Thanks for your essential journalism! I had a question about the IRD report on the 300 wealthy families of NZ. I've looked into it a bit and it seems that IRD's definition of economic income for these families includes unrealised capital gains. Can you confirm? If yes, then why are they doing that? We're not talking about…
Thanks for your essential journalism! I had a question about the IRD report on the 300 wealthy families of NZ. I've looked into it a bit and it seems that IRD's definition of economic income for these families includes unrealised capital gains. Can you confirm? If yes, then why are they doing that? We're not talking about taxing unrealised capital gains, it doesn't make any sense. What would happen if somebody pays taxes on unrealised capital gains but then ends up with a loss? Do they get tax credit?
Taxing unrealised capital gains was never on the cards, so why include it in the definition of economic income? Again, I don't understand why would any government do that - why would anybody invest if they had to pay part of their unrealised gains every year?
Thanks Raoul. Yes on the tax credit. Interesting question on realised vs unrealised. An assumption for the analysis. The profit is real. It can be done. It's what is done in other countries. We're exceptional.
Australia is planning a tax on unrealised gains for shares. Other countries effectively tax those gains on sale, or in an ongoing basis through wealth, land and inheritance taxes.
The NZ government already taxes unrealised capital gains on foreign investment funds, so there is a precedent for it. You pay tax on unrealised gains but don't get credits (as far as I am aware) for any losses.
OK, fair enough if other countries do it, but the CGT bill was supposed to be applicable to realised capital gains only, wasn't it? It just sounds like they're being very optimistic with their assumptions.
No, they don't. It's funny when you look at the countries that have no CGT, and you see you're in a list with the likes of Barbados, Bahrain, Bermuda you realise you are in the hall of shame. I'm all for a CGT and joining the league of sensible nations.
But few countries attempt to tax _unrealised_ capital gains, and it is completely unworkable. What Bernard is talking about could be more like a wealth tax, which Switzerland has, but that is a very low percentage levy against all of your assets. From .05% to 0.3%. When you start talking about taxing _unrealised_ cap gains as _income_ it's crazyville.
I think I'm starting to turn around on this. Imagine if instead of having to report on all of your unrealised gains, the institution that has the asset (like Sharesies if the asset is shares) does that for you, so you just get an invoice from IRD corresponding to the taxes on your share position every year. I mean in my case I wouldn't pay anything because I'm in the red, but realistically if you're investing less than say 100k, you wouldn't pay much in cap taxes tbh. The problem I think is the lack of tax credit if your unrealised gains become a realised loss...
You are correct, above a certain threshold. And it is a complete disincentive to making such investments. I think that's part of why it is done - keep NZ money in NZ.
I'm interested in this idea of 'unrealised gains' and why (or, by who) we've been convinced it is unworkable.
At my work, my income is taxed (PAYE) before it is 'realised' into my bank account. It is also taxed at my annual salary's marginal rate (if I lose my job mid-way through the year, I have to wait until the end of the year to recover any excess tax I might have paid). That's a pretty shit deal if you ask me... No wonder Mark Zuckerberg takes an annual salary (since 2013), of just $1!
We have decades of objective evidence that, beyond a certain level, wealth can be easily leveraged into 'spending money' (via tax-free equity loans etc), and managed wealth is essentially guaranteed to grow... It makes me wonder if all the worrying people are doing about unrealised gains is entirely ingenuous?
Wait you can't equate work income and capital gains, they're not the same thing. The amount you get from work depends strictly on the hours you do. The amount you get from capital depends a lot on luck, but also on timing. The same investment can be worth a lot or nothing depending on when you unwind it. I'm all on board for taxing income at the source - less hassle. I'm all on board for taxing capital gains when they're realised - fairer.
However, taxing unrealised capital gains seems a bit weird to me.
Do you have more info on how the wealthy manage to get loans based on their capital? Because if you get money through loans, you still have to pay monthly/yearly interest. I just think the logistics seem complicated and compound interest means you potentially offset your capital gains with the loans you take out.
Yep, to be fair, it's not intuitive. I think the best way to understand this is the very wealthy live in a different universe from me (and presumably you, given you're asking how this works).
Basically, the first thing to realise is the very rich don't manage their own money. They don't open their banking apps or balance their chequebooks. Other people do all this for them. And, those other people do it exceedingly creatively and well (because their own livelihood depends on it!). Which is all to say, historically, the wealth of the rich has well outpaced inflation for decades because they are fielding very different players than the rest of us (see: any wealth inequality chart of the last 50 years).
