KiwiSaver for business owners
MAJOR changes to the original KiwiSaver scheme were announced in the budget, which came out after our last newsletter. This time we deal mostly with KiwiSaver from the business owner's point of view. Articles on KiwiSaver are spread throughout this newsletter. We start here by suggesting some of the things you might wish to consider before you decide whether to join a KiwiSaver scheme.
When will your scheme mature?
KiwiSaver matures when you reach the age of qualifying for National Superannuation. Allowing for an improvement in life expectancy and the baby boomer problem, is it likely you will still collect the pension at age 65? Will the conditions for getting National Super be changed? It might be related to whether you are properly retired. The ratio of working to non-working adults is declining. This problem has to be addressed. Do not assume your scheme will mature when you reach the age of 65.
What will you get at the end?
You will receive a lump sum you can invest to generate income for your old age. You might be able to reinvest it into a pension for life. How much might you have, in real terms, after adjusting for inflation? Talk to people who have been in savings schemes for many years and hear what they say.
Getting to the end
If your business is a company, you could put yourself on to the PAYE system, just like any staff you might employ. If you want to switch from being a provisional taxpayer to having PAYE deductions, talk to us first, because there are some important tax issues to consider.
Employees are going to receive a compulsory subsidy from their employers of 1 percent of gross salary, starting from 1 April 2008, rising, by 1 percent annually until the total is 4 percent. This is a tax-deductible cost for the employer AND the employees do not pay tax on this income. In addition, employers will get a subsidy of up to $1040 per year for each employee. If you make yourself a PAYE employee of your company, you will get the benefit of this.
If you start saving before 1 April 2008, you could start with only 2 percent contributions from yourself and 2 percent from your company. This will increase annually at 31 March so it comes into line with the required 4 percent employee contribution. The company 2 percent counts as an employee contribution for claiming the $20 per week government subsidy, until 31 March 2008. See "How to join KS" on page 4 for joining KiwiSaver if your income is not subject to PAYE deductions.
Will the subsidies last?
The subsidies will become unnecessary if the scheme becomes compulsory, as some people think it will.
What are the costs of KiwiSaver?
The smaller the fees, the less the fund provider might be willing to do to earn them.
KiwiSaver might be expensive to run because of accounting for so many small payments. Those on PAYE have their savings paid to 1RD, who then pass them on to the fund managers. What happens if Ivy discovers one of her payments has gone missing? Is it the fund's mistake, Ivy's mistake or 1RD's? Who will sort it out and at what cost? In addition to fees, fund managers might levy other charges, which might not be evident to the investor.
Will there be an exit fee to switch to another scheme? Many funds are not charging exit fees at the moment.
Some risks associated with scheme
KIWISAVER has its good and bad aspects. In this section we show you some of the risks.
• Your KiwiSaver contributions are not protected against your creditors. If you go bankrupt you will lose your KiwiSaver contributions.
• Some KiwiSaver schemes might fail. The Government does not insure you against this. The economy, with its full employment, will not always be as good as it is today.
• KiwiSaver providers might sell their businesses, which could lead to changes in investment strategies. Don't invest and forget.
• Expect many new governments during the years you are in the scheme, and hence many rule changes.
• Fees might not stay at the same level as they are today. The Government Actuary controls KiwiSaver fees, but they might increase if the cost of running the schemes proves higher than anticipated.
• Staff with good skills are sought-after and move on. Keep an eye on your fund managers.
• You do not join the scheme and a future government abolishes or severely limits National Superannuation. You wish, as a result, you had joined.
• You do not join the scheme and could have collected the subsidies, when you had the chance and then it becomes compulsory and the subsidies are abolished. You wish you had joined earlier.
Three markets — by price
HAVE you ever noticed you can classify potential customers into three groups based on their sensitivity to price?
Customers spending their own money
When you have to pay for things out of your tax-paid income, you are usually quite careful with your decisions, particularly if the amount is large. These customers can be expected to be the most price-sensitive of the three groups.
Customers who own their businesses
Payments are tax deductible, so business owners spend the Government's money as well as their own. Their purchases are subsidised. They are also less price-sensitive than the first group because:
• business people have less time to fuss over prices;
• time spent developing the business might yield more than time spent haggling over relatively small savings — for example, is it worth getting three quotes every time you want some printing, if you are already fzetting, a good service at a reasonable price?
