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The Week in Tax: tax take holding up but trouble on the way? A realistic working from home allowance, Inland Revenue takes on libertarians, and we already have a defacto wealth tax 

The Week in Tax: tax take holding up but trouble on the way? A realistic working from home allowance, Inland Revenue takes on libertarians, and we already have a defacto wealth tax 

Late last week, I was one of the presenters at the Accountants and Tax Agents Institute of New Zealand's Spring Mini Conference. As you'd expect, the programme was dominated by the impact of Covid-19 and its implications for accountants and tax agents. It was an excellent mini conference and there were plenty of very useful insights from the presenters and also from the audience and participants. Here are a few of the highlights which stood out for me 

From what Chris Cuniffe of Tax Management New Zealand is seeing, outside of the very obviously hard hit sectors such as tourism and hospitality, business seems to be holding up well, judging by the tax take. During the first lockdown, the final tax payments for the year ended 31 March 2020 year were due on the 7th of May. Now, by that stage, Inland Revenue had made it clear that they were using new provisions to enable it to waive the application of use of money interest if tax was paid late. So Chris Cunniffe thought there would be a huge take-up of that opportunity.  

But in fact, what they saw about $2.8 billion of provisional tax was paid on the due date through the tax pools. According to Inland Revenue statistics, it has about $163 million of tax that would have been payable on the 7th of May under instalment. That is, the person contacted Inland Revenue saying “Hey, we’re not going to make this payment, can we arrange to pay it in instalments?” 

That $163 million represents about five per cent of the total tax payable on the due date. And that's actually really encouraging because it means businesses had the money, their profitability was relatively unaffected, and they were prepared to meet their liabilities. Given that the tax year end was 31st March, is what you would expect to see because the full impact of Covid-19 had not been felt by that date.  

For most businesses the first instalment of provisional tax for the current year to March 2021 was due on 28th August. And there was only about a five per cent fall in the tax paid comparing what was paid on in August 2020 with what was paid in the previous year. 

Remarkably, 55% of all depositors with TMNZ paid more tax this year, with only 42% paying less tax than the previous year. So that was actually really encouraging when you consider that the June quarter was when GDP fell 12.2%, the tax take holding up as well as it did seems to be an encouraging factor.  

Generally speaking, though, most people thought the real acid test for how businesses are tracking along will be the second instalment of provisional tax, which is due on the 15th of January. Which of course is terrible timing in the middle of a holiday period. So that will be interesting to see how well businesses have held up then.

Insolvency issues

Derek Ah Sam of insolvency practitioners Rogers Reidy thought the real wave of insolvencies hasn't really got underway yet. But what was intriguing to hear was that despite Inland Revenue’s Business Transformation programme, it seems that a fair number of companies going into liquidation still owe several years of PAYE and GST. And this is surprising to me because Inland Revenue systems really ought to be picking this up much, much sooner. We did used to see this quite a bit several years ago, but with Business Transformation, they're supposed to be across this much sooner and taking action earlier. If that is not happening, then there's something else going on at Inland Revenue that we don't know which the Minister of Revenue should be perhaps asking a few questions about.  

The other thing Derek noted is in relation to the question of commercial landlords who have not been required, as in Australia, to provide some form relief for their tenants. Actually, in Australia, I think there's some provisions preventing eviction notices being issued. What Derek is seeing is that commercial landlords are taking much harder line on tenants in arrears. And they seem to be particularly targeting food outlets that have already been hit hard by Covid-19 and probably long term are not sustainable. So it appears some landlords are going to apply pressure now and get rid of them. That seems to be something that's happening there. Again, we'll see more as the year goes on.

Wage subsidy ethics

Tristan Dean of Hayes Knight, then ran us through the professional ethics issues to be addressed when a client takes up a wage subsidy which they're either not entitled to or don't apply it as prescribed. That was highly relevant given the issue popped up in the second leaders debate on Wednesday night. And it provoked an interesting discussion around that which no doubt won’t be the last time we hear about that.

Home office safe haven

And finally, from the floor when we were discussing the question of home office allowances, the overwhelming reaction was that Inland Revenue safe haven of $15 per week was well short of the mark, with most people suggesting somewhere between $40 and $50 per week being much more realistic representation of the costs involved using the formulas available to people under the Income Tax Act.  

That's something that I've seen pop up in commentary or from some of the comments to articles when I've discussed this question. The present determination Inland Revenue issued was a temporary one. Maybe when a permanent one comes out we can get an increase of the available amount to say something closer to that $40 mark.

New pressure on crypo tax

Moving on, a couple of weeks back, I mentioned at Inland Revenue has issued up updated guidance on the taxation of cryptoassets. It now seems that it's decided to apply much more pressure on this industry and investors, because this week it emerged that it has been asking companies that deal with cryptoassets to hand over customer details.  

