This article was published on 30 October 2004. Some information may be out of date.

QI’ve just read your article on splitting income derived by a person to a spouse or partner.

I think that a basic point that was omitted was that splitting the income derived by one self-employed person with another who didn’t work or did little is also illegal, and IRD would have a field day with an audit.

For example, Mr Smith is an IT boffin who earns $200,000 a year. Mrs Smith has no income because she is a fulltime mum.

If Mr Smith were to split his income by way of a partnership or limited company, they would both be for the high jump when the IRD catches up.

Section GD 3 of the Income Tax Act and sections 141D and 141E of the Tax Administration Act would be good viewing (100 per cent and 150 per cent shortfall penalty and name publication too!!)

AYou’re quite right. From the IRD’s point of view, Mrs Smith has to actually work for the business if she gets income from it.

What’s more, if Mr Smith wants to deduct the wages he pays to his spouse, he must get approval from Inland Revenue, says KPMG’s national tax director Craig Macalister.

This would involve writing to the IRD outlining the nature of Mrs S’s work, her work hours and pay. “They’re looking to see if she gets an arm’s length rate for the job,” says Macalister.

He notes that under the Tax Act, the rule doesn’t apply to de facto partners. However, this is expected to change soon.

QIncome splitting can be achieved for salaried people by deriving income through a trust.

You give your employer the trust’s IRD number and an invoice each week or month.

It can’t be used where employee benefits accrue, eg Super or health insurance.

You can also use a company, but a trust is more common.

ANot so fast!

Firstly, you risk losing your status as an employee, “and all the rights that go with that, such as sick pay, annual leave and holiday pay,” says Craig Macalister.

Secondly, “Rules were put in place in about 2001 to specifically stop employees from interposing trusts and companies” between themselves and their employers for tax purposes, he says.

“When the Labour Government lifted the top personal tax rate to 39 per cent, specific legislation was enacted to overcome the tax benefits obtained by such arrangements.”

Macalister notes that the IRD has recently successfully challenged similar arrangements in the Taxation Review Authority.

“While people may have legitimate reasons for establishing intermediaries through which services may be performed, there are complexities and tax risks inherent in such structures.

“People should get professional tax advice before embarking on an income splitting journey, not knowing which corner the Commissioner of IRD is waiting around.”

Another worry: “If you interpose a trust or company you will also take on obligations to account for GST,” says Macalister.

Speaking as someone who just spent a chunk of Labour Weekend wrestling with GST records, I suggest you don’t take that lightly.

QPeople earning $100,000 with four kids may pay the same tax as childless people. But they are investing in their future.

The hungry mouths of today hopefully will pay dividends in retirement.

In Japan, the eldest child (usually a son) takes responsibility for the care of their parents, in return for eventual ownership of the family home.

My father made sure I would look after him by leaving me a house in his will.

AI never thought I would be quoting Kahlil Gibran’s “The Prophet” in this column. But here goes:

“Your children are not your children. They are the sons and daughters of Life’s longing for itself.

“They come through you but not from you,

“And though they are with you, yet they belong not to you…

“You are the bows from which your children as living arrows are sent forth…”

In other, much less eloquent, words, I don’t think kids should feel obliged to pay back their parents for raising them.

As for the idea of a parent waving an inheritance in front of a child in the hope of getting support in old age, that’s rather sad. Maybe I’m naïve, but I like to think support happens — when it does — without the need for deals to be done.

QYou ask for thoughts about retirement planning.

My husband and I have been retired for 23 years, and we could give a great deal of advice, but I shall concentrate on the car question.

Financially, two cars meant two depreciating assets. The logical solution is to share one car, and where interests conflict, one person takes a taxi or explores public transport.

However, everything depends on how well the spouses get on! If either one is possessive or dominant over the use of a shared car, life can become impossible.

It is vitally important that both partners keep up their proficiency behind the wheel as the 80-plus diving tests approach.

We worked on the principle that when we went out together in the car, one partner drove out and the other drove home, and this has paid dividends as one of us can no longer drive.

AI know quite a few younger couples in which one partner drives there and the other one home, for quite a different reason — booze! Perhaps they should continue the habit into retirement to keep up the driving skills.

Another reader who made a similar point about cutting back to one car added, “If possible walk instead, or do as I did and get a bicycle as a means of keeping fit.”

I got many more responses about retirement finances than I have room to run, but thanks to everyone who wrote in. Many of you seem to manage well on less than huge incomes.

The following are excerpts from the cyclist’s letter:

QHere are a few random observations based on l5 years of retirement living by my wife and myself. For just over l3 of these we lived in our own, mortgage-free home. For the past eighteen months we have lived in a retirement village.

I receive three small pensions from past employers, plus NZ Superannuation. The total (less than $30,000 per annum) is sufficient for us to live in comfort, run a car and have a holiday now and again. I am 80 and my wife 79. We are truly blessed.

The major concern for anyone near to retirement should be his/her health and the escalating cost of preserving it. Any amount of money cannot make up for inability to function physically and mentally. Between retirement at 65 and age 75 health problems increase markedly and unexpectedly.

Southern Cross (the main health insurer) doubles premiums beyond age 65. I cannot afford Southern Cross for myself and only partial cover for my wife.

Before retirement your correspondent and his wife should have a thorough top-to-toe health check including eyes, ears and teeth, and take any remedial action required, e.g. buy new glasses, have a hip replacement, etc. Get on a hospital waiting list for the latter (if not insured).

In preparation for retirement check all appliances, e.g. TV, computers, and other devices required for easy, trouble free living. Any that are suspect should be serviced or, preferably, replaced. Living on a fixed income, large repair bills for out-dated equipment can be a nasty shock to the most careful budget.

If possible, clear a mortgage or any other large debts before retirement. It can be a struggle to do so afterwards.

AThanks very much for lots of good practical advice.

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.