• they want reliability and good service, which saves them administrative time.
Customers spending other people's money
These are the bigger organisations. Their staff will happily pay to avoid making mistakes. That is why so many of them call in consultants. Sell them on the idea you can keep them out of trouble and charge accordingly. An electrician made an excellent living out of about 10 big customers. He almost guaranteed his customers' factory machinery would keep running. He would approach management with recommendations for overhauls and preventive maintenance and got well paid for his service. He staked his reputation on having no breakdowns. Those who spend other people's money are the least price-sensitive.
If you have a choice, which segment will you choose to work in?
Administration — new employees
WHEN a new employee joins your staff, you must:
• give them a KiwiSaver kit within seven days;
• deduct 4 percent KiwiSaver contributions from the very first pay packet;
• keep records of KiwiSaver deductions for at least seven years after the employee has left your employment. Employees can only opt out by completing a KS10 opt out form. They can complete this form on line. If the employee opts out, IRD will refund all contributions. Trap: Any new employee providing you with an opt out form within the first fortnight of employment has not opted out. Opt out must be between the beginning of the third week of employment and the end of the eighth week. If you receive a late application to opt out, send it to the IRD and do not act on it.
Donald Trump says: "You can always rebuild a factory; you may never regain a customer who is lost."
KiwiSaver and first home
ONCE investors have been in KiwiSaver for three years they may qualify for the subsidy of $1000 a year towards a first home. The maximum subsidy is $5000 for anyone who has been in the scheme for at least five years, so a couple could get $10,000 between them. Other requirements include:
• The combined incomes of a couple have to be less than $100,000 (and if there are more than two people, the maximum rises to $140,000).
• The money must be used for a first home for the couple to live in and they must stay for at least six months.
• The house must not cost more than $300,000, unless they are buying in a high priced area such as Queenstown or Auckland, in which case the limit is $400,000. These figures will be revised within the next three years.
All contributions, including those from an employer, can be withdrawn to help buy a first home. Government contributions remain locked in. Some parents might want to start a KiwiSaver account for their children. They will secure the $1000 kick-start for each child and the clock will start ticking for the home subsidy scheme. When youngsters start their first job, they restart the clock for the purpose of the three-year qualification period. Each KiwiSaver scheme has different rules about the amount you need to pay to join your child.
Databases make money
BUILDING industry suppliers are gettinLY, lists of building permits issued and using them to build their databases. Good selling, is about targeting your sales effort. Someone who has a buildinL,, permit is going to want doors, kitchens etc. Why not send your advertising where it is likely to make the most impact? Small firms, with limited resources, have to find cost-effective ways to sell their products. Mass advertising is not an option for them.
Letters addressed directly to potential customers and having their names on them will be more effective than an advertisement in a newspaper. Build up your database and use it constantly.
Put in all your contact details, including your email address. Your ad might be read outside working hours. Email is a convenient way to get a response.
Keep copies of GST returns
IRD is providing only one copy of every GST re- turn. Be sure to keep a copy of any return you send to the IRD. It may be needed for preparation of your annual accounts.
Paying off the mortgage
YOU can use half your savings to pay off your mortgage," someone said on TV a few days before 1 July. It is not completely correct. It requires the fund manager and your mortgage provider to agree to the arrangement. We know of one firm which will charge 2.5 percent on all payments applied to the reduction of the saver's mortgage.
Choose your trustees
IF you choose a trustee company to administer your family trust, monitor its performance. The trustees of a family trust decided to withdraw all the trust's investments from a trustee company and put them in an interest-bearing bank account. As a result of this decision, they made the following
• they achieved a big increase in the income of the trust;
• the trustees distributed the income of the trust to its beneficiaries and cut the income tax rate from 33 percent to 19.5 percent;
• capital losses, though small, ceased;
• administration costs halved.
It is not a good idea to hand your wealth to some- one you do not know and believe you can forget about it. The same applies to KiwiSaver. Keep an eye on the performance of your chosen fund. Ex- pect some short-term downturns. It is the longer view which matters.
