Capital Gains Tax – How Might It Impact You?
UPDATE: Since this article was written the New Zealand Government on the 17th of April 2019 announced the rejection of the Capital Gain’s Tax (CGT)
The tax working group in New Zealand has released its findings and a capital gains tax appears to have some political will behind its implementation. It is not in place yet, however the process is underway.
The government will outline its proposal for implementation in April. The tax, if and when implemented, starts 1 April 2021.
At the risk of sounding old and cynical, this sounds like a real sweetener (the delay until April 2021) for the everyday Kiwi worried about a capital gains tax.
As an adviser, strategist and investor, I know that it is the long-term outcome that really matters. The short-term sweetener (it is me saying that is what it is) might feel good now but will not make much difference longer term. You have only got to look at The Rule of 72, which highlights the impact of compounding, to see that you will pay the most tax in the long run, when you sell (if and when you do sell).
It is not so bad after all
At the risk of oversimplifying it, for those who invest long term, whether it be their own business, direct shares and/or property, the capital gains tax that you will pay might be more on your Kiwisaver scheme than on your directly held investments.
Let’s face it, if you hold those assets long term, then you are not going to pay capital gains tax along the way. Tax on Kiwisaver is set to be levied as an unrealised tax along the way. Although you will not actually get a tax bill, your fund manager will and believe me, it is no different than you getting that tax bill yourself.
Worse still, the tax that needs to be paid by the managed fund needs to come out of that fund, which reduces the investable funds available to compound and grow long term. That is progressive damage …
Is a change of mindset required?
I do like to go on about mindset. That is because it is what tends to separate out those who are independently wealthy from those who are not.
There are other factors, however, mindset is a key factor that in my experience really is a big one.
I am massively generalising; however, Kiwis tend to exist in a world of work hard, save hard and then cash it all up when you retire and live off the interest. The reality of this idea is that the world is not that simple. I will not go on about it but let’s just say that this approach is one option but, in my experience, not the best plan by far.
Better off to maintain growth on one’s assets after so-called ‘retirement’ so that the amount of income we can draw down or have access to is much greater.
Here is the change in mindset: what about the idea that you do not ever sell?
Let’s face it, in terms of financial independence (call it retirement planning if you like), the amount of your net worth is important but so too is the level of income that you receive (they are different things).
The discussion around this is beyond this brief paper on capital gains tax, however what about that idea? What about holding on to our assets for most if not all of our ‘retirement’ and passing it on to the next generation?
We get the use of that income forever and then the next generation kicks off with a really good start to life.
I know, things are not always that simple. The academics are already pulling my idea apart but what do you reckon?
What might capital tax mean to you?
As I pointed out, under the current proposed regime, those who hold assets long term actually are not paying the capital gains tax until they sell. Sure, the academics will argue that by holding it long term, the asset will grow much bigger and therefore you will pay much more tax in the long run, but there is also the question of the practicalities of what income you and I will want throughout so called “retirement”.
Just to simplify things, even if I do pay much more tax, should I decide to sell my asset longer term, the chances are the income I will receive along the way may be much greater regardless.
So, who is worried about the tax anyway? If I am passing it on to the next generation, under current proposed capital gains tax rules, is there is a capital gains tax to pay?
Is it time to get our thinking out of the 1980s?
I remember back in the day, starting off as a financial adviser, that many people took the view that because they paid tax all their lives, that the government owed them – they were entitled. We all know how well that plan worked (!).
That said, the pension scheme for Kiwis does provide a solid base and makes sure that no one is left out on the streets.
Mind you, would you be happy living off the government pension only?
I am not saying that you need to subscribe to anyone else’s philosophy or do what someone else does. It comes down to what is practical for you but more than that, it comes down to what is financially safe and secure for you and those you care about.
Not saving money so that we do not pay too much tax truly does sound silly. Likewise, not accumulating assets just in case we pay capital gains tax … well, what do you think?
How might capital gains tax impact on you?
Here are some simple examples that I thought you might find useful:
Here are a couple of examples the tax working group has provided of how it could work: