This article was published on 2 August 2008. Some information may be out of date.

Q&As

  • 3 Q&As on whether New Zealand should raise GST and reduce income tax — including how some farmers cheat on their taxes, and whether we want to encourage people to work longer hours.
  • Why KiwiSaver providers are highly unlikely to suffer the same fate as many finance companies.

QI enjoyed the “question” and suggestions about GST in your column last week, in which a reader suggested we raise GST and lower income tax. I would like to make two comments on your response.

Firstly, talking about GST, you write “You can’t avoid paying it by setting up trusts and other tax dodges.” I strongly object to the implication that a trust is also a tax dodge.

We have a family trust, which was set up a long, long time ago for various reasons, but not including dodging tax. In fact, for most of our working years and certainly since we retired, our family trust pays a higher rate of tax than we do personally.

The second point is the avoidance of paying GST. True, avoiding payment is very difficult — but not impossible. But gaining from GST is quite simple, especially if you run a small business.

I have worked with farmers for most of my life and it is not very difficult to make the farm pay for what really are strictly personal expenses and claim the GST back on these expenses. The transaction means a tax deduction by making the item or service involved a business expense and in addition to that gain, the GST is refunded.

It’s amazing how easy this is and how widespread the practice is. Just one example: my gardens. The price of every bit of timber for my private garden — fencing, gates, retaining walls, raised gardens, etc includes GST. A farmer can charge all these items to the business, quite openly, and gain in tax and GST.

On the income side, where an item of income can be transferred to a private account, the tax-free income derived by cheating is increased by the GST percentage as a bonus.

For your information, I have never been a farmer.

AAnd now that you’ve told the world about their crafty little tax games, I don’t imagine farmers would welcome you into the fold — if they knew who you were.

Before I’m deluged with letters from indignant farmers, I hasten to add that I’m sure not all of them are hell-bent on paying as little tax as possible — just as not all trusts are set up for that purpose. Indeed, there are honourable reasons for setting up trusts, as explored in this column in some depth a few years ago.

In last week’s column, I was simply saying that one way some people reduce their tax bills is through the use of trusts. I’m sorry if I offended you.

Turning to the practice of getting the farm to pay for the garden improvements and moving income off the farm accounts, this sounds like another variation on an old theme: You can get away with pretty much anything with taxes — until you are audited.

But I would hope that an audit would catch most of what you describe. It certainly doesn’t seem fair. And while many people are never audited, I would also hope that the cheaters at least have sleepless nights worrying that Inland Revenue may knock on their door.

QYou said in last week’s column, “You can’t avoid paying (GST) by setting up trusts and other tax dodges”. But GST can easily be avoided by saving and investing etc, or by purchasing from overseas (i.e. via the internet).

As published from the last census, one in three New Zealanders work more than 50 hours a week. Do you believe that by reducing income tax and upping GST New Zealanders will work even longer? Additionally; is this something we want to encourage?

I hate to see colleagues working long hours to provide for their families, yet miss out on quality time at home. Personally, I would love to see couples with children taxed as one unit and see less children in day-care from dawn to dusk.

Nice article for a debate,

APossibly too nice — when I’ve got so many letters on other topics to get to. So let’s keep this debate short and sweet.

Your point about avoiding GST by saving is another way of saying what last week’s correspondent said, that raising GST would encourage people to consume less.

But, for those on lower incomes, “easily” is hardly the right word. Most of them have to spend most of their income — which is why they are hit hardest by GST increases.

As for buying from overseas, I’m not sure that qualifies as “easily” either. Apart from the issues of freight costs, customs clearance and so on, most of us like to buy locally, where we can see what we’ll get, take it home straight away, and take it back later if it’s not as good as it seems.

Having said that, I suppose a large increase in GST could make overseas buying more attractive for some items. It’s a point worth considering.

On your comments about work hours, I’ve got no idea whether lower income taxes would lead to workaholics’ working even longer hours, and I certainly don’t want to encourage that.

But I suspect the issue is more complicated. Many of the one in three might be driven to work long hours by forces other than pay — such as job satisfaction or status. A tax cut might make little difference to their work input.

Others, who need a certain number of after-tax dollars to live on, might work shorter hours if taxes were cut.

The idea of raising GST and lowering taxes — with extra help for those on lower incomes — is not about increasing work hours as such, but broadly to reward working and discourage spending, which are surely good influences for most people.

When I read your last point, about taxing families as one unit, I thought, “Oh no!”. It opens up yet another contentious topic already debated at length in this column.

Suffice to say that it would help some families and hurt others.

Consider Sam and Sue, both working full-time because that’s the only way to feed and clothe their children, and each making $30,000. Is it fair that they pay the same total tax as Joe, who makes $60,000 while Jane stays home to look after their children?

QRegarding the proposal made last Saturday to reduce income tax and increase GST, you seemed to end totally agreeing with the proposal but did not answer the question: If this is such a great idea why doesn’t it happen?

AI didn’t mean to evade the question. My answer is: I don’t know.

But hey, it’s election year. Why don’t you get out and ask those who could implement the policy?

QA column on KiwiSaver in last Sunday’s Herald says that if a KiwiSaver provider goes under, investors in that fund will lose their money. The article then points to the recent failures of local finance companies as evidence that this could happen.

As a KiwiSaver investor, this, on top of Saturday night’s rugby, really spoilt my Sunday morning. Do you think some providers might go under? And if so, would I lose my money?

ASad to hear about your dismal Sunday. I can’t do anything about the rugby, but I’ll try to lift your spirits on the KiwiSaver front.

KiwiSaver providers are entirely different creatures from finance companies. A finance company is basically like a high-risk bank. People deposit money, which the company lends out. If the borrowers don’t repay their loans, and their security — perhaps half-built developments or used cars — isn’t worth as much as the loans, the finance company can’t repay the depositors.

On the other hand, a KiwiSaver provider doesn’t lend money. It invests members’ savings in many different fixed interest investments, shares, properties and so on — quite separate from its own business. And an independent trustee watches to make sure the money goes where the provider says it is going.

The value of those investments will fall sometimes, but most will rise again as markets improve. Sure, a few assets in the riskier KiwiSaver funds will go down the gurgler every now and then, but it’s highly unlikely that it would be more than a few.

Meanwhile, a KiwiSaver provider could, itself, be badly managed. But scheme trustees will be monitoring providers, and the Government Actuary — who regulates superannuation schemes including KiwiSaver — oversees KiwiSaver schemes, and can intervene to tell trustees what to do.

The media will also take an interest. If you hear anything iffy about your provider, you can readily move to another one. You’re not stuck waiting for your deposit to mature, as the poor investors in finance companies have been.

If worst comes to worst, and a KiwiSaver scheme is wound up, the members’ savings will be allocated to default KiwiSaver schemes, unless members name another scheme, in which case their savings will be moved to that one. Their balance should be whatever it was in the defunct scheme.

Of course there’s no absolute guarantee against fraud, or gross negligence. But that’s true of most other investments. And while it might not apply to do-it-yourself investments like rental property, that comes with other risks, as people are increasingly realizing.

Basically, if you want to save at all, you’ve got to take some risks.

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.