NZ Herald 9 March 2019

ADifficult times for the two of you. It’s good, though, that you are comfortably off, and that you’re thinking about how your wife will cope.

I strongly suggest you sell the Australian house.

You’ve got into a way of thinking that is really common, even amongst professionals: dwelling on how much you paid for an investment. Of course you’ll take an interest in how your investments are performing. But your main focus should be on your current situation. And in that context, it’s irrelevant what you paid for an asset.

As of today, you have a list of investments, and you want to simplify them. It will clearly simplify things more to get rid of your overseas property than to sell your local property.

You bought the Gold Coast property as a longish-term investment — although I would rather you had planned on holding it for at least ten years, given how volatile property can be. Anyway, circumstances have changed. If that means you sell at a loss, so be it.

Your wife has enough else to contend with. I expect she’d be glad to get the Oz property off her list of worries.

While you’re at it, perhaps you should also sell the New Zealand townhouse, given your wife doesn’t like dealing with tenants.

What should you do with the proceeds? I recommend the two of you find a financial adviser you both feel comfortable with. While I would love to see you helping your wife learn about money, I expect she might still want someone who can help her with decisions in future.

The Adviser page on www.maryholm.com has a list of advisers who charge fees as opposed to accepting payments from financial providers — and are therefore much more likely to have your interests at heart. Check out the websites of several, then go and meet a few that appeal to you.

Interview them as if you are hiring an employee — which in effect you are. Keep going until you find someone who seems trustworthy and will keep your investments straightforward — someone who speaks your wife’s language.

I hope things go as well as possible for you both.

AYou raise some good questions.

Let’s look first at the idea of 10 per cent of people paying 70 per cent of tax. Others have come up with similar numbers, for example the top 3 per cent of earners paying 24 per cent of tax.

These calculations usually look at “net tax”, which is the tax you pay to the government minus the money you get from the government — in benefits, Working for Families and so on.

Another perspective comes from the website inequality.org.nz:

“The richest tenth of New Zealanders pay 47 per cent of all income tax, but that’s hardly surprising when they earn 34 per cent of all the income. Declared income, that is — a lot of income for the wealthy gets hidden in various ways.

“But even that doesn’t give you the whole picture, because it’s only measuring income tax, and leaves out two other key parts of the tax system: GST and capital gains.”

The article goes on to consider the proportion of people’s income that they pay in tax.

A graph looking at income tax and GST combined, “shows that the very rich don’t pay that much more of their income in those taxes than the poor do.” That’s largely because GST hits low-income people harder, as they spend most of their income while richer people save some of theirs.

And if capital gains were included, “since those capital gains will go largely to the richest tenth, the truth about tax in New Zealand is that the rich almost certainly pay less of their income in tax than the poor do,” says the article.

You could no doubt criticise that way of looking at things. But I’m just saying there are several ways to approach this question.

And in New Zealand, as the graph in last week’s column showed, our tax and benefit systems don’t reduce income inequality as much as in most countries. A capital gains tax would bring us more in line.

This brings us to the basic question: should we try to reduce inequality in New Zealand. If you don’t think so, you and I are just going to have to agree to disagree!

However, we do agree on the family home. In theory at least I think gains on family homes should also be taxed.

Your Auckland-Timaru example is a good one. It would also apply to a person buying the most expensive house in Timaru compared with someone else buying the cheapest Timaru house.

If CGT is brought in, with an exemption for homes, people will inevitably put more money into their homes than they otherwise would.

The fact is, though, that a capital gains tax on homes is problematic. For one thing, what do you do if you’re selling your home and buying another? Maybe we could let you postpone tax at that point if you “roll over” the money into another home. But in the end you or your heirs might face a huge tax bill. It all gets horribly complicated.

Governments have wrestled with this around the developed world. I suppose that when our government said the Tax Working Group couldn’t consider taxing the family home, they were just being practical. If people’s homes were included, many people wouldn’t be able to see beyond their “my home is my castle” attitude and appreciate the fairness of the inclusion.

There would be such an outcry that the whole capital gains tax idea would be doomed. And while I suspect you might like that, I wouldn’t!

ASleep easy. And get that bach off the market if the only reason you are selling is your worry about tax.

The Tax Working Group is not proposing to tax any assets on an annual basis. They are suggesting a “realisation-based tax”, which means you pay the tax only after you sell an asset at a gain. The money would come out of your profit.

If the proposed tax comes into effect — and there are several steps to go yet — you would then need to get a valuation of your bach on April 1 2021, although you would have five years from that date to actually get the valuation done.

Inland Revenue would give you guidance on the valuation — perhaps based on a Quotable Value or RV valuation.

Then, when you finally sell the bach, you would pay tax on any gain in its value since April 2021.

In the meantime, I hope you have many more relaxing days in your little piece of paradise.

AYou’re right, the taxable capital gain would be $900,000.

“The Tax Working Group proposes that interest should not be deductible in respect of a holiday home used for private purposes because the interest is in large part funding consumption — the enjoyment of the holiday home. As a general principle, spending on consumption is not tax deductible,” says the TWG Secretariat.

It adds, “However, the Tax Working Group recommended that interest on borrowing to acquire an asset should be deductible where the asset is not used privately (for example where the asset is a rental property, or shares), as is the case under current law.”

It makes sense to me. In your example, you pay a $100,000 deposit, but you then enjoy a $600,000 asset over the years. You have a lot more to enjoy than if you had bought a $100,000 bach. The interest you pay is for consuming that enjoyment.