Personal Finance

  • Low interest rate environment sees more borrowers and less savers complain to the Banking Ombudsman

    Borrowers are heading to the Banking Ombudsman with their qualms, as they’re flocking to the banks with their loan applications.

    The Banking Ombudsman Scheme, in its 2015/16 Annual Report, shows there’s been an uplift in the portion of lending-related cases it has dealt with from 28% to 31% this year.

    Ombudsman Nicola Sladden says the increase is a symptom of our low interest environment encouraging more borrowing than saving.

    Accordingly, the report shows the portion of bank account related cases the scheme dealt with fell from 23% to 19% over the year, as “falling interest rates made savings accounts less appealing”.

    “There aren’t the same opportunities in the low interest rate environment,” Sladden says.

    She notes there was a spike in the number of cases the Scheme received related to early loan repayment charges between September and November last year.

    Bank clients complained about the costs associated with getting out of fixed term agreements early, how these fees were calculated, the terms and conditions of fixed term agreements, the quality of banks’ communication and disclosure.

    Borrowers suffered from “post-fixing dissonance” as they sought to break their fixed term contracts early and opt for loans with lower interest rates.

    This issues were largely at the forefront of the cases the scheme dealt with in the 2014/15 year.

    Yet as interest rates have stopped falling so rapidly, the scheme has seen a drop in these sorts of complaints over the last nine months.

    “We think that there is better information out there about early repayment charges and a better understanding about the risks associated with getting out of your loans early,” Sladden says.

    The Ombudsman Scheme’s other lending-related complaints have stemmed from customers’ dissatisfaction with the services they receive.

    Clients were concerned with bank staff’s failure to act as instructed or promised. They were also unhappy with the how banks collected debts.

    Across all complaint types, the underlying causes were as follows:

    KiwiSaver withdrawals and switches an issue

    Asked about emerging trends in the nature of enquiries dealt with by the scheme, Sladden mentions there’s been an uptick the number of people with KiwiSaver issues.

    These relate to investors’ abilities to withdraw funds, as well as miscommunication or concerns around disclosure when they switch funds.

    “Sometimes people feel the switch may have been made without proper and full information,” Sladden says.

    She is also aware of cases where people have raised concerns around banks’ KiwiSaver sales practices.

    The Scheme hasn’t dealt with a significant number of KiwiSaver fees-related enquiries, despite the Financial Markets Authority, Ministry of Business Innovation and Employment and Commission for Financial Capability pushing for providers to detail these more clearly in dollar cent terms in investors’ statements.

    While Sladden notes the prevalence of KiwiSaver related enquiries, it’s worth noting banks are continuing to capture market share in the KiwiSaver space, as shown in this FMA graph:

    The FMA’s KiwiSaver Annual Report also shows the level of switching between KiwiSaver providers has spiked in the past year.

    Fraud becoming more sophisticated

    Sladden also pinpoints increasingly sophisticated fraud as an emerging trend.

    The report says: “This year, 66 bank customers contacted us about scams by third parties. Most commonly, these involved buying or selling transactions with scammers, investment scams or the scamming of customers’ personal information.

    “Customers were unhappy because banks had declined to compensate them for their losses. Banks are not responsible if customers’ actions enabled (even if unintentionally) a scam to succeed.”

    Asked to provide more comment on the instances in which banks would be responsible for compensating scam victims, Sladden says: “A bank is liable for making transactions that aren’t properly authorised by the customer.

    “However often the customer has unwittingly authorised the transaction, whether it’s by way of providing password or pin information, or not being aware the recipient of the funds is a fraudster.

    “And in those circumstances, unless the bank knows about risk of fraud, it is very difficult to hold the bank responsible in those circumstances.

    “If a bank is aware of some red flag or any other risks or fraud or exploitation, they do have an obligation to act and as a minimum, alert the customer to that risk.”

    Proportionately high number of cases relate to medium-sized banks

    Looking at the bigger picture, the Ombudsman Scheme’s report notes: “The number of cases we received about small banks generally corresponded with their market share (as estimated by assets).

    “Medium-sized banks used the scheme more (22% of all cases compared to 12% of market share), while the four main banks – ANZ, ASB, BNZ and Westpac – used the scheme correspondingly less.”

    Sladden says the overall number of cases the scheme received over the year rose only slightly compared with the year before – from 3,213 to 3,323 cases – but their make-up changed noticeably.

    “Over-the-phone-type enquiries made up a growing share of our work, and simpler complaints were unchanged. The big shift was in disputes, which shrank in number but grew in complexity.

    “I attribute this to two factors: greater determination by banks themselves to resolve problems before their customers come to the scheme – leaving us with the frequently difficult or protracted cases – and greater emphasis by us on education to prevent disputes in the first place,” Sladden says.

    She says visitor numbers to the scheme’s website had risen more than 60% in the year. 

  • Our comprehensive review of regular savings returns to September 30, 2016 for Aggressive KiwiSaver funds

    by Craig Simpson

    A portfolio of Australasian listed property stocks managed by ANZ continues to outperform more diversified aggressive portfolios.

    This has been a recent trend but one that could end shortly as Milford Active Growth Fund is closing in on the top spot.

    The funds that have added the most value over the past quarter are the Milford Active Growth (includes Aon Milford) and ANZ OneAnswer's Australasian Share, International Share and Sustainable Growth Funds.

    The smallest growth over and above our investors contributions and after accounting for tax and fees, was recorded by ANZ OneAnswer International Property Fund.

    A common theme across the funds that added the greatest value was their greater exposure to Cash compared to some of their peers. The Cash holding is effectively reducing the risk in the portfolio and has provided some capital protection during what has been quite a volatile quarter. Exposures to Australasian shares continues to provide schemes with some return pickup.

    A recent Melville Jessup Weaver (MJW) report has identified the Milford Active Growth Fund is delivering returns on an after fees, before tax basis, which are superior to a sample peer group and with less risk. (The MJW review is a point-to-point analysis, different to our regular savings approach.) In fact, the annualised volatility numbers are below two of the Balanced funds in the report. This is a unique situation and defies what the text books say should be happening.

