This article was published on 7 April 2007. Some information may be out of date.

Q&As

  • A year-old letter shows the danger in trying to predict what the Kiwi dollar will do
  • “Plodders” wonder how to match the investments of their landlord friends
  • Traders in shares beyond Australasia no longer pay the old tax on capital gains
  • How about taxing rental property the same way as international shares?

Q(Letter received exactly a year ago). In a column in September 2001 you stated that “at any time the dollar is just as likely to fall as rise”.

I took the bait and responded — part of which you published and, as I remember, rubbished.

I am glad that you now concede, indirectly of course, that I was right, in your column of 18 March 2006 where you state, “But the likelihood that the Kiwi will fall in the next few years should help things along”. You — correctly this time — advise readers to leave their money offshore — to take advantage of the falling Kiwi.

This is indeed contrary to “at any time the dollar is just as likely to fall as rise”, where you were plainly wrong.

If the 2001 reader had taken my advice and invested in the domestic market and then sent his/her money offshore in the past few months — when you’d have to have been an idiot to not see all the factors and read all the advice lining the Kiwi up for a fall — he/she would have been substantially better off.

Blind obedience to mantras of “invest offshore” can often get you losing gains against currency — why not work them both?

ABecause you can easily get it wrong.

Your letter didn’t make it into the paper a year ago because lots of other issues were going on, and I get too many letters to run them all.

A few months later, I re-read your letter and thought it would be interesting to watch what happens to the Kiwi dollar over the next year.

And what did happen? Exactly the opposite to what you — and I in a weak moment — predicted a year ago.

I don’t recall a time in recent years when so many economists and other experts were in agreement about the likely direction of our currency. Nearly everyone saw a fall coming soon, and I’m afraid I echoed that.

Since then, the trade weighted index — which measures movements in our dollar relative to the currencies of our major trading partners — has risen about 10 per cent. And the Kiwi versus the US dollar has risen about 17 per cent.

While you ended up right in 2001, you ended up wrong in 2006. And that’s probably typical. Those who predict foreign exchange movements get it right about half the time.

I’m going back to saying, “at any time the dollar is just as likely to fall as rise” — and also to the “invest offshore” mantra.

International investing gives you great diversification — and thus lower risk.

But those who try to move their money onshore and offshore to take advantage of currency movements are bound to have mixed fortunes. And they also have lots of hassle and pay high transaction costs.

How about another mantra: Let sleeping offshore investments lie.

QOur friends and work acquaintances are buying property to rent or to do up, while we are just plodding on paying off the mortgage as fast as possible.

We would very much like to take that plunge into the two-home market, but the so-called experts keep telling us the bubble is going to burst. We have been waiting for around three years now. It is very frustrating, and the price of houses is skyrocketing.

How can we get ahead?

AFace it: You are not such big risk takers as some of your mates. Anyone going into the property market in the last few years — especially if they borrow lots to do it — is taking quite a risk.

More often than not, those who get into risky investments come out as winners. But some lose in a big way. And we haven’t yet read the last chapter of the current property boom story.

You might be plodding, but plodders, like turtles, sometimes win the race. So how to get ahead?

Firstly, keep doing what you already do. Paying off your mortgage improves your wealth as much as an investment that brings in — after tax and all fees — whatever your mortgage interest rate is. That’s a good solid return, and it’s risk-free. Putting as much money into repayments as possible is an excellent move.

Once you’re rid of your mortgage, I suggest you put the money that used to go into the mortgage into a low-fee diversified share fund.

Promise yourselves not to withdraw from the share fund for at least ten years, regardless of what the market does.

Drip feeding a regular amount into an investment like that reduces risk and gives you some great buys, as you get more units with your monthly money when prices are down.

I understand your frustration at not being in the property action. Price rises have certainly continued beyond what most of us expected.

That’s always a worry, though. The longer a market rises, the further it has to fall. Whether the bubble bursts or just slowly diminishes (can bubbles diminish?) — and when it starts — nobody knows.

But property is highly unlikely to keep growing at its current pace over the next ten years.

Chances are pretty good that you will end up as well off, or even better off, than your property investor mates — especially if they find themselves forced to sell in a down market.

QRe the letter in last week’s column that begins “My husband is interested in doing some share trading…”:

Does your response mean that a person deemed to be a trader of shares, as opposed to a long-term investor, would not have to pay income tax on the full amount of any gains that they (hopefully) make if they trade only overseas shares as opposed to NZ and listed Australian shares?

Shouldn’t this person declare the total net gain/loss from share trading as income, as opposed to declaring a maximum of 5 per cent as investment gains under the new rules?

AYes to your first question, no to your second.

Under the fair dividend rate (FDR) system, “the trader/non-trader boundary has gone. The trader pays the same tax under FDR as a non-trader investor,” says Peter Frawley of Inland Revenue.

Note, though, that this doesn’t apply to New Zealand shares or listed Australian shares, which are still taxed the old way.

By the way, in a thank you note, last week’s correspondent said: “I showed your response to my husband and he’s happy now, thinks it’s better now than when you had to declare yourself a trader and pay big taxes on the gains or take a risk and not declare at all.”

That leads me to one of my concerns about the old system: At least some — and possibly many — people don’t declare their trading income and get away with it, although they probably feel nervous about it.

On the other hand, those who do pay the tax feel a bit foolish, knowing others are getting rich by not paying.

There’s got to be something wrong with a tax system that leaves you feeling scared or foolish, as opposed to simply taxed.

QGiven the Government’s new tax rule on overseas shares has just come into being, I thought the following might be an interesting addition to the theme for the Government.

It (or probably more likely Mr. Cullen) has talked itself into a corner with comments like “A capital gains tax on housing would be political suicide”.

So given this and the fact that the new FDR (or unfair dividend rate as most of us call it) was justified as NOT a capital gains tax, how about all property — excluding the property you live in — receives a similar “non capital gains tax”; e.g. FDR.

The rate could be the same 5 per cent or (given the present history of returns) maybe a higher rate is justified?

This way investors would incur a tax bill each year and also be limited in the tax losses they can claim.

Surely if FDR was fair to correct the “overseas tax break” it is also fair to correct the property investor’s tax break. Fairer still, they should have been done at the same time.

The negative of an FDR on property is that it would (I guess) remove the “tax loss and capital gains investors” from the present housing market and quickly bring house prices back to their long-term average of about four times average salary equaling the average house price.

ANow there’s a thought.

Maybe we should go even further, and just tax all investments as if they earned a return of 5 per cent. That would certainly make life easier.

And the fact that the change might reduce property values is by no means a negative for everyone. Would-be first-home buyers would love it.

And for most homeowners who don’t have rental property, it wouldn’t make much difference. When they move, they would get less for their old home but pay less for their new one.

True, some people borrow against their home equity for business loans and so on, but in most cases there would still be enough equity to do that.

In any case, the downward pressure on property prices would be at least partly offset by the fact that, if we excluded the family home from the tax, people would tend to put more money into their home, and less into other assets.

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.