Q&As
- Should we get bigger tax deductions for donations to charity? Also — give Christmas gifts to those who really need them.
- Readers disagree over the price of a 1950s pie.
- Buying shares company by company, over the years, not the best strategy.
- Is the new proposed tax on international shares fair?
QI see the Government has put out a discussion document that contains a number of specific proposals to encourage donations to charity, both by individuals and companies.
One suggestion is that individuals might feel encouraged to give more if the threshold at which the rebate is capped was raised. (The 33 per cent maximum rebate is currently capped at $630, ie for donations up to $1890.)
I wonder whether in fact there needs to be a cap on individual giving at all? If individuals could claim an agreed percentage of their gifts to organizations approved for tax-deductible gifts, no matter what the amount, would this do more to encourage significant giving?
Secondly, with regard to philanthropic giving by companies, the existing company deduction — of up to 5 per cent of net income — does not apply to most close companies, ie companies controlled by 5 or fewer people.
Yet out of a total of 297,000 companies who filed a return for 2005, 195,000 of them were apparently registered as close companies. This suggests that there may well be greater scope for philanthropic activity were the company deduction to be extended to close companies.
We frequently hear New Zealanders described as generous despite the lack of tax incentives enjoyed by many other countries. I would be interested in your views on whether the above measures — or any others you can suggest — might encourage the development of a more philanthropic society.
By the way, readers might want to know that submissions close on 28 November.
The discussion document is called “Tax incentives for giving to charities and other non-profit organizations” (located at www.taxpolicy.ird.govt.nz). It contains a number of specific proposals to encourage giving, both by individuals and companies.
AThis has been an issue with many New Zealanders for some time — especially those who have lived in countries where they could deduct all their charitable donations.
According to Revenue Minister Peter Dunne, last year New Zealanders donated at least $356 million. That’s getting on for $100 for every man, woman and child. And given that many can’t or don’t give, I’m sure it translates into considerably more than $1890 for many others.
Why should they pay tax on dollars they are giving away?
Also, I would think that an easing of the rules — perhaps making deductions unlimited from people and closely held companies — would encourage more giving.
While the government would miss out on 33c or 39c in the dollar in most cases, charities would get more whole dollars. Those who need support — from either the government or charities — might well end up better off.
I would far rather see the wealthy reducing their tax bill by boosting their donations than by setting up trusts and other tax-dodging arrangements.
I hope, though, our IRD doesn’t end up behaving like America’s Internal Revenue Service. Some US friends of mine give such large donations that they are frequently audited because the IRS’s computer says, “This is a suspiciously high deduction.” What a way to treat such generous souls!
It would be best if readers who want to make a submission read the document you mention, as it asks people to prioritise various ideas. But those who want to just make a comment can email it to [email protected] with “Tax and charitable giving” in the subject line.
Speaking of charitable gifts, instead of giving your relatives and friends more stuff for Christmas that they don’t need or maybe even want, you can give a gift on their behalf to needy children or families overseas.
You might, for example, donate $20 to be spent on ten trees, $30 on five textbooks, $25 on a first aid kit or $100 on a bike. You might even get together with others and spend $5575 on a house for a child-headed family in Tanzania.
The charity sends you a card to give to your relative or friend, telling them the donation has been made.
Two organizations running such programmes are:
Oxfam. Ring 0800 400 666 for a catalogue, or you can order from www.oxfamunwrapped.org.nz.
World Vision. Ring 0800 245 000 for a catalogue, or you can order from www.giftsofhope.org.nz.
QI was born in 1941 and attended Gladstone Primary School, where I would have been 11 in Std 4, early 1950’s, old enough to eat a whole pie.
Very occasionally Mum reluctantly gave me one shilling — a large amount out of her budget — for one pie. This was memorable to me.
AGladstone must have had an expensive bakery.
For those who didn’t read this column last week, we were musing on how the price of pies have risen since the 1950s. I quoted a friend who remembered paying sixpence around the middle of the decade, and I asked for other recollections.
One reader says he paid ten pence for a pie and tuppence for a cream bun in 1957. “So your sixpence is probably a bit light”.
Another, who bought a pie every week, says the 1960 price was ten pence — rising to two shillings by the end of the sixties.
