An article in the New Zealand Herald today outlines a couples' renovation. They've bared their soal in terms of the budget and that they'll be selling the place - in a national paper. So, you'd have to conclude that they're going to pay capital gains on this project, or will they? It looks like a classic do-up to sell project, but they don't say that. They sold their previous family home to buy this one and they spent $200,000 to renovate it. In the article, Rachel talks about the figures having to stack up - she talks about the resale value. I'd conclude, they always intended to flip it for gain. But, it's the family home - and under Labour's proposed Capital Gains Tax, the family home will be exempt. They've lived in it for more than a few months - yep, they're exempt. But, she's virtually advertising the place for sale by the end of the article.
Now, if they were asked to pay Capital Gains Tax, it would be only fair that the cost of renovations counts towards the expense of gaining any capital to be made at sale - thus the capital gain should be calculated to be only the profit (the amount left over after the expenses: purchase price, maintenance costs, lawyers and real estate agents fees, bank interest on the mortgage, rates, insurance and renovation and repair costs are all deducted.) That's only fair - maintaining a home and improving a home costs.
Tuesday, July 19, 2011
Friday, July 15, 2011
The Truth Behind Labour's Capital Gains Tax Grab
Labour's Capital Gains Tax proposal is, as they admit, a tax grab. It's pitched as if it's a tax that will only affect a small percentage of rich people. It's pitched in a way, that implies there is no CGT now, which is not true. So who are they targeting? People harbouring resentment towards the 'rich'? People feeling hard done by and ripped off by the rich? They are also relying on people being fairly financially illiterate - well that's a lot of people. Even some 'rich' people are financially illiterate - they think they know what to do with their money, but look at how many people invest in managed funds and Kiwisaver.
How we pay CGT now
Let's say I work and work and climb the employment ladder until one day, lucky me, I start earning more money a week than I need to spend. Finally, I have some disposable income. Choices are: spend it on having fun or crap for the house, move up to a nicer lifestyle thus increasing my weekly outgoings so I have no disposable income each week; or, I could save it in the bank, where, after bank fees, tax on interest and inflation, I'll be lucky if it holds it's value. (Note: interest earned on money in the bank is taxed at the highest tax rate possible, your personal income tax rate).
The best thing to do with my disposable income is to buy assets - things that will actually appreciate in value (capital gain) or better yet earn money somehow (that's cashflow). There are a range of assets: property, shares, bonds, collectables like art or antiques, businesses...
Let's say I buy some shares in Air NZ. At the moment, I have to decide whether the shares are for my long-term savings portfolio (i.e. for retirement) or for trading. Trading means I'm going to watch the market and sell the shares when they increase in value - i.e. I'm going for capital gain.
The Air NZ shares in my long-term savings portfolio are not taxed. They just sit there long-term. Every now and then though, to balance my portfolio, I may sell some. Other things could happen, like a company gets taken over and the shareholders are paid out. I wouldn't pay tax on any capital gain, because that was not why I bought the shares in the first place. Labour is, if I've read it right, planning to tax any capital gains inadvertently earned via these occasional or unwelcome sales of shares.
The shares I bought for trading, for example, Genesis Research and Development at $2.60 are a purely speculative bet. Yep, it's like gambling. They looked good, were on track to develop a treatment for psoriasis. If they had, then they might have done well and the share value might have increased, at which point I'd sell. Any gains would be factored in to my annual income and taxed at the highest rate, i.e. personal tax rate (less the costs of buying and selling the shares).
Take home message: We already pay tax on capital gains from assets bought and sold for the purpose of making money. I don't like that, but that's the way it was.
We don't pay tax on money we convert into an asset of some kind that we then hold on to, that one day in the long distant future, we may have to sell to turn the asset back into money.
Labour says personal assets, like gold jewellery, will not be taxed. What about gold bars? Silver ignots? What about my Robyn Kahukiwa painting? And, the family home? The family home is going to be exempt. That might be because for many many people, the family home is not an asset, it's a liability! More on that next post.
How we pay CGT now
Let's say I work and work and climb the employment ladder until one day, lucky me, I start earning more money a week than I need to spend. Finally, I have some disposable income. Choices are: spend it on having fun or crap for the house, move up to a nicer lifestyle thus increasing my weekly outgoings so I have no disposable income each week; or, I could save it in the bank, where, after bank fees, tax on interest and inflation, I'll be lucky if it holds it's value. (Note: interest earned on money in the bank is taxed at the highest tax rate possible, your personal income tax rate).
The best thing to do with my disposable income is to buy assets - things that will actually appreciate in value (capital gain) or better yet earn money somehow (that's cashflow). There are a range of assets: property, shares, bonds, collectables like art or antiques, businesses...
Let's say I buy some shares in Air NZ. At the moment, I have to decide whether the shares are for my long-term savings portfolio (i.e. for retirement) or for trading. Trading means I'm going to watch the market and sell the shares when they increase in value - i.e. I'm going for capital gain.
The Air NZ shares in my long-term savings portfolio are not taxed. They just sit there long-term. Every now and then though, to balance my portfolio, I may sell some. Other things could happen, like a company gets taken over and the shareholders are paid out. I wouldn't pay tax on any capital gain, because that was not why I bought the shares in the first place. Labour is, if I've read it right, planning to tax any capital gains inadvertently earned via these occasional or unwelcome sales of shares.
The shares I bought for trading, for example, Genesis Research and Development at $2.60 are a purely speculative bet. Yep, it's like gambling. They looked good, were on track to develop a treatment for psoriasis. If they had, then they might have done well and the share value might have increased, at which point I'd sell. Any gains would be factored in to my annual income and taxed at the highest rate, i.e. personal tax rate (less the costs of buying and selling the shares).
Take home message: We already pay tax on capital gains from assets bought and sold for the purpose of making money. I don't like that, but that's the way it was.
We don't pay tax on money we convert into an asset of some kind that we then hold on to, that one day in the long distant future, we may have to sell to turn the asset back into money.
Labour says personal assets, like gold jewellery, will not be taxed. What about gold bars? Silver ignots? What about my Robyn Kahukiwa painting? And, the family home? The family home is going to be exempt. That might be because for many many people, the family home is not an asset, it's a liability! More on that next post.
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