    Hedging ratios across the category differ greatly and this will be influencing returns also. International Bond and Property portfolios are traditionally fully hedged back to NZ dollars to protect the income stream plus the hedging premium that is present.

    QuayStreet NZ Equity Fund (formerly Craigs Investment Partners) is the best overall performer on a since inception of the fund basis. The Fund came to market at the beginning of the prolonged bull market period and has not experienced any of the severe sell-off that existed in 2007/2008.

    A dispersion of returns across the various managers exists and those funds appearing at the bottom of the table are likely to remain there for some time as the funds above them are continuing to perform at higher levels.

    We have observed the number of funds with three-year returns higher than long-run averages have fallen away. Last quarter approximately half of the main table were ahead on a three year basis, this quarter it is 30%.

       ANZ OneAnswer Australasian Property is awarded our 'best in class' title for this quarter. This award is reserved for schemes which have a three-year track record equal to, or greater than, the long-run returns.

    On our regular savings basis, the average of the top five funds would have resulted in you earning $24,872 more than you have contributed; last quarter it was $22,200.

    The average annual long-term compound return of the top five aggressive funds' earnings after-tax and after-fees is 12.4% which is 6.4% per annum more than the average of the top five default funds. The top 5 aggressive funds are adding over $14,400 more value to investors than the top 5 default funds.

    Our September 2016 reviews of the Default, Conservative, Moderate, Balanced and Growth funds can be found here, here, here, here, and here

    Here are the full comparison as at September 30, 2016 for Aggressive Funds.

    Aggressive Funds      
    (EE, ER, Govt)
    + Cum net gains
    after all tax, fees
    cum return
    = Ending value
    in your account
    last 3 yr
    return % p.a.
    since April 2008 X Y Z
    to September 2016      
    % p.a.
      ANZ OneAnswer Australasian Property A A P 28,805 26,472 13.0% 55,276 15.5%
    Milford Active Growth A G AE 28,805 25,666 12.7% 54,470 11.9%
    Aon Milford A G AE 28,805 25,404 12.6% 54,209 11.8%
    ANZ OneAnswer Australasian Share A G AE 28,805 25,235 12.5% 54,040 11.9%
    ANZ OneAnswer Int'l Property A A P 28,805 21,585 11.1% 50,389 10.2%
    ANZ OneAnswer Growth A G G 28,805 18,549 9.9% 47,354 8.5%
    ANZ Growth A G G 28,805 18,319 9.8% 47,123 8.4%
    Aon Russell LifePoints 2045 A G A 28,805 17,909 9.6% 46,714 10.3%
    ASB Growth A G A 28,805 17,844 9.6% 46,649 10.1%
    Mercer High Growth A A A 28,805 17,403 9.4% 46,208 8.7%
    Fisher Funds Growth A A A 28,805 17,035 9.2% 45,840 7.7%
    ANZ Default Growth A G G 28,805 16,939 9.2% 45,744 8.6%
    ANZ OneAnswer Int'l Share A G IE 28,805 16,341 8.9% 45,146 9.4%
    Westpac Growth A G G 28,805 15,632 8.6% 44,437 8.4%
    Fisher Funds Two Equity A A IE 28,805 13,790 7.7% 42,595 6.8%
    AMP Aggressive A A A 28,805 13,297 7.5% 42,102 6.3%
    Kiwi Wealth Growth Fund A A A 28,805 13,184 7.4% 41,989 6.2%
    AMP Growth A G G 28,805 12,667 7.2% 41,472 6.1%
    Booster High Growth A A A 28,805 12,522 7.1% 41,327 7.8%
    ANZ OneAnswerSustainable Growth A A IE 28,184 10,375 6.4% 38,559 7.1%
    Column X is definition, column Y is Sorted's definition, column Z is Morningstar's definition

    A = Aggressive, AE = Australasian Equities, G = GrowthIE = International Equities, P = Property

    Booster was formerly Grosvenor and QuayStreet was formerly Craigs Investment Partners

    For those funds that have not been going for the full period (April 2008 to September 2016) the results are shown below. In this group the standout performers are Craigs NZ EquityGenerate Focused Growth and Booster International Share


    Aggressive Funds      
    (EE, ER, Govt)
    + Cum net gains
    after all tax, fees
    cum return
    = Ending value
    in your account
    last 3 yr
    return % p.a.
    since April 2008 X Y Z
    to September 2016      
    % p.a.
    Booster Geared Growth A A A 24,472 11,670 8.8% 36,142 8.8%
    Booster International Share A A IE 23,790 9,234 9.0% 30,643 7.9%
    Booster Socially Responsible A A AE 21,410 8,443 8.3% 29,853 7.4%
    Booster Trans-Tasman Small Companies A A AE 21,410 6,317 6.2% 27,726 5.5%
    QuayStreet NZ Equity A A   21,410 14,509 15.3% 34,110 13.0%
    QuayStreet Equity A A   19,601 8,512 6.9% 32,302 5.7%
    QuayStreet Australian Equity A A   19,601 6,433 7.4% 26,033 7.5%
    Generate Focused Growth A A A 11,856 3,602 9.4% 15,458 7.1%
    Amanah KiwiSaver Plan A A   8,551 1,011 0.1% 9,562 n/a
    Column X is definition, column Y is Sorted's definition, column Z is Morningstar's definition

    A = Aggressive, AE = Australasian Equities, G = GrowthIE = International Equities, P = Property

    Booster was formerly Grosvenor and QuayStreet was formerly Craigs Investment Partners

    Observations and return drivers

    Stock picking (active management) as opposed to index tracking (passive management) remains the flavour of the day when it comes to producing top ranking funds within KiwiSaver. ASB with a passive strategy is slowly eating away at the lead the active managers have enjoyed to date.

    Socially responsible funds have continued to perform below par. This will be disappointing for those wanting a feel-good factor to their investment strategy.

    We are continuing to see an overlap between the top end of the Growth category and the bottom of the Aggressive category. MJW noted in their latest report (mentioned above), there is little to be gained from taking on additional risk in KiwiSaver - we concur.

    Funds that have hedged global shares have received some considerable gains over and above an unhedged position.

    While some funds are holding greater positions in Cash and Fixed Income, the defensive positioning in this category, where the returns are traditionally more volatile, is reducing the impact of under-performing global equity markets.

