NZ Herald 23 March 2024

AGood on you for caring. Perhaps you could give them copies of this Q&A.

Hey young ones! I know retirement is too far away to think about. But how about owning your own home? A great way to make that happen — sooner rather than later — is to make the most of KiwiSaver from the word “go”.

Spend an hour or so online, and then you can get back to exercising or partying or reading or going to the beach or whatever you love to do.

Start by answering the three questions in the KiwiSaver Fund Finder on sorted.org.nz. That will tell you which level of risk is best for you. It will then give you a list of KiwiSaver funds at that risk level, starting with the ones that charge the lowest fees. If you click on the fund names, you get more info about them.

I suggest you choose from the low-fee funds, as fees can make a big difference to your balance over the years.

If you also want to take ethical investing into account, the Mindful Money website tells you how each KiwiSaver fund invests.

Don’t agonize for too long about your fund choice. It’s impossible to know, in advance, which one will be best. Choose a fund that appeals, then contact that provider and they will arrange to have your money moved to them.

Once you’ve done that, the main message is: don’t take savings suspensions. Keep that money rolling in, and compounding returns will work their magic.

The only time you need to do more about fund choice is when you get within about ten years of buying a home. At that stage, if you’re in a higher-risk fund, it’s good to gradually switch to medium risk — perhaps transferring a quarter or your money each month for four months.

Then, when the home purchase is three years or so away, gradually move to low risk. Those moves will prevent your balance from suddenly dropping when you’re about to buy a home.

ANot so fast!

Broadly speaking, your first idea — moving in with Mum and Dad and letting out your house — could work, says tax expert Terry Baucher of Baucher Consulting. Eighty per cent of your mortgage interest would be deductible from April 1, and the whole lot from April 1 next year.

But Baucher is not at all keen on your house swap plan. “What’s proposed is a very clear case of tax avoidance, and the Commissioner of Inland Revenue can use their powers to make it null and void,” he says.

“Furthermore, the Commissioner could view the arrangement as representing an ‘abusive tax position’, and if so can impose ‘shortfall penalties’ of up to 100 per cent of the tax involved.

“For example, if the arrangement reduced the correspondent’s tax bill by $25,000 the shortfall penalty could be $25,000. Shortfall penalties are in addition to the tax payable, and use of money interest of currently 10.92 per cent will also apply. In summary it’s a very bad idea.”

Baucher adds that “The changes to interest deductibility in 2021 made this a complicated topic and it will remain so until 1^st April 2025, when full interest deductibility will be restored. Landlords should keep detailed records of when they borrowed money and for what purpose so they can maximise their interest deduction.”

AI understand where you’re coming from. I don’t like to see high house prices either. But I don’t think meddling with tax deductions is the way to solve that problem.

New Zealand’s tax system is in many ways less complicated than in other countries. For example: most people don’t have to file an annual tax return. Roughly the right amount of income tax is deducted before we get our money.

Part of our system is to tax businesses — including rental property — on their income after they’ve deducted their expenses. Changing that, by disallowing one particular expense, complicates things. For example, it gives a relative advantage to the wealthiest landlords who don’t have to borrow to buy a property.

At the same time, as I said last week, gains on rental property and all other investments should be taxed. And, by the way, the International Monetary Fund recommended this for New Zealand this past week. That might put off would-be investors at least as much as the allowance of interest deductions attracts them.

New Zealand must also attack the housing shortage, which is basically what’s behind the huge increase in house prices — relative to incomes — of recent decades. The new Government is making noises about doing that. Here’s hoping.

ASure, someone in Group A, the landlord group, is likely to pay more in the auction. And the resumed deductibility of mortgage interest — looked at on its own — is likely to push up house prices. And the change may also increase the number of rental properties versus owner-occupied homes.

But that ignores how a capital gains tax would dampen landlord enthusiasm, as discussed above.

On homeowners deducting mortgage interest, that isn’t really logical. We don’t pay that interest in order to make a taxable profit. Also, to be consistent, owner-occupied homes should be included in a capital gains tax. I don’t think so!

Before I’m flooded with letters, it’s unimaginable that this country would do such a thing. More on mortgage interest deductions next week.

AGood on your Mum. And sorry to annoy you.

The correspondent was pointing out that many landlords are not “heartless capitalists in top hats”, and he came up with the “little old lady and gentleman” image as a contrast. I picked up on this in a spirit of fun.

When I think about it, in stories both factual and fictional, a “little old lady” is often feisty and gutsy. I wonder if anyone answering that School Cert question wrote about the Little Old Lady from Pasadena, immortalised in the 1964 song for driving her sports car “real fast” and “real hard…The guys come to race her from miles around, But she’ll give ’em a length, then she’ll shut ’em down.”

AThanks. I don’t quite go along with your take on the system, though. For one thing, not all landlords are male. See the Q&A above.

APerhaps I’ve oversold laddering — or perhaps you’ve overbought it!

When you ladder, you set up term deposits so, say, a quarter of your money matures in one year, a quarter in two, a quarter in three and a quarter in four. Then, when each one matures, you reinvest it for four years. See last week’s column for more on this.

It means you get access to some of your money frequently, while at the same time receiving the higher interest that usually applies to longer-term deposits.

Currently that’s not the case, because the markets expect interest rates to fall. But that’s unusual. We will undoubtedly move back to higher rates for longer terms soonish. And while current five-year rates might not look appealing now, it’s highly likely they will look good by the time they mature.

Meantime, I think you would find that if instead you had put your money in one-year deposits from the start, you would be worse off over all.

Laddering usually works well over any period of more than a few years.