NZ Herald 29 October 2011

AYou’ve got to be kidding — in more than one sense!

But just in case you’re not… “In general,” says an Inland Revenue spokesperson, “a person intending to employ his or her child should ensure that the payment is made in respect of genuine work done in the operation of the business.”

Let’s see now, how could a three-month-old earn her pay? She’s a bit young for chimney sweeping. And something tells me that while eating and crying might be hard work for her, you might have trouble explaining how they help your business.

Continues the spokesperson, “The wage must be at a market rate for the work/services performed, and the wage must actually be paid (it is not enough to simply raise a journal entry).

“There is a specific anti-avoidance provision in the Income Tax Act 2007 (section GB 23 and GB 4) to prevent a deduction for excessive remuneration paid to a relative (i.e. where the amount paid does not relate to work/services performed, or the rate of remuneration is excessive for the work/services performed).”

I’ve seen this applied when one spouse runs a business and employs the other to do the paper work. The couple has to be able to show that the second spouse actually did the work. I’m sure there are teenagers on their parents’ payrolls, too. But you are really pushing more than the pram here.

The department adds, “Taxpayers who do claim a deduction in respect of payment for which no work/services were performed, or who pay an excessive amount for any work/services performed, are likely to face penalties for tax evasion. Inland Revenue would suggest that taxpayers considering employing their children should discuss the matter with their tax adviser.”

But before you bother, it might be an idea to at least let Bubba start school.

AThanks for your kind comments, but I’m afraid I can’t lump protesters in with tax dodgers. While I’m not camping out for the cause, I have some sympathy with the Occupy Wall Street protesters’ arguments.

Even if I didn’t, I think of another quote — from French philosopher Voltaire. Written in the entrance to the Chicago Tribune, where I used to work, it reads, “I do not agree with a word you say, but I will defend to the death your right to say it”. It’s good that people can protest; it’s bad that people dodge taxes.

What’s more, you seem to be implying that, firstly, all protesters are welfare beneficiaries, and secondly, that beneficiaries may not be worth supporting. On both counts, some are and some aren’t.

Still, good on you for working hard, and for making the most of what New Zealand has to offer. You probably deserve your comfortable future.

ARegardless of your history, I suggest you buy a home — even if it it’s just a modest unit.

For most people, it’s not a good idea to go into retirement without your own home. You never know when a landlord might kick you out because they’ve decided to live in the place themselves or to sell it.

And you can decorate and garden your home the way you want to. It’s harder to make a rental property feel as if it’s really yours — and that tends to matter particularly in retirement.

Your first step should probably be to find out how big a mortgage you can get. It might not be large at your age, but with two incomes you should be able to raise something. Even if you reduce repayments after you stop work — which might mean the mortgage isn’t fully repaid until after you die — at least you’ve had your own place to live in.

In most parts of the country, now is probably not a bad time to buy a home — which means you can bargain hard. Find something you like and make a low offer. You might be surprised at what’s accepted. If not, move on to the next place. No matter how much you think a certain home is the only one for you, there are always other good ones around the corner.

AFirstly, a couple of clarifications. What you were told, that the fund pays the inter-bank/OCR rate, isn’t quite right. Instead, it tracks the ANZ 90 Day Bank Bill Index, which measures returns on short-term wholesale bank bills, says ASB’s general manager investments, John Smith. “It is similar to being invested in a rolling 90-day wholesale term deposit.”

Secondly, you’ve actually slightly overstated the fund’s return since it started. As of September 30 this year, the return has averaged 4.49 per cent a year, before tax and after fees.

Your point that the fund should invest in longer-term deposits sounds reasonable. However, the fund’s stated objective is to “provide investors with low-risk returns consistent with short-term wholesale New Zealand bank deposits,” says Smith. If you don’t like that, I guess you shouldn’t be in that fund.

A bigger issue, though, is the fact that the fund is a wholesale investor, because the manager invests big sums.

In the past, wholesale investors tended to be paid higher interest than retail investors like you and me. It was much cheaper for a bank to deal with one manager investing $20 million than 200 people investing $100,000 each.

But that changed when the Reserve Bank brought in new rules, from April 2010, to strengthen banks’ financial stability. By looking at a bank’s “core funding ratio”, the Reserve Bank limits how much the bank can lend out, relative to its deposits.

Under the current rules, if someone has total deposits of less than $5 million in a bank, 90 per cent of those deposits count towards the bank’s core funding ratio. But if someone has deposits of more than $20 million, only 40 per cent of that money counts towards the ratio. The proportion decreases again for total deposits of over $50 million.

“The details of the rule are complex, but the broad principle is that the larger the deposit, the less lending it can fund proportionately,” says Catherine McGrath, ASB’s executive general manager of strategy, payments and products.

That’s because it’s much more likely that a big depositor would withdraw all its money at once than that many small depositors would.

The change has made retail depositors much more attractive to banks than the big boys. So how does a bank bring in the little guys? By offering them higher interest rates.

There’s not a lot you can do about that, other than to contribute only as much to KiwiSaver as you need to get all the government and employer contributions. Beyond that, save in bank term deposits — as long as you can resist the temptation to spend that money.

You can, of course, move to another provider’s cash fund, but it will probably be in a similar situation.

It’s unfortunate. But, as McGrath points out, even wholesale interest rates are pretty good these days compared with rates in many other countries. And because of the KiwiSaver incentives, cash funds are still a good investment.