    Milford's Active Growth, Quay Street NZ Equity and ANZ OneAnswer Australasian Share Fund have been reaping the rewards of investing a majority of their funds into NZ shares. The NZ share market has returned over 30% for the last 12-months and if a fund didn't hold an exposure to, or were under-weight NZ shares, their performance has suffered.

    Australian shares continue to be a poor cousin to NZ shares.

    For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

    The right fund type for you will depend on your tolerance for risk and importantly on your life stage. You should move only with appropriate advice and for a substantial reason.

  • A global perspective on how far off crisis point New Zealand is when it comes to making superannuation sustainable

    Joe Public appears to be what’s stopping the Government from taking bolder measures to ensure there’s still money in the kitty for millennials to receive superannuation when they retire.

    A number of countries in the OECD have implemented reforms to ensure the sustainability of their retirement savings schemes, in the face of ageing populations, high unemployment, low wage growth and low interest rates.

    While New Zealand’s demography and state of economic affairs aren’t as dire as other parts of the developed world, questions are still being raised over whether New Zealand Super and KiwiSaver are sustainable in their current forms.

    The Minister of Commerce and Consumer Affairs Paul Goldsmith believes they are; the Retirement Commissioner Diane Maxwell disagrees.

    Speaking at the NZ-OECD Global Symposium on Financial Education in Auckland this week, Goldsmith notes Super is currently set at 66% of the net average wage for a married couple from the age of 65.

    “In contrast to the situation in many developed countries, it is affordable," he says.

    “Currently we spend 5% of GDP on it.

    “Treasury predictions are that the cost will rise to 7% of GDP in 2045. We will be able to manage so long as we continue to keep control of other government spending.”

    The average amount governments in the OECD spend on pensions as a portion of GDP is 7% according to 2013 OECD data.

    Factoring in different ways in which taxpayers support the elderly, the New Zealand Government’s expenditure on health is equivalent to around 8% of GDP, compared to the OECD average of 6%.

    Maxwell: ‘We’ve got time, but not all the time in the world’

    Recognising the shape of our economy, Maxwell admits: “We’ve got some really good tailwinds.

    “We’ve got time, but not all the time in the world. We do need to act, we do need to signal that changes are ahead. The problem is that when you do that, people get worried and think you mean tomorrow…

    “I would like to see a little more action than we’re seeing now, but do I understand it’s a vote loser.

    “How do governments change the system without losing the support of their voter base?”

    As described in this interview, Maxwell says the most obvious change that needs to happen is extending the minimum period of time you need to have lived in New Zealand to qualify for Super, from 10 years.  

    “All the other countries I’m engaging with are generally sitting at around 25 years, so we are the outlier,” she says.

    Furthermore, she says 18 OECD countries have raised the age of eligibility for their government super schemes.

    She agrees the Government can take comfort in the fact Super is only equivalent to 5% of GDP, but when it gets to 7%, the cost will be in line with that of a number of European countries, which have been forced to ram through major reforms.

    “So I understand, in a pragmatic sense, why no one’s in a rush to deal with it,” Maxwell says.

    “However, I do need both sides of the House to have a good, candid, robust, public conversation about this.”

    Goldsmith: Improving financial capability the focus

    Goldsmith isn’t showing signs of tweaking New Zealand Super and Prime Minister John Key has vowed he would resign before increasing the age of entitlement for Super.

    Rather, Goldsmith says the sustainability of our system lies in making sure we are financially capable.

    “It [NZ Super] is a system that fundamentally works. New Zealand has very low levels of poverty amongst its older citizens.

    “Not surprisingly, that system has had an impact on our savings culture. With such a secure, universal system in place, individually we have been more modest in our retirement savings.

    “Many people have looked to own a home mortgage free by retirement, aiming to live off their Government superannuation.

    “With a slow trend over many decades of falling home ownership, the challenge is to remind people that even with universal superannuation there is every reason for people to save, in order to have more choices in retirement. 

    “And that is why, as with many of the nations represented here today, the New Zealand government has recognised the significance of improving levels of financial capability and we have invested considerable resources to achieve it.”

    Trust central to reform in the Netherlands   

    Also speaking at the OECD event, hosted by the Commission for Financial Capability, a representative from the Netherlands’ Ministry of Finance, Olaf Simonse, says education isn’t a silver bullet.

    He says the age of eligibility for government super in the Netherlands has been raised to 67 and will continue to be hiked as life expectancy increases.

    The minimum contribution rate for the Netherlands’ retirement scheme is also 15%-20% of wages/salaries, with two thirds of this being funded by employers.

    Still, Simonse says the system is not sustainable and needs to be further reformed.

    The Netherlands Government’s pension expenditure is equivalent to 6% of GDP, according to 2013 OECD figures.

    While it is difficult to compare New Zealand Super and KiwiSaver to the system in the Netherlands in the scope of this article, it is valuable to note how overseas Governments are going about implementing reform.

    Simonse says rebuilding trust in the pension system, off the back of the Global Financial Crisis, is key.

    Crisis spurs bold reform in Italy

    Italy’s former Labour Minister Elsa Fornero has a similar view, saying transparency and financial literacy are vital to building trust in the system.

    Fornero pushed through a major pension reform programme in 2011, which was central to Italy’s efforts to convince investors of its creditworthiness.

    Even though it helped the country avoid financial collapse, Fornero’s name will be associated by the next few generations of Italians with one of the most unpopular political reforms in Italian history. 

    Also speaking at the OECD event, Fornero admits her biggest failure is not being able to convince the younger generation that her austerity reforms were done for them.

    Fornero recognises the demographic and economic outlook in New Zealand is very different to that of Italy.

    Yet she doesn’t take Goldsmith’s word that NZ Super is sustainable in its current form, without seeing more evidence of how we will continue to fund the scheme in the long-run.

    She concludes: “We as politicians all know what to do, but we don’t know how to get re-elected once we have done it.” 

  • The Morgan Foundation's Jess Berentson-Shaw tackles the Minister of Corrections and Police's view that for every poor family that is stressed, there is public money available to assist them

    By Jess Berentson-Shaw*

    Judith Collins happily chucked her “Non-PC” views into the supercharged arena that is the current debate on low-income low-opportunity families in New Zealand.