Ring-fencing rental property
RING-FENCING, in tax talk, means isolating. If the Government ring-fenced tax losses incurred from owning rental properties, it would make rental tax losses claimable only against rental tax profits. Any losses left over would not become individuals' tax claims. They would be carried forward into the future and used up as the properties became profitable.
The Reserve Bank Governor is getting agitated about inflation. To contain it he uses the only weapon he has. He increases interest rates.
The Government is concerned about the high interest rates and its effect on our economy. It is also concerned about high house prices. It is, therefore, considering ring-fencing rental losses.
Will ring-fencing be introduced? Cynics count up the number of MPs who have rental properties and suggest the answer is no.
Ring-fencing would be likely to significantly affect the price of houses at the lower end of the market, thus reducing inflation.
Airpoints and taxation
AIRPOINTS generated by shareholder/employees of a company, using their private airpoint accounts, are not taxable. These people can pay for business expenses, get reimbursed by their companies and keep the resulting, airpoints — tax free.
Can you pay for business travel using personal airpoints? The answer is you can but if you want to be paid for the value of the travel, you will have to pay tax on the money you get. You would be better to save your airpoints for holidays.
Airpoints generated by your company and used privately form part of taxable income. Hold your airpoints account in your own name.
Is it worth joining for business owners?
EVERY dollar you put into KiwiSaver is another dollar you will not be able to use to develop your business. Compare the return on your investment from applying your money to your business with all the gains you could make from investing in KiwiSaver. Which gives you the better return? Add to the KiwiSaver side of the equation the forced discipline of saving for your retirement.
KS and working in more than one job
IF an employee has opted out of KS in her primary employment, she must also complete an opt out notice for any new secondary employer. Otherwise she is in the scheme and will have to pay 4 percent of wages for both jobs. Employees can take a contribution holiday after 12 months, by advising IRD using form KS 6, from either or both their jobs. The department will then tell the employer(s) to stop making, KS deductions.
October 7 3rd instalment of Provisional Tax (October balance date)
1st instalment of Provisional Tax (June balance date)
October 29 Six monthly GST payers — pay GST for period ending 30 September by this date.
November 7 2nd instalment of Provisional tax (March balance dates)
Terminal tax (October balance dates)
How to join KS
TO join a KiwiSaver scheme if your income is not subject to PAYE tax deductions, approach any of the KiwiSaver providers. Each has its own rules. You do not need to pay them 4 percent of your income. You can nominate any amount, which fits within the provider's rules. You get the $1000 kick-start and the $20 per week dollar for dollar subsidy. You cannot get an employer contribution.
KiwiSaver suppliers —the list.
AT the time of writing these were the approved KS schemes:
ABN Amro Craigs Start KS
AMP KiwiSaver Scheme
ANZ KiwiSaver scheme
AON Saver Scheme
ASB KiwiSaver Scheme
ASB KiwiSaver First Choic
AXA KiwiSaver Scheme
Credit Union KS EoSaver
Fisher Funds Growth KiwiSaver scheme
Gareth Morgan KS scheme
Grosvenor KiwiSaver Scheme (provisional registration)
ING KS Superannuation Scheme IRIS KiwiSaver
KS Supereasy Superannuation
Scheme (Civic Assurance)
Medical Assurance Society KS Mercer KiwiSaver Scheme National Bank KS Scheme
SIL KiwiSaver Scheme
Staples Rodway KS Scheme Superlife Kiwisaver (Provisional registration)
Waterfront Industry KiwiSaver Westpac KiwiSaver Scheme
Trident Securities has a website SmartK iwisaverco.nz. It will help you to make an informed choice of KiwiSaver provider for $30 per annum fee. The pension fund industry has www.workplacesuper.org.nz which offers you fund performance comparisons.
JOAN is secretary to a club. When she sends out minutes they contain:
• a brief discussion of each topic covered by the meeting.
• decisions made;
• management's post-meeting response to the decisions;
• management action plans resulting from those decisions.
Thus committee members arrive at the next meeting knowing what has happened as a result of the decisions they made at the previous meeting.
All information in this newsletter is, to the best of the author's knowledge, true and accurate. No liability is assumed by
the author or the publisher for any losses suffered by any person relying directly or indirectly upon this newsletter.
You are advised to consult professionals before acting upon this information