On the other hand, a fourth reader recalls paying five pence in 1950/51, and sixpence in 1953/54 — backing up my friend’s number.
Conclusion for the original letter writer, who wanted to use pie prices in an exhibition to explain inflation: You pays your pennies and you takes your choice.
By the way, other readers sent interesting letters about prices of other items in other eras. More of those next week.
QThanks for your response last week to our letter about share investing.
Silly us, when we first read that you should have 20 to 50 shares, we thought you meant 20 to 50 shares in one company. However, further reading shows you meant 20 or 50 companies.
We think we could buy one lot of shares, of around $2,000-$3,000, once or twice a year and slowly build up a nice portfolio. This would also help us build confidence in this type of investment.
At 20 or so years to retirement, we would have a diversified investment in the sharemarket. We would still have funds elsewhere, i.e. bank term deposits, superannuation, property, etc. to give us a nicely rounded portfolio.
ANot bad. But I’ve got a couple of worries.
Admittedly, by avoiding the fees charged by share funds, you may receive somewhat higher returns. But your strategy is fairly risky. And from last week’s letter, you sound risk averse.
Ask yourself now: If the small number of different shares you own in the first few years happen to do particularly badly, will you continue with your plan?
Another issue for many small investors is deciding which shares to buy. There are recommendations around, but they are often not worth much. Many would-be share investors can’t choose what to buy and end up buying nothing.
However, if you can cope with the risk and the decision making, go for it.
I still think an index fund would be better — you get instant diversification and no hassle — but I like your plan better than term deposits over the long term.
PS: Sorry about the confusion. Next time I’ll say “20 to 50 different shares”, or “shares in 20 to 50 companies”.
QThe “Fair” Dividend Rate (FDR) offshore tax proposal offends every principle of fair taxation. Some examples:
- Mary has offshore shares in Iffico valued at $100,000 in April 2007. Iffico suspends its dividends and the shares drop by 60 per cent. The holding is valued at $40,000 in 2008, and no tax is payable in the first year.
Iffico shares recover at 10 per cent per year, but no dividend is paid. Nevertheless, Mary will pay tax on 5 per cent of the share value. It will take 10 years to recover to the original $100,000, ignoring inflation. Meanwhile, Mary will be assessed for over $30,000 of taxable income, just to get her original money back.
- Paul has $100,000 in each of Ayco, Beeco and Seaco. Ayco gains 60 per cent, but Beeco and Seaco both lose 20 per cent. Paul’s overall gain is $20,000 and he is taxed on 5 per cent of $300,000, or $15,000.
Meanwhile, Peter has only $100,000 in Ayco, so Peter’s gain is $60,000. Peter will be taxed on 5 per cent of $100,000, or $5,000. Dividends have been ignored, for clarity.
Peter gains three times more than Paul, but he will only pay one third as much tax. Beeco and Seaco made losses, but Paul still pays tax on them.
With FDR, you will be taxed:
- on losses
- on market fluctuations
- on currency fluctuations
- on capital
- more than your neighbour, irrespective of value
What is “fair” about any of that?
AInland Revenue’s David Carrigan acknowledges that the FDR is less than perfect.
The earlier proposed tax change for international shares “would have addressed all of the equity issues raised in the examples,” he says. “However, it was widely criticised for its complexity.”
“The new proposal is consistent with what a number of submitters have asked for — namely a deemed rate of return.
“It is vastly simpler, economically efficient and addresses the distortions that the reform is aimed at — namely investing via a fund versus directly; investing in grey list countries rather than non-grey list countries; as well as countering offshore tax-preferred investments, such as those through UK investment trusts.”
Individuals and family trusts would be given the option to pay tax on actual returns if those returns are below 5 per cent, he says. This is “a concession to address a number of loss issues. However, it does not do so completely, as the examples show.”
There is no perfect solution, says Carrigan, but most people seem to vastly prefer the FDR to the earlier proposal.
“Lastly, it should be noted that under current tax rules investors have to pay tax on dividends from their offshore shares, even if those shares are falling in value.”
It strikes me, too, that Peter won’t always be the winner. Next year it might be Mary or Paul. Who knows? The answer is blowing in the wind.
People who hold a wide variety of shares over a long time — which is the best way to invest in shares — will do well some years and badly other years. Over time, hopefully it will be reasonably fair.
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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.