    What she had to say contained elements of truth.

    And because the story that is often told about low income families is far too simplistic, when someone steps up with a smattering of some complex truths scattered amongst the mythology it gets traction.

    So what did she say that was true, and what was myth?

    The true bits

    Judith Collins tells us that there is money available to everyone who needs it. She is (mostly) right.

    There is (some) money available for low-income families in New Zealand. Problem is there is not enough of it.

    Prior to the late 80s and early 90s in New Zealand we had a pretty solid welfare state in the sense that welfare provided more than the bare minimum of support for families who needed it. However in 1991, following mass unemployment after rapid deregulation of the New Zealand Economy, benefit rates were slashed drastically to below poverty lines and they have barely moved since.

    By most measures the number of children living in poverty rose at that time, and have stayed there since.

    So there is money available, just not enough. To add insult to injury, there has been an insidious growth in the conditions and sanctions that come with benefits.

    These conditions are not based on any evidence that they improve outcomes for families or children, and instead can actually make families more stressed and less well off than ever. And stress as it turns out is the real problem in low-income, low opportunity families.

    So Judith Collins is also right that with low incomes and few opportunities there comes as she puts it “a poverty of ideas”.

    The science tells us that the toxic impact of stress brought about by insufficient resources eats away at family relationships, even at babies and children’s physical development. The grinding stress of having to cover bills, keeping children warm & healthy, worry about whether casual work will become no work is certainly no good for optimal thinking or ideal family functioning.

    But then Judith Collins gets it all so very very wrong

    We have previously covered the total lack of evidence for the misinformation that Judith Collins gave voice to. Most low-income parents are concerned deeply about their children’s welfare and want to do their best for them. We see this in research across numerous societies. In the UK for example when cash benefits increased for those on the lowest incomes as part of the child poverty package of the Blair Government, the cash was spent on the children. Clearly they are errors of fact that still have some palatability amongst those who like what Judith Collins has to say. However, she is also wrong in thinking that this is how most New Zealanders see the issue.

    Actually the evidence tells us that most New Zealanders place great value on qualities including social justice, helpfulness, equality and respect for others. So they understand that most (not all) but most parents work hard for their children, love them, and want the best for them. They understand that those parents on low incomes with few opportunities find it very hard to deliver good outcomes for their children if the rope they get thrown is just that little too short and has bits of glass embedded in it.

    How much is Minister Collins right and how much is she wrong?

    Where is her evidence that the poor are bad parents? From what we can see there is none.

    What we do know is that there are around 5000 children who have been removed from the legal care of their parents. We do know that not all these children are poor- abuse happens across society.

    We also know that there is no evidence the state does a better job of looking after these kids than their parents did. If fact we know these are the kids who do worst in New Zealand.

    So people in glass houses much?

    If we do assume that the majority of these 5000 children are from low-income families (given the stress pathway there is a link between insufficient resources and parent/child relationships) lets put that in context. There are a number of robust measures of child poverty (despite silly claims to the contrary), but if we take the most severe groups (children who are both income poor and in severe material deprivation), there are about 90,000 of them. So maybe (and that is a pretty huge ‘taking a guestimate finger in the air’ type maybe) around 6% of children in low-income families have parents or caregivers who don’t know how to keep them safe.

    So while the Minister might be a bit right, we can’t see any evidence that she is more than 6% right, and even then this is pretty weak data. What Minister Collins has done is tar the other 94% of families with the same brush, when in fact most of them do an incredible job in challenging circumstances.

    So what to make of the Minister’s approach?

    From an evidence-based perspective it is extremely lightweight. This raises the question as to why the Minister has reached for the megaphone to broadcast a false message:

    (a) She likes to take a lightweight approach and prefers anecdotal-based to empirical evidence

    (b) she has a political agenda – to reinforce the prejudice that a particular cohort of right wing supporters have – playing to her constituency.

    (c) she’s acknowledging that her government doesn’t like the real solutions to poverty and so is deciding to play the “blame” card to disguise that inadequacy

    (d) she actually doesn’t care that the bulk of poor people are that way through no fault of their own and is quite happy to call them names, to label them as bad unloving parents in full knowledge of the evidence that shows that’s not correct

    Only Judith Collins knows which is correct but the fact remains she is mostly wrong, about 94% wrong by our calculations. Her reasons are hers to acknowledge.

    What actually works?

    We are currently finalising a book on what works best to improve child outcomes for those from low-income low opportunity families. Targeted programmes (like intervening in families and implementing parenting or education programmes) certainly have some evidence of effect, they are popular amongst the voting public and can be very useful for achieving improvements in very specific outcomes for children. However, one of the most effective ways to improve child outcomes (based on the intervention literature) is unconditional cash transfers for families. That means giving them more money without conditions attached to it.

    We can understand the effectiveness of this approach a few ways. The main being that, as we mentioned earlier, a significant pathway through which children from low-income families suffer poor outcomes is stress. Both their exposure to stress in the family, and hence poor family dynamics and relationships, and their own stress responses, which limit brain and cognitive development, have long term impacts on their development. Unconditional cash gives parents the opportunity to reduce the stress resulting from insufficient resources in a way that works best for them and their families. No family experiences stress the same way or have the same exact constraints on their resources. That the government would know what yours or my main sources of stress are and how to counter them effectively seems a little ludicrous really.

    Of course this is not the whole solution – unconditional cash transfers are modelled to halve the difference in outcomes between low-income children and their better off peers. So targeted interventions will still have a role to play. There will still be some “dysfunctional parents” who will treat their children poorly even if they have a higher income.

    However, one of the main issues we find in New Zealand with targeted programmes is while popular they are just not as effective as we think they are going to be. One of the big issues is that they work in a research scenario but when they get taken up by Governments they get changed so much that they are not longer delivering the components that are really effective. We also have a problem with appropriate high quality evaluation. Another reason cash transfers as a first step has a lot of benefits.

    All this is covered in detail in the book. But you can read a once over lightly on the issue starting with this blog.