So, largely because of this, when they need money, the very wealthy go to the bank and say "I have $50m in shares, and want to buy a boat" and the bank manager says "sure, here's a $10m loan, secured against your shares, at an insanely-low interest rate for the rest of your life (P.S. Please Love Me)". And then, your wealth manager goes off and does their work, and your wealth grows at a rate higher than the bank interest rate and, boom, tax free 'income'!
And, if you think this is all theoretical, I'm not especially rich but I do have a house. And because I have a house, banks are very happy to give me decent credit so, for the last few years, I've put thousands into various '0% balance transfer' credit card offers. I paid the minimum each month, and never a cent in interest, effectively arbitraging 'income' to pay off my mortgage faster (*Banks hate this one weird trick!!*)... I'm not some unique financial genius or a wealth manager, but it was easy, untaxable, money.
Now, imagine what sorts of tricks and offers are available to a professional wealth manager with $300m-odd to work with (...and don't even get me started on the huge industries set up solely to revalue and churn-resell assets to build up equity so the wealthy can borrow more against them)
I'm not saying it isn't an uphill battle trying to convince people about this stuff. At face value, it fundamentally does sound unfair to tax 'unrealised' gains, until you get a glimpse into the 'wealth-dimension' where money just works very differently.
If you're interested in this stuff, I should warn you it's a rabbit hole, but for an alternative approach I'd highly recommend starting at https://pudding.cool/2022/12/yard-sale/
Thanks for the link that was very interesting. So you're saying you've been getting interest-free money from the same bank you have your mortgage with, to repay that mortgage?? That sounds a bit crazy... Why would a bank do that?
Haha, yes, why indeed! A glimpse into the 'wealth dimension' I guess? ;-)
To be fair, the trick to get the most from it is to shift from one bank's credit card offer to the next: Offers are drying up a bit now unfortunately - https://www.moneyhub.co.nz/balance-transfer-credit-cards.html - and obviously it's not something I'd recommend to anyone without very good financial discipline!
But basically when you get near the end of your 0% period, you apply for a new balance transfer offer from another bank, pay off any remaining balance, and max out the new card - they rarely asked for proof of the actual outstanding balance of the old card...All they care about is whether you can service the debt with them - i.e. you have some 'wealth' to secure it against.
Kia Ora Bernard,
Thanks for your essential journalism! I had a question about the IRD report on the 300 wealthy families of NZ. I've looked into it a bit and it seems that IRD's definition of economic income for these families includes unrealised capital gains. Can you confirm? If yes, then why are they doing that? We're not talking about taxing unrealised capital gains, it doesn't make any sense. What would happen if somebody pays taxes on unrealised capital gains but then ends up with a loss? Do they get tax credit?
Taxing unrealised capital gains was never on the cards, so why include it in the definition of economic income? Again, I don't understand why would any government do that - why would anybody invest if they had to pay part of their unrealised gains every year?
Thanks Raoul. Yes on the tax credit. Interesting question on realised vs unrealised. An assumption for the analysis. The profit is real. It can be done. It's what is done in other countries. We're exceptional.
No, no no this is not done in other countries. Please name them.
Australia is planning a tax on unrealised gains for shares. Other countries effectively tax those gains on sale, or in an ongoing basis through wealth, land and inheritance taxes.
The NZ government already taxes unrealised capital gains on foreign investment funds, so there is a precedent for it. You pay tax on unrealised gains but don't get credits (as far as I am aware) for any losses.
OK, fair enough if other countries do it, but the CGT bill was supposed to be applicable to realised capital gains only, wasn't it? It just sounds like they're being very optimistic with their assumptions.
No, they don't. It's funny when you look at the countries that have no CGT, and you see you're in a list with the likes of Barbados, Bahrain, Bermuda you realise you are in the hall of shame. I'm all for a CGT and joining the league of sensible nations.
But few countries attempt to tax _unrealised_ capital gains, and it is completely unworkable. What Bernard is talking about could be more like a wealth tax, which Switzerland has, but that is a very low percentage levy against all of your assets. From .05% to 0.3%. When you start talking about taxing _unrealised_ cap gains as _income_ it's crazyville.
I think I'm starting to turn around on this. Imagine if instead of having to report on all of your unrealised gains, the institution that has the asset (like Sharesies if the asset is shares) does that for you, so you just get an invoice from IRD corresponding to the taxes on your share position every year. I mean in my case I wouldn't pay anything because I'm in the red, but realistically if you're investing less than say 100k, you wouldn't pay much in cap taxes tbh. The problem I think is the lack of tax credit if your unrealised gains become a realised loss...
