Analysis of the Capital Gains Tax

In the days since the Government Tax Working Group announced its recommendations, there has been a lot of discourse on them. Some of the discourse has been highly constructive, but there has also been a lot of ideological, emotionally driven commentary which has ignored the subject matter.

In light of that I have tried to write an analysis that is politically neutral.

It is important to note that New Zealanders buy property as an investment because it is one of the few ways of developing ones own wealth, without a significant tax measure applied. When I say an investment I am not talking about the family home, something everyone would like one of to be their own. Nor am I talking about the holiday home that might be a crib on land with a total value of $100,000. Rather I am mentioning properties that are going to be used in the rental market and have active tenants paying rent/board.

The idea of owning a rental property permits the owner to have control of the house and be paying off any mortgage that they might have without actually having to use their own funds.

The more properties of this nature that they own, the great the return per week from tenants. When the landlord exits the market and sells all of their properties, they are able to take all of the appreciation without having to pay taxation on it. Not surprising then that people with a bit of money to spare have flocked to the New Zealand market, invested in properties. However this has had a down side as in turn it has driven up property prices, which have forced a number of potential buyers from the market. In order to pay for those properties or gain appreciation on them, the matching rents have risen as well, which has put the squeeze on those with limited income means.

Contrast this with putting their savings into something like the share market or a long term deposit in a bank account, where it can be taxed. The share market obviously has a degree of volatility reflecting the trading environment of the day. How well the shares do depends on how will the company performs publicly – oil companies for example experience fluctuations in oil prices depending on the ability to supply the market, geopolitical conditions in the Middle East.

In terms of the long term deposit, the holding bank announce . However interest rates have stayed very low since the Global Financial Crisis, making it difficult to accrue significant interest. Some banks have interest rates so low that they are what I call acidic in that one actually starts paying the bank to have ones money invested in them, and the net outcome is a loss. The taxation of these methods of developing ones wealth poses a question:

If they get taxed, then why should the method of wealth development that is owning secondary properties  for the purpose of money gain not subject to tax?



Chinese economic crisis harms New Zealand

Long before China became a by word for foreign takeover, I had what I considered valid reasons for not trusting the economic relations between New Zealand and China. As the depth of the relations have grown my distrust and sense of unease has followed a largely linear climb.

I will be clear. I am not anti-Chinese. China is a proud and just sovereign nation that has contributed immensely to the world. It has challenges no other country in the world has in terms of sustainable population growth and managing its economy. It is an environmentally, socially and economically diverse nation. I have the pleasure of working with a nice temp from Coverstaff at the moment from Beijing.

However, it has a form of Government, that aside from being quite corrupt and about as transparent as mud, is in some respects waging economic imperialism on nations that it tries to befriend. It matters not what the nations name is – America, Nigeria, New Zealand, Iran – as the Chinese Government investment in these nations is all to support a pro-Beijing agenda. More problematically for these nations, the Chinse Government hoodwinks the governments of the individual nations into believing that they want to develop friendly ties. Political Beijing is only friendly when it suits them: the moment when N.G.O.’s raise questions about human rights abuses, or other questionable activity that is occurring, the Chinese Government gets grumpy.

But at the same time, I feel really sorry for the New Zealand investors in China and the Chinese investors here who came with honest intentions. Many of them just wanted somewhere that they thought was a relatively safe place to invest their monies and hope for a gain of some sort when they wanted their money back. They probably could not, despite contributing to it, have foreseen the massive wipe outs that have been wracking the sharemarkets both here and in China. The failure of corrective actions by banks in China and the Chinese Government to stem the outflow of capital. For a trader in the stock markets, the last few days watching a sea of red on their screens and a plunging red line like a barometer before a hurricane, must have been harrowing.

There are no worth winners in this economic wipe out. Whether by poor Government management over the last decade or so, or by virtue of the post-Global Financial Crisis world economy being in a worse state than we thought this is hurting both New Zealand and China. The latter will probably be subject to further abrupt readjustments as the effects of mitigatory measures take effect and the markets react.  New Zealand, drugged as it is on Christchurch rebuild insurance and dairy farming, however might watching the onset of some seriously stormy economic weather. That barometer might have setting up for another plunge.