    Finally, lets consider again what New Zealanders value. They value respect for others and for whatever reasons Judith Collins is showing very little of this for hard working parents. She is not crushing the ‘PC’ brigade, she is just wrong, wrong on what the evidence says and wrong about what New Zealanders value.

    By reminding ourselves of the humans, the parents, the people involved and the respect and value they all deserve, we get much closer to discussing the real solutions for low-income low opportunity families based on the science. So why does Minister Collins and others wish to avoid that particular discussion?

    Dr Jess Berentson-Shaw is a science researcher working for the Morgan Foundation. She holds a PhD in Health Psychology from Victoria University.. This article is here with permission and first appeared here.

  • Tax professor calls for independent inquiry into how tax evaders and benefit fraudsters are treated by the justice system

    By Jenée Tibshraeny

    A tax expert is calling for an overhaul of the way we treat white collar criminals compared to benefit fraudsters.

    Victoria University of Wellington Associate Professor of Taxation, Lisa Marriott, wants to see an independent inquiry undertaken into our justice system, further to her research highlighting the extent to which tax evaders are largely let off the hook, while benefit fraudsters are chased down and forced to repay every cent they’ve swindled.

    She says $1.24 billion of tax was evaded in 2014, while just $33.55 million of welfare payments were defrauded.

    Yet for around a third of the level of offending, welfare fraudsters were three times more likely to receive prison sentences than tax evaders.

    What’s more, with the Ministry of Social Development (MSD) spending proportionately more recovering benefit debt than the Inland Revenue (IRD) does recovering tax evaded, Marriott says there could be $5 billion to $9 billion of undetected tax being evaded every year.

    With this much at stake - without even considering tax ‘avoidance’ - she questions whether we should be putting more resource into recovering these funds.

    Having spent three years studying the issue under a Royal Society of New Zealand Marsden Grant, she echoes the Orwellian view that “all people are equal, but some are more equal than others” in our justice system.

    Here is a summary of some of Marriott’s findings:

    Conclusions drawn from data collected between 2008 and 2014 Tax evasion Benefit fraud
    Value of tax evasion/welfare fraud committed in 2014 $1.24b $30.55m
    Average portion of income earners/benefit recipients investigated for tax evasion/benefit fraud  0.01% 5%
    Average number of prosecutions brought forward in a year 60-80 800-1000
    Average value of offending  $229,000 $77,000
    Average portion of offenders who received prison sentences 18% 67%
    Average amount spent by the IRD/MSD recovering every $100 of tax/welfare debt  $3 $17
    Tax/welfare debt written off in the 2011-12 financial year $435m $8.7m

    Double standards among different government departments

    Speaking to in a Double Shot Interview, Marriott says: “People think the differences come about because the tax evasion is repaid and the welfare fraud is not repaid. In fact it’s completely the other way around.”

    Of the 399 tax evasion cases she investigated over a six-year period, only one perpetrator was made to make a full repayment at the time of sentencing.

    She admits defrauded welfare funds aren’t always repaid at the time of sentencing, but the MSD is committed to ensuring they are eventually repaid in full.

    “The MSD does have a policy where they will attempt to get all that welfare fraud money back from the offenders. Usually most of it is repaid - admittedly over a long period of time - but it is their policy that those funds are collected.”

    On the flipside, the IRD’s mandate is to collect the largest amount of tax revenue at the lowest possible cost.

    “Prosecuting people is not going to collect much in the way of tax revenue, because only a tiny proportion of those prosecuted cases repay their tax anyway, and of course it’s expensive to take a criminal prosecution.

    “So the IRD will do that when they want to make an example of somebody, but it’s not going to help them achieve their objective, which is collecting tax revenue for the government.

    “Whereas, if you contrast that with the MSD, there does certainly seem to be a wee bit more willingness to punish people or make an example of people, because of the type of crime that it is.”

    Marriott notes that the IRD only spends $3 recovering every $100 of tax debt, while the MSD spends $17 recovering every $100 of welfare debt.

    “If they [the IRD] had specific funding, perhaps to investigate more debt and collect more of their debt, then perhaps that might be a good outcome for them.”

    Guideline judgements should be introduced

    As well as an independent review, Marriott is calling for guideline judgements for financial crimes to be introduced in New Zealand.

    This way judges can have guidelines as to what sentences are appropriate for certain levels of offending, enabling them to treat all cases in a similar way.

    Being of a financial nature, Marriott says tax evasion and welfare fraud are readily quantifiable.

    “There is an absolute dollar amount of the harm that we are talking about.

    “So it strikes me that a guideline judgement would be ideal for the types of crimes that we are talking about here. And what that would mean is that any large discrepancies from those guideline judgements would be a bit more transparent.”

    She says this would be relevant given the examples we see in the media where there are “suggestions that the outcomes from the justice system have been different because of people’s family or who they are, or what they do for a living”.

    Lack of government will to review situation despite public opinion

    Asked what the government’s response has been to her findings, Marriott says: “I haven’t had much challenged to the data.

    “My overall impression is that people [government authorities] are accepting of the facts as they are, but there isn’t much happening in the way of willingness to review the situation and to think about whether we would like it to be different.”

    In fact, Marriott’s request to interview judges in New Zealand as a part of her research, was declined.

    Yet a survey she’s undertaken suggests public opinion supports authorities coming down harder on tax evaders.

    “People do tend to see tax evasion as worse than welfare fraud, which is a bit of change of thinking in recent times. Historically it has been the other way around.”

    Therefore, contrary to what’s expected of it, the justice system isn’t reflecting society’s views.

    Lack of robust capital gains tax perpetuating inequality

    Marriott says we also have a two-tiered system in the sense that we tax wage/salary earners, not but those who earn income from capital gains made by selling property.

    “Given what is happening with our property market - not just in Auckland… - I think it’s a really sensible time to be putting this discussion back on the table, of having a capital gains tax.”

    It is worth noting we do currently have some form of capital gains tax in that you will be taxed if you buy a property with the firm intention of resale. However the ambiguity in this rule makes it easy to skirt, as described in this story.  

    A bright-line test also took effect in October last year, which means that if you buy and sell a residential property within two years, you'll pay tax on the income you earn from the sale, regardless of your intention at the time of the purchase. The family home is excluded in both instances.

