Forum Archive Index - February 2002

["Richard Hooper" <hoop@ihug.co.nz>]

Oh Dear ....thats all we need, a politican trying to grow a brain.

I will give Cullen some creditibilty here by saying that this could be a
kite flying exercise.

What worries me is the socialist thinking here ...after they tap the rich
and makes everyone poorer, it is easier to pass a wealth tax ,because the
majority will assume it wont effect them as they perceive that they are now
poorer.  hmmmmmmm..
Hoop

----- Original Message -----
From: <tennyson@caverock.net.nz>
To: <sharechat@sharechat.co.nz>
Sent: Saturday, February 23, 2002 7:34 AM
Subject: [sharechat] Cullen to Introduce Wealth Tax - Confirmed


>
>
> Larry asked for comments on Cullen's speech today.  I
> think the headline for this post more or less sums it up.
>
> >
> >-Cullen
> >
> >The Review's preferred solution is that investment in
> >listed shares and securities be taxed at a standard
> >risk-free rate of return, no matter the country of
> >investment.
> >
> >I am interested in this idea because it has the
> >potential to make the relevant tax rules simpler, fairer
> >and more effective. I hope to be in a position to set
> >out in some detail the likely direction the government
> >will take on these issues in the upcoming budget.
> >
> >
>
> Now if you go to the treasury website you get a more
> detailed run down on this
>
> http://www.treasury.govt.nz/taxreview2001/finalreport/ove
> rview3.html
>
> And a break down of the Risk Free Return Method (RFRM)
> formula
>
>
> Net asset value at the start of the year
>                   x
> Statutory risk-free real rate of return
>                   x
>         The investor's tax rate
>
>
> I can't see any other way of interpreting what Cullen is
> saying except to say he is introducing a wealth tax.  It
> is possible that this sort of tax will not make much
> difference to funds management companies.  They have a
> broad spread of funds which means that returns will
> converge towards the 'notional rate'.  They also have
> sufficient size to be able to liquidate their positions
> for tax purposes with relative ease.
>
> For the small investor however, this RFRM will be a
> disaster for any overseas investments they hold, and here
> is why.
>
> Many overseas companies have very low, sometimes zero
> dividend yields.  Under the above scheme they will have
> to pay tax at a 'notional rate' highly likely to be above
> any cash income they receive.  So in order to pay their
> tax, small investors will have to sell down part of their
> investment each year.  For most investors this will be
> impossible as the minimum marketable parcel requirements
> overseas are much larger than New Zealand.
>
> A second problem is that shares do not always go up in
> value, often they go down.   Under this scheme, share
> investors will be required to pay money on their past
> wealth, based on a notional return they might have
> earned, even if their shares have subsequently crashed in
> value.  In other words it is possible for shareholders to
> left with a large tax bill with no assets to sell with
> which to pay it.   Those 80% of 'day traders' who end up
> not making money please take note!
>
> A third problem for this method is that it would become
> impossible to calculate one's tax, as the tax rate
> becomes an implicit, not an explicit variable.  For those
> that are a bit rusty on the maths this means:
>
> Old Situation:
>
> 1/ Calculate Income
> 2/ Determine Tax Rate
>
> New Situation
>
> 1/ Calculate Wealth
> 2/ use Wealth to work out notional income
> 3/ Determine Tax Rate on notional income
> 4/ Check reduction in Wealth
> 5/ Use Wealth to work out notional income
> 6/ Determine Tax Rate on notional income
> 7/ etc. etc.
>
> In other words it will be impossible to calculate your
> wealth or your tax rate in any simple way, as an increase
> in one means an increase in the other and vica versa.
> Did someone say 'simpler'?
>
> A fourth problem is that overseas wealth is highly
> subject to exchange rate fluctuation, which is
> particularly relevant to a small country currency such as
> ours.   This means, for instance that you could
> prepurchase a holiday overseas and find yourself with a
> massive tax bill because the NZ currency suddenly
> depreciates.  Of course the costs in the country you were
> planning to visit have not gone down, so any increase in
> 'wealth' which you are being taxed on, is illusory.
>
> To summarize, this coming tax law change assumes that any
> notional increase in wealth, (which bears no connection
> to any actual increase in wealth remember) will be
> accompanied by an accompanying ability to pay it.  This
> is so obviously false, that I find it astonishing that
> any principle so basically flawed could ever make it past
> the discussion stage let alone rearing its ugly head in
> the upcoming budget.  Can anything be done to stop this?
>
> SNOOPY
>
>
>
>
>
>
>
>
>
>
> ---------------------------------
> Message sent by Snoopy
> e-mail  tennyson@caverock.net.nz
> on Pegasus Mail version 2.55
> ----------------------------------
> "Dogs have big tongues, so you can bet they don't
> bite them by accident"
>
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