How will inflation affect you?

Dear *|FNAME|*,

The end of this month finds us in Omicron Phase 3 under the Red light setting.

Our office continues to remain open and operate under the Red rules. You are not required to have or present a Vaccine Pass to visit, but we encourage you to take appropriate care.

It’s a good time to ensure your legal affairs are up to date, both personal and business, and you’re aware of your obligations and rights. Let us know if we can help.

Inflation hits a 31-year high

You may already be aware of it after looking at the items in your supermarket trolley: inflation is at its highest level in three decades.

The increase in the consumer price index (CPI) between the December 2020 and December 2021 quarters was 5.9 percent. A move that big hasn’t been seen since a 7.6 percent movement in June 1990. It’s nearly double the highest point of the Reserve Bank’s target range for inflation (1—3 percent).

So what’s driving things up? A bit of almost everything! In a Stuff interview, ANZ economist Finn Robinson said it’s “become harder and harder to pinpoint individual items in the CPI that are the main drivers of inflation,” and inflation is now “under every nook and cranny”.

But some of the key areas include:

• Imported goods—and in particular, petrol. COVID-19 has disrupted and increased the cost of supply chains around the world the past two years, and the Omicron variant has had a particular impact. The costs are passed on to us. Notably, petrol saw a 30 percent increase between the 2020 and 2021 December quarters.

• Construction costs. Demand for labour and building materials is high, and coupled with low unemployment figures and disrupted supply chains, this led to a 16 percent increase in the cost of building a new dwelling.

• Food. The increase in food prices between the 2020 and 2021 December quarters was the highest annual increase in a decade, at 4.5 percent.

• Wages. Unemployment hit a record low of 3.2 percent in the December 2021 quarter, and the downward trend is forecast to continue this year. That gives workers strong bargaining power to seek higher wages—which is what they’ll be looking for as other costs of living increase. This can lead to a “wage-price spiral,” where wage prices without increases in productivity push up costs for businesses, which leads to higher prices, which leads to workers seeking even higher wages to compensate.

• Borrowing. Robinson believes the official cash rate will climb steadily to 3 percent by April 2023. This would make it even costlier for homes and businesses to borrow money.

Are there holes in the proposed Income Insurance Scheme?

The Government, in conjunction with Business New Zealand the New Zealand Council of Trade Unions,is proposing the adoption of a New Zealand Income Insurance Scheme.

This would provide workers who lose their job due to issues outside their control 80 percent of their income for up to seven months. This includes things like redundancy, and health conditions and disabilities where ACC does not apply.

Here are some of the key details.

Eligibility

To be eligible you must:

• be a New Zealand Citizen and/or resident

• have made six months of levy contributions in the previous 18 months

• suffer at least a 20% loss of income if employed in multiple jobs

• have been laid off having been subject to redundancy or displacement, or suffer health conditions or disability where you stop work entirely or your capacity to work is assessed at 50% or more for at least four weeks

• not be a working holidaymaker, international student or temporary work-visa holder

• not have had your job terminated for poor performance or serious misconduct, or by your own resignation.

Scope

Payments will:

• start after you have made six months’ worth of levy contributions in the previous 18 months

• consist of

  • a four-week notice period

  • followed by four-week employer paid bridging payment

  • and then six months’ financial support from the scheme

• be eligible for an extension up to 12 months for training and rehabilitation

• amount to 80% of previous income, and be capped at $130911.00 per annum. A person may earn up to 20% of their previous income before abatement is applied

• not affect other forms of government support such as superannuation.

Still, there may be some holes in the scheme.

Concerns

• Double dipping. Existing employment law includes a statutory minimum of three months’ lost remuneration in the event of an unjustified dismissal. To date there is no suggestion of a litigation bar as with ACC.

• Redundancy compensation. There is no requirement that redundancy compensation be taken into account.

• Ability to disguise dismissals for poor performance. Poor performance could easily be disguised as redundancy if both the employer and employee were to agree.

• Multiple claims. The proposal is open to multiple claims by a worker becoming redundant regularly.

If you’re interested in having your say on the proposal, you can make a submission up until 26 April.

Please get in touch with us if you’d like to discuss how it might affect your business.

Monthly Housing Update

As we noted in the inflation item above, a rising official cash rate (OCR) will make borrowing more expensive. That will lead to higher home loan interest rates, and accordingly, more restraint when it comes to buying properties.

That’s a view backed by independent economist Tony Alexander, who notes that average sale prices have fallen by 2.5 percent in the past two months, and expects this trend to continue.

So what mortgage rates could we expect to see? If the OCR reaches 3.4 percent in late 2024, as predicted by the Reserve Bank, then we’d be back to where things were between July 2014 and May 2015. During that period, the floating rate peaked at 6.7 percent, the one-year fixed rate at 6 percent, and two-year rates at 6.4 percent.

The Reserve Bank suggests this, mixed with an increase in new builds, low net migration, changes in tax policy and tighter lending could see house prices fall by 9 percent by the middle of 2024.

Do you feel it's the right time for you to buy or sell? Get in touch with us for advice and assistance.

Trusts, and how your wishes can influence your trustees

Trusts, such as family trusts, are there to hold and protect your assets and provide for your chosen beneficiaries.

When you set one up, it’s arranged according to your wishes at the time. Trustees can take these into account when exercising their powers, but they are not required to do so.

But what if you express different wishes after that? Do those later wishes override the application of the original wishes?

The Court of Appeal tackled this question recently in Kain v Public Trust & Ors. The result was that trustees can consider later wishes as overriding earlier wishes, but it remains up to the trustees whether those wishes are actually applied when carrying out their duties.

The decision also covered another trusts question: whether trustees should take into account benefits a beneficiary has received or may receive under other trusts.

The Court held that trustees are entitled to take this into account, but they are not required to do so.

Where does this leave you?

Trusts are extremely helpful, but they’re also complex. It’s worth getting good advice when setting one up, so you can be sure it works how you want it to work. Our team has a lot of experience with this, so if you’d like to understand the benefits a family trust could deliver you, please get in touch.

Thanks *|FNAME|*.

That’s it for another edition of Legalchat this year. As always, we’re just an email or phone call away for any questions, help or advice. We look forward to chatting next time, as we reach the end of the first month of autumn!

Regards,

Clive, Grant and the Team at Canterbury Legal