    Nonetheless, Marriott says a more robust capital gains tax is an “enormous gap in our tax base”.

    “Our philosophy towards tax in New Zealand is broad base, low rate. We have a very broad base with our GST, we have a good base with our income tax, but there is a real gap where we don’t tax capital.

    “I think this general idea that the population as whole has no desire for a capital gains tax probably comes from a really significant misunderstanding of what a capital gains tax is and who would be affected by a capital gains tax.”

    She points out owner-occupier homes are excluded from capital gains taxes in most countries, with investment properties being the target.

    “If we look at Auckland at the moment, people are making significant capital gains on properties, but those gains are not taxed in most cases where people have structured their affairs appropriately, which most of them have…

    “Whereas other people who only have gains in the form of traditional income for example - wage and salary earners - they will be taxed from the first dollar they earn.

    “So we do end up with this two tiered system whereby people who are wealthy, who are the asset owners, the capital owners, can make gains which are not subject to tax. Whereas people who are the workers, the income earners, they are taxed. So it does strike me as being particularly unfair.”

    *This article was first published in our email for paying subscribers. See here for more details and how to subscribe.

  • Our comprehensive review of Default KiwiSaver fund performance to September 2016, identifying who has the best long-term returns

    By Craig Simpson

    Default funds held their course during the quarter and our regular savings model balances continue to grow.

    Compared to the March returns of six months ago, the top three funds managed by Mercer, ANZ and ASB have all improved their long-term returns based on our return calculation methods.

    We have seen one-month returns from two of the leaders come in marginally negative over the past month, while others are marginally positive and in line with the returns received from a three-month bank bill over the same period.

    With over $35 billion in KiwiSaver and the average balance of just $13,000, anyone following the tried and true path of making regular contributions and who keeps picking up the member tax credit from the Government should be well ahead of the average since the inception of KiwiSaver. 

    Mercer's Default Fund retains the top spot in our regular saving model and has been extending their lead over ANZ (see table below). There is no best in class award this quarter as although Mercer Conservative Fund is ranked number one, their three-year returns are trailing the longer returns based on our regular saving model. Our award is normally given to the top performing fund when the three-year data is ahead of, or equal to the long-term return.

    The fund with the best performance over the past year is the ASB Conservative Fund. This fund is passively managed (index tracker) and is making in-roads into the two predominately actively managed portfolios that sit ahead of it on the leader board. The lower fees charged by the ASB fund will be assisting their performance.

    It is interesting to see a passive fund which aims to replicate broader market indices at the lowest possible cost outperform funds which employ analysts, strategists, and managers whose job it is to try and beat the market.

    For so long we have seen actively managed portfolios outperform passive funds within some segments of the KiwiSaver market. Are we now seeing the worm turn back in favour of low-cost passive funds?

    Default Funds      
    Cumulative $
    (EE, ER, Govt)
    + Cum net gains
    after all tax, fees
    cum return
    = Ending value
    in your account
    last 3 yr
    return % p.a.
    since April 2008 X Y Z
    to September 2016      
    % p.a.
    Mercer Conservative C C C 28,805 11,439 6.6% 40,244 6.1%
    ANZ Default Conservative C C C 28,805 10,888 6.3% 39,693 6.1%
    ASB Conservative C C C 28,805 10,659 6.1% 39,464 6.3%
    Fisher Funds Two Cash Enhanced C D C 28,805 10,282 5.9% 39,087 5.7%
    AMP Default C C C 28,805 9,006 5.2% 37,811 5.0%
    BNZ Conservative C C C 12,083 2,576 5.8% 14,659 4.7%
    Kiwi Wealth Default C C C 7,754 1,577 4.9% 9,331 ...
    Westpac Defensive C C C 7,754 1,555 4.7% 9,309 ...
    Booster Default Saver C C C 7,473 1,630 5.7% 9,103 ...
    Column X is definition, column Y is Sorted's definition, column Z is Morningstar's definition
    C = Conservative, D = Defensive

    Observations and factors impacting default portfolios

    Firming expectations of rising interest rates in the US have investments such as bonds and global property under-perform the balance of the market. All Default funds are heavily weighted to fixed income assets and will see their returns negatively impacted.

    Default funds that are cash heavy such as AMP, ANZ and BNZ, will be able to take advantage or rising rates but may be missing out on better returns from other assets such as global bonds or equities.

    NZ Property listed funds continue to provide investors here with some decent running yields and returns. Rising interest rates in the future will impact financing costs within the fund and this will flow through to the bottom line. The NZ listed property sector could also fall out of favour as the dividend yields have been falling and the premia that once existed is shrinking. NZ property funds are becoming less attractive for local institution investors according to a UBS analyst report on the sector. Within Default funds Fisher Funds Two, ANZ and Westpac have the highest property exposures (listed and unlisted)

    Locally, the Government Bond index return was negative for the past month and has been trailing global bond returns over the last quarter. When we looked under the hood of some of the Default funds back in June we found a large exposure to NZ Government bonds within portfolios of ANZ, Fisher Funds Two, ASB & Westpac. On the basis these managers are still heavily weighted to government bonds their returns will be a little softer over the past month and quarter.

    The flip side to this, the Default funds with greater exposure to corporate bonds (both local and global) will have performed better. Booster (formerly Grosvenor) was one manager that has previously favoured corporate debt over government bonds. Global bonds hedged back to NZ dollars have outperformed NZ equivalents. Historical data showed the Fisher Funds Two portfolio was heavily exposed to NZ bonds, while many of their competitors such as BNZ, Mercer and KiwiWealth prefer global bonds. Funds with a bias to NZ bonds should see returns trailing those funds with a bias towards global securities over the past 12-months.

    We have seen NZ equities record a negative return for the past month and this will be taking some of the shine off the returns of those Default funds with heavier exposures to the local stock market. An example would be ASB's Conservative Fund where the manager has exposure to many of the top companies listed on the NZ stock exchange. Having said this the local market remains bullish and the returns for the past quarter and 12-months are well ahead of many other developed nation markets.

    Underpinning the local equity market has been investors hunting for yield in the current environment and interest from overseas exchange traded funds (ETF's). With large funds buying into our market on a regular basis the impacts from movements in overseas markets have been suppressed.

    While global equity markets have been relatively flat overall, there is insufficient exposure to growth assets in the Default funds to offset some of the negative capital movements in fixed income assets. With global markets rising and NZ shares retreating some Default funds will be getting a double hit during the month of September. Fully hedged global equities have provided a nice pick up in returns over unhedged positions and those taking the bet each way with a 50/50 hedged/unhedged portfolio. Based on historical data nearly all the managers have some exposure to hedged global equities in the top 10 holdings as we uncovered in a previous story.

    A rampant NZD compared to our global trading partners will be taking the top off some of the unhedged investment positions which many of the Default funds have, especially in their equity portfolios. All of the global bond exposures are hedged. The currency impact in a Default fund which has unhedged global equities will be relatively small compared to a more equity or growth-focused strategy which we will be covering in later KiwiSaver reviews.

    Market Overview

    Volatility returned early in the quarter as traders struggled to come to grips with the Brexit outcome. Markets were promptly reassured there was plenty of money in the financial system rainy day fund and life soon returned to normal.

    Adding to the volatility was speculation German banking heavyweight, Deutsche Bank, could become the next Lehmann Bros without further capital injections. Subsequently, Deutsche Bank has been selling down assets in an effort to steady the ship. Reports of counter parties moving money away from Deutsche Bank gave the fear-mongers more fodder to chew on.

    Fixed income markets caught the same cold as equity markets. Uncertainty over future interest rate cuts by the RBNZ and an upward bias in global interest rates resulted in longer dated NZ bond yields moving higher. Funds with a high concentration of NZ bonds will have seen some of the capital gains leak away.

    Of the major central banks, Bank of Japan (BoJ) was the only one to make any meaningful alteration to their monetary policy during the period under review. Previous bids to stimulate the Japanese economy have failed so the BoJ is trying something a bit out of left field. In doing so they've declared intentions to overshoot their inflation target.

    Other activity during the quarter

    It's been a busy period for re-branding and marketing of funds with three schemes changing their names. Craigs Investment Partners KiwiSaver scheme took on the name of their underlying manager Quay Street, Forsyth Barr's KiwiSaver funds become Summer with well respected financial commentator Martin Hawes on board and Grosvenor became Booster. Booster's Conservative fund is now called the Booster Moderate Fund.

    All in all, new names but effectively no changes to the underlying teams managing the money.

    What is new, however, is the launch of Simplicity KiwiSaver. The KiwiSaver equivalent to Uber, is now open to the general public and from what we understand is off to a flying start with much of their new money coming from customers who are seeking lower fee costs that are usual in this industry.

    KiwiSaver default funds are only part of a broader range of conservative funds available. Many of the 'traditional' Conservative and Cash funds are underperforming the Default funds. We will look at the rest of the Conservative funds in another article.

    For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

    There are wide variances in returns since April 2008, and even in the past three years, and these should cause investors to review their KiwiSaver accounts especially if their funds are in the bottom third of the table.

    The right fund type for you will depend on your tolerance for risk and importantly on your life stage.

    You should move only with the appropriate advice and for a substantial reason.

  • Apple Pay makes New Zealand debut through offer to ANZ NZ's Visa credit and debit card customers

    ANZ New Zealand says Apple Pay will be available to its customers with a Visa debit or personal Visa credit card from today.

    This marks Apple Pay's New Zealand launch.

    “More than 50% of ANZ Visa transactions are contactless and this number is steadily increasing as more retailers adopt contactless technology. Adding Apple Pay to our mobile payment offering will make it fast and convenient for more customers to securely make every day purchases wherever there is a contactless terminal," ANZ NZ CEO David Hisco said.

    “Following on from our highly successful goMoney mobile banking app, ANZ is pleased to continue leading the industry with innovative solutions for customers," added Hisco.

    The bank says customers will be able to use Apple Pay anywhere in New Zealand where contactless payments are available such as BP, The Warehouse, Warehouse Stationery, Noel Leeming, Torpedo 7, McDonalds, Domino’s Pizza and Burger King.

    "Users will continue to receive all of the rewards and benefits offered by credit and debit cards. In stores, Apple Pay works with iPhone SE, iPhone 6 and later, and Apple Watch," ANZ says. 

    "Security and privacy is at the core of Apple Pay. When you use a credit or debit card with Apple Pay, the actual card numbers are not stored on the device, nor on Apple servers. Instead, a unique Device Account Number is assigned, encrypted and securely stored in the Secure Element on your device. Each transaction is authorised with a one-time unique dynamic security code."

    "Online shopping in apps and on websites accepting Apple Pay is as simple as the touch of a finger with Touch ID, so there’s no need to manually fill out lengthy account forms or repeatedly type in shipping and billing information. When paying for goods and services on the go in apps or Safari, Apple Pay works with iPhone 6 and later, iPad Pro, iPad Air 2, and iPad mini 3 and later. You can also use Apple Pay in Safari on any Mac introduced in or after 2012 running macOS Sierra and confirm the payment with iPhone 6 or later or Apple Watch," says ANZ.

    Also see ANZ New Zealand's Apple Pay coup.

  • Westpac Group CEO Brian Hartzer estimates New Zealanders reliant on term deposits need interest rates of about 4% to live off 'and that's getting really hard'

    Westpac Banking Corporation CEO Brian Hartzer reckons retirees dependent on bank deposits need interest rates of about 4% to live off.

    Hartzer made the comment in an interview with the NZ Herald during a recent visit to New Zealand.

    "One of the things that we feel very deeply is for our older customers who are reliant on bank deposits for their income, rates are getting really low," Hartzer was quoted as saying. 

    "Our estimate in NZ is people probably need interest rates around 4% to live on and that's getting really hard," added Hartzer.

    Westpac New Zealand's highest current carded, or advertised, term deposit rate is its 3.50% six-month rate. The Official Cash Rate is currently at a record low of 2%.

    See all banks' advertised term deposit rates for one to nine months here, and all banks' advertised rates for one to five years here.

    Hartzer was also quoted as saying "there is a tremendous amount of anticipation and hope in the international markets" that the US Federal Reserve will increase its benchmark interest rate soon, probably in December.