Exactly. In this case it's socialise the gains, privatise the losses.
You are correct, above a certain threshold. And it is a complete disincentive to making such investments. I think that's part of why it is done - keep NZ money in NZ.
I'm interested in this idea of 'unrealised gains' and why (or, by who) we've been convinced it is unworkable.
At my work, my income is taxed (PAYE) before it is 'realised' into my bank account. It is also taxed at my annual salary's marginal rate (if I lose my job mid-way through the year, I have to wait until the end of the year to recover any excess tax I might have paid). That's a pretty shit deal if you ask me... No wonder Mark Zuckerberg takes an annual salary (since 2013), of just $1!
We have decades of objective evidence that, beyond a certain level, wealth can be easily leveraged into 'spending money' (via tax-free equity loans etc), and managed wealth is essentially guaranteed to grow... It makes me wonder if all the worrying people are doing about unrealised gains is entirely ingenuous?
Wait you can't equate work income and capital gains, they're not the same thing. The amount you get from work depends strictly on the hours you do. The amount you get from capital depends a lot on luck, but also on timing. The same investment can be worth a lot or nothing depending on when you unwind it. I'm all on board for taxing income at the source - less hassle. I'm all on board for taxing capital gains when they're realised - fairer.
However, taxing unrealised capital gains seems a bit weird to me.
Do you have more info on how the wealthy manage to get loans based on their capital? Because if you get money through loans, you still have to pay monthly/yearly interest. I just think the logistics seem complicated and compound interest means you potentially offset your capital gains with the loans you take out.
How does that work, concretely?
Yep, to be fair, it's not intuitive. I think the best way to understand this is the very wealthy live in a different universe from me (and presumably you, given you're asking how this works).
Basically, the first thing to realise is the very rich don't manage their own money. They don't open their banking apps or balance their chequebooks. Other people do all this for them. And, those other people do it exceedingly creatively and well (because their own livelihood depends on it!). Which is all to say, historically, the wealth of the rich has well outpaced inflation for decades because they are fielding very different players than the rest of us (see: any wealth inequality chart of the last 50 years).
So, largely because of this, when they need money, the very wealthy go to the bank and say "I have $50m in shares, and want to buy a boat" and the bank manager says "sure, here's a $10m loan, secured against your shares, at an insanely-low interest rate for the rest of your life (P.S. Please Love Me)". And then, your wealth manager goes off and does their work, and your wealth grows at a rate higher than the bank interest rate and, boom, tax free 'income'!
And, if you think this is all theoretical, I'm not especially rich but I do have a house. And because I have a house, banks are very happy to give me decent credit so, for the last few years, I've put thousands into various '0% balance transfer' credit card offers. I paid the minimum each month, and never a cent in interest, effectively arbitraging 'income' to pay off my mortgage faster (*Banks hate this one weird trick!!*)... I'm not some unique financial genius or a wealth manager, but it was easy, untaxable, money.
Now, imagine what sorts of tricks and offers are available to a professional wealth manager with $300m-odd to work with (...and don't even get me started on the huge industries set up solely to revalue and churn-resell assets to build up equity so the wealthy can borrow more against them)
I'm not saying it isn't an uphill battle trying to convince people about this stuff. At face value, it fundamentally does sound unfair to tax 'unrealised' gains, until you get a glimpse into the 'wealth-dimension' where money just works very differently.
If you're interested in this stuff, I should warn you it's a rabbit hole, but for an alternative approach I'd highly recommend starting at https://pudding.cool/2022/12/yard-sale/
Thanks for the link that was very interesting. So you're saying you've been getting interest-free money from the same bank you have your mortgage with, to repay that mortgage?? That sounds a bit crazy... Why would a bank do that?
Haha, yes, why indeed! A glimpse into the 'wealth dimension' I guess? ;-)
To be fair, the trick to get the most from it is to shift from one bank's credit card offer to the next: Offers are drying up a bit now unfortunately - https://www.moneyhub.co.nz/balance-transfer-credit-cards.html - and obviously it's not something I'd recommend to anyone without very good financial discipline!
But basically when you get near the end of your 0% period, you apply for a new balance transfer offer from another bank, pay off any remaining balance, and max out the new card - they rarely asked for proof of the actual outstanding balance of the old card...All they care about is whether you can service the debt with them - i.e. you have some 'wealth' to secure it against.
Haha in French we have a saying "on ne prête qu'aux riches" which translates to "one only lends to rich people", which is quite fitting here 😂