $213 a week (a number soon to be raised a little) for each one, you don’t have to pay tax on that income or keep records about it. If you charge more, go to www.ird.govt.nz and do a search on “boarder” to get info on taxation.

AMy KiwiSaver book didn’t go into detail about the first-year KiwiSaver tax credits being proportionate to how much of the July-June year you were contributing. The government didn’t reveal that information until after I wrote it.

Given that government officials in three departments checked the book for accuracy before it was published, I suspect they didn’t know about it either. That’s what happens when a government radically changes a programme weeks before it is implemented.

Since then, though, I have written heaps about it in columns and on my website, but perhaps you missed them. What your friend and the Inland Revenue website say is correct.

Note, though, that after their first year in KiwiSaver, non-employees can contribute $1040 — more accurately close to $1043 — in a lump sum any time up to June 30 and still get the full tax credit.

So there’s no need for you to put next year’s money in on July 1. You’ve got almost a year to do it — although I suggest you deposit it by early June next year in case it takes a while to process.

On your specific questions, Inland Revenue says you can’t reverse your contribution. I’m not sure what recourse you have with the provider and, to be honest, I can’t be bothered finding out.

It’s hardly a huge injustice that you get only a third of the credit when you’ve been in the scheme for only a third of the year. And the $1040 you’ve put in is still yours, to be spent in your retirement. It’s not like a tax.

By the way, you’re optimistic to expect your tax credit in early July. Firstly, the provider has to send Inland Revenue a list of how much each member has contributed up until June 30. Then Inland Revenue has to send the tax credits to the provider within 30 working days, and then the provider has to distribute the money to each account.

It will be interesting to see how long it all takes the first time. Given how long various other KiwiSaver transactions have taken, I wouldn’t be holding my breath for tax credits until at least August, if not later.

Your letter raises some important points for others in KiwiSaver:

• Non-employees planning to contribute between now and June 30 should note that unless you joined KiwiSaver near the start last year, you won’t be eligible in your first year for a full $1043 tax credit.

  You might want to estimate your credit and then contribute just that amount in the first year — in the same way as our correspondent wishes he had contributed only about $300.

  For most non-employees, the key date for calculating your credit is the first of the month in which your first contribution — no matter how small — was made. From that date, the maximum tax credit is $20 a week.

  The exception is those who joined in July through September last year and made their first contribution before October 31. For them, the key date is the first of the month when they joined.

• I have suggested that employees earning less than $26,000 — whose 4 per cent contributions therefore total less than the maximum tax credit of $1043 — might want to top up your contributions in June so you get the full tax credit.

  But you, too, should note that in your first year in KiwiSaver, your maximum tax credit is $20 a week, starting from the first of the month that you joined. Any contribution beyond that won’t be matched by the government.

• Employees earning more than $26,000 don’t need to take any action. But you should be aware that, unless you joined last July, your tax credit will be less than $1043 in your first year.
• The message for everyone who hasn’t yet joined KiwiSaver is to get in and start contributing as soon as possible. The earlier you start, the bigger your first year tax credit will be.
• For more information on all situations, see the bottom of the KiwiSaver book page on www.maryholm.com. [This page has been removed from the website. Visit kiwisaver.govt.nz for up-to-date information.]

PS That’s great that you used my book for your presentation, and that lots of people came. I’m sure you played fair and told people the source of your info!