    "We think the signs look pretty good that there will be a rise in interest rates in the US ... on balance, I think it will be a positive thing because as interest rates get really low it puts real pressure on the profitability of banks and the ability of banks to lend to support the economy," the Herald quoted Hartzer as saying.

  • Terry Baucher mulls the hidden economy and concludes IRD should look more closely at the tax gap

    By Terry Baucher*

    During TVNZ’s Breakfast’s recent story on tradies offering cash “discounts”, Inland Revenue’s Andrew Stott was asked about the size of the hidden economy, or the “tax gap”. He replied it could involve “hundreds of millions” of dollars, before conceding it was a “big problem”

    How big? 

    We don’t know. Or as a Treasury report put it in January 2013, “There are no reliable estimates of the size of the tax gap in New Zealand.” 

    This is in part because measuring the tax gap is difficult. As Victoria University of Wellington researchers noted in a September 2012 methodological review of the tax gap “…almost all of the methods proposed or implemented have been subjected to severe criticisms” The Victoria University paper defined the tax gap as:

    “broadly the difference between the tax revenue collected and that which would be expected to be collected in the absence of any evasion or late payment.” It therefore encompasses not just deliberate tax evasion as in the hidden economy but also aggressive tax planning and non-compliance through ignorance."

    But if measuring the tax gap is difficult, this doesn’t stop an increasing number of tax authorities from attempting to do so. The Canada Revenue Authority’s first estimate of its tax gap in relation to GST put it at 5.6% of collections. 

    Across the Ditch, the Australian Tax Office’s has been publishing tax gap estimates for GST and luxury car tax since 2012, and estimates its GST tax gap as 4.9% of collections. 

    HM Revenue and Customs (HMRC) in the United Kingdom probably has the most comprehensive and sophisticated tax gap analysis at present. It’s been estimating its tax gap since 2000 and has been publishing annual reports since 2009. Its latest report estimates the British tax gap at £34 billion annually or about 6.4% of total theoretical tax liabilities. The tax gap for VAT, the British equivalent of GST, was the highest of all taxes measured at 11.1%. 

    So what’s Inland Revenue doing about the tax gap? Not as much as perhaps it should. At the moment Inland Revenue doesn’t publish estimates of New Zealand’s tax gap and a search of its 2015 annual report found no mention of the term.

    (Similarly, none of Inland Revenue’s Briefings to Incoming Ministers of Revenue between 2008 and 2015 contain any specific reference to the tax gap and also say very little about the hidden economy).

    Although determining the tax gap might not be a specific priority for Inland Revenue, the hidden economy is one of its key focus areas. In the year to 30 June 2015 it identified discrepancies of $146 million in the sector and its investigation activities in countering aggressive tax planning yielded $336.9 million (including $191.1 million from examining complex finance and trust losses). 

    With the current building boom in Auckland and Christchurch, Inland Revenue has plenty of targets. 

    The Breakfast story revealed that 50% of the tradies working on house renovations for a TVNZ reporter offered “discounts” for cash without prompting from the reporter. This was for work with a value of between $10,000 and $18,000. As Mr Stott acknowledged Inland Revenue investigators have seen similar amounts. 

    In the subsequent “Breakfast Club” panel discussion several participants admitted to paying tradies cash for minor repairs and renovations. No-one on the panel seemed particularly concerned about this.

    Similarly, although Andrew Stott pointed out the risks of making cash payments, 70% of the nearly 4,000 respondents to a TVNZ Facebook poll saw no problem with tradies doing “cash jobs” that they don’t declare for tax.

    A few hundred dollars here or there paid to tradies doesn’t seem like much. Although most people use eftpos when purchasing from cafes, dairies or restaurants, they probably think little of it if a cash sale is not rung through the till. 

    But the hidden economy isn’t just the building and hospitality sectors. It includes any industry where cash is frequently used such as the scrap metal industry and also the myriad of micro-businesses carrying out service activities who do not register for GST. (Unofficially, maybe 15% of all contractors do not fully comply with their income tax and GST obligations). Then there’s illegal activities such as the drug trade and trading in stolen goods such as cigarettes. (Just because an activity is illegal doesn’t exempt it from tax, as Al Capone found out to his cost). 

    All this adds up to a much bigger tax gap than most people realise. After noting the lack of “reliable estimates” Treasury concluded in its January 2013 report to the Long Term Fiscal External Panel:

    “A reasonable general order of magnitude for the tax gap across OECD countries would be 5 to 20 percent of total tax collections. This implies a tax gap for New Zealand of around $3-11bn. We expect New Zealand to be at the lower end of this general range owing to our general broad-base, low-rate tax settings, significant reliance on indirect taxes, and low levels of corruption – all things that are thought to be correlated with a smaller tax gap.“ 

    This seems a dangerously complacent view. Anecdotal evidence such as the TVNZ Facebook poll points to taxpayers having a somewhat “relaxed” view about accepting cash “discounts” from tradies. (On the other hand quite a few Facebook commenters also expressed dissatisfaction about multinationals not paying their fair share). In any case, even if the tax gap is at the lower end of Treasury’s estimate, $3 billion (in 2012 dollars) is hardly loose change. 

    But on the basis of the maxim “What gets measured, gets managed”, maybe it’s time Inland Revenue and Treasury looked more closely at the tax gap. 

    Such an investment would seem very worthwhile given that Inland Revenue’s return on investment during the 2014-15 year was $5.21 for every dollar invested into investigating the hidden economy and $34.10 for each dollar spent countering aggressive tax planning. 

    Furthermore, once the tax gap is more accurately measured then Inland Revenue can use the data to promote awareness and better compliance. My impression is that most people greatly underestimate the size of the cash economy and this then colours their attitude towards accepting cash “discounts”. A wider education programme could change this attitude. 

    Accordingly, I believe Inland Revenue should, like HMRC, report annually on the size of the tax gap and the measures it’s taken to reduce that gap. It would be a good step towards encouraging voluntary compliance and promoting support for the integrity of the tax system. Otherwise, it’s naïve to think that if managing and closing the tax gap isn’t seen as a major priority for Inland Revenue, the less scrupulous won’t try and take advantage.


    *Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »

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