NZ Herald 8 October 2011

ABeing mainly a reader of novels, I don’t know any books along those lines, nor seminars. In any case, I wonder if they might be a solution looking for a problem.

There’s nothing wrong with being an oily ragger in second-hand clothes driving an old car. You sound much more interesting than all those people with new everythings who have made shopping one of New Zealand’s favourite pastimes.

Sure, it’s good to buy quality, not junk. I recommend membership in Consumer NZ, which gives informed independent advice on what’s best across a wide range of goods and services, and what features you might want to look for. I check what they have to say before buying anything significant, and many small things. See www.consumer.org.nz.

Beyond that, though, how about making some serious donations to charities? Lots of research — as well as just looking around — shows that people who give away money tend to be happier than those who buy stuff.

New things give you a buzz for a while, but then they just become the norm and you’re no happier than before. But knowing you have helped people — or animals or the environment — genuinely in need leads to long-term contentment.

And you’d have no problems with guilt. The opposite!

AI’m much too nice to respond that you should really try to get your facts right before writing.

Let’s say Tiny Co’s income is $2000. On its tax return, it subtracts deductible spending of $1000, to give it net income of $1000. With the corporate tax rate at 28 per cent, it pays tax of $280.

Without the deductible expense, its net income would have been $2000, so its tax would have totaled $560.

Having the $1000 deduction reduced its tax bill by $280.

It’s an important point that people sometimes miss. For example, a landlord might say, “I’m spending $500 a year on insurance, but I’ll get that back because it’s deductible.” In fact, they get back — in the form of a lower tax bill — way less than half what they have spent.

Given your attitude, I doubt if you will trust me to get this right. So — just as I did last week with the Q&A about corporate boxes — I’ve had this checked for accuracy by PwC partner Scott Kerse.

AYes, it’s correct, says the Ministry of Social Development — assuming that when one spouse goes into care, the other is still “in the community”.

Is it fair, given that the two couples have the same total assets? Well, it doesn’t seem so. The As’ children are likely to inherit more.

But it might be the only practical way to run a system that does both of the following:

• Requires a couple to spend all but $115,000 of their cash before getting a government rest home subsidy for one of them.
• Allows such a couple to keep their house and car and still get the subsidy.

Both seem reasonable, until we consider scenarios like the one you’ve come up with.

However, to get around the unfairness, we would have to either force the As to move to a cheaper house — which seems harsh — or give the Bs a subsidy even though they have more than a third of a million dollars in savings — which might upset long suffering taxpayers. Policy making is not easy.

If this really concerns you, when you retire you could put most of your savings into a house and car. Keep in mind, though, that most people don’t end up in rest homes, so you could well distort your spending for no gain.

I suppose you could wait until it seems likely you or your spouse will need rest home care, and then switch to a flasher house or car. The Ministry can, however, look at whether a person has recently bought a major asset such as a house. “Consideration around this is done on a case by case basis, as each person’s circumstances are different,” says a spokesperson.

In any case, you might find that trading up a house or car is the last thing on your mind at that stage.

AEither you’re not quite remembering it correctly or some mistake has been made.

A Ministry of Social Development spokesperson stands by what was in the September 24 column. The relevant section reads:

“The legislation allows you to give away up to $6,000 a year — including ‘gifts in recognition of care’ — in the five years before you apply for residential care subsidy (the gifting period).

“If your total gifts over the five years exceed $30,000, the excess will be counted back into your assets. In the period before the gifting period, you can gift $27,000 per year.

” ‘The current practice of the Ministry is that your spouse or partner can also gift the same amount if they have applied for a subsidy as well,’ says a Ministry spokesperson.”

To clarify the last paragraph, if one spouse applies for the subsidy, the couple could have given away $27,000 a year in the years before the five-year gifting period. Any amount beyond that may be added back to their assets when considering the asset threshold for the subsidy.

If the other spouse also applies later, the Ministry then says the couple could have given away $54,000 a year before it adds back. In other words, for each application they allow $27,000 of gifts made in any year outside five years.

In the case you quote, not all the gifting would have been added back, says the spokesperson. Many couples have — until a recent law change — gifted $27,000 a year each to a trust. If that was the case here, $27,000 of gifts per year would have been allowed and the second $27,000 would have been added back.

Let’s say that when your couple applied for a subsidy, they had been gifting to their trust a total of $54,000 a year for twelve years. That comes to $648,000.

The Ministry would have allowed a total of $30,000 for the previous five years, and an annual $27,000 for the preceding seven years, bringing us to a grand total of $219,000. Subtract that from $648,000, and you get $429,000 added back.

That’s way more than the $115,000 excluding home and car that would have made the couple eligible for the subsidy. It’s the same result — no subsidy — as if the whole lot had been added back, so perhaps that’s why you misremember.

Your point about the Ministry using the value of an asset at the time it is put into the trust is correct.

“However, if the asset loses value over time, e.g. the trust may have invested in finance companies where the value of investments were lost, those losses are also not taken into account in the assessment,” says the spokesperson.

She adds a further comment about the paragraph above starting “The current practice”. The legislation is not clear on this point, so it’s possible a court could rule that as an overly generous interpretation of the law, she says. If that happened, even when the second spouse applies for a subsidy, gifting from the couple of only $27,000 a year would be exempt from the add-back.

All of this just backs up our conclusion. It’s not worth it to set up a trust to enable you to receive a rest home subsidy.