Now, as probably people are quite aware, the cryptocurrency and cryptoassets world is quite libertarian in its philosophy. So, this probably came as a huge shock to investors and the companies themselves that Inland Revenue not only could demand the information, but there was nothing they could do to stop Inland Revenue’s action.  

A couple of years back the information gathering powers of Inland Revenue contained in the Tax Administration Act 1994 were increased and new sections giving them wider powers of search and entry were given to them.  

Inland Revenue’s extensive powers are well known within tax and professional community. And pretty much our response is when a client asks, “Can they really do this?” is “Yes, you're just going to take your lumps on this”. And so, the cryptoassets community is not the first to find out just how extensive Inland Revenue powers are, and they won't be the last. And if they're feeling very unhappy about it, they're not alone in that.

I would think that this could work out quite profitably for Inland Revenue that if taxpayers have been thinking “Well, the web servers are offshore, we don't really need to comply with this as all takes place in the darker reaches of the Internet and outside the reach of Inland Revenue”. You're not. And other tax jurisdictions are also taking a close look at a cryptoassets. So you've been warned. It will be interesting to see what comes of this and how much revenue Inland Revenue raise as a result of their actions.

A wealth tax template

And finally, the Green Party's wealth tax has been in the news again as we get closer to the election date. There's been a reigniting of the whole question of the taxation of capital. 

Without getting into too much detail, one of the arguments advanced against a wealth tax is that it would be complicated to implement. And undoubtedly, there are quite a lot of complexities to be addressed, most notably around valuations, but it's not impossible. In fact, we already have a de facto wealth tax in operation. And we've had it since April 2007 when the revamped Foreign Investor Fund regime with the fair dividend rate was introduced.  

For those who are not familiar with the Foreign Investor Fund regime it applies to overseas stocks and shares, (but not bonds because they are subject to a different regime).  Basically, taxpayers are assessed on the lesser of the notional gain over the tax year, together with the actual receipts from sales and dividends in that year, or the 5% fair dividend rate applied to the value of the investments at the start of the income year. For KiwiSaver funds and companies, the 5% fair dividend rate is automatically applied. They don't have the alternative of the actual gains and losses during the year. 

Now, as you might expect, I have to explain the foreign investment fund rules to overseas clients. And they've conceptually struggled with it, because it's not a capital gains tax. But once it's and reframed in the idea of a flat wealth tax, they get it very quickly. And that's basically how I explain it to overseas investors. Effectively the 5% fair dividend rate is a wealth tax. And if your tax rate is 33%, you're talking about a 1.67% effective wealth tax.  

Now, the foreign investment fund regime is easy to apply where you have publicly listed securities, but the regime has a whole set of rules that people normally don't see which relate to unlisted securities. So much of the work that you'd expect to see when you're addressing a wealth tax has actually already been done and is part of the Income Tax Act. 

So if you were introducing a wealth tax your starting point would be to expand the Foreign Investment Fund rules across more asset classes and tweak the fair dividend rate to whatever rate of tax you wish to levy on the assets.  

In short, it's complicated, but not quite as insurmountable as people make out. And of course, when you hear people saying, “Oh, it's too complicated”, a cynic like myself is always wondering just how much they're arguing that out of self-interest.  

And on that bombshell, that's it for this week. I'm Terry Baucher. And you can find his podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Hei konei ra!


This article is a transcript of the October 2, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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54 Comments

Terry thanks for having more on the evils of the FIF regime. I think you would have protests in the streets if they applied the regime to houses!
What about all those who paid it via kiwisaver who are in foreign equities on 1 April 2020 and made a loss to 31 March and are being tax again as the funds recover?
Or those who crystallized the losses by changing to low risk funds while the market recovered. Cant get the tax back and gains were lost.
The tax working group did recommend a reduction in the FDR to 3% but it fell on deaf ears.
Its the stealth tax in NZ that most people have no idea they are paying!
Tax on an unrealised basis is a disgrace. It robs kiwisavers of the benefits of compounding.
I would much prefer CGT.

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Hiya OC, not sure about a CGT. I'd hate to pay the top marginal rate on Equities gains. 3% maybe would be bearable I guess on realised gains less compounded inflation.

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Hello Hook. If you let the S&P 500 compound over say 15 to 20 years and only pay tax on the distributions you are so far ahead its not funny.
I have done the numbers. The frictional costs of 1.65% annual wealth tax really kills the result.
If you are on reasonable money and drip feed from say age 21 you are about 150k less at retirement than if you just paid the CGT at the end.
Worth thinking about!

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Yeah, I guess I'm just anti CGT. Seems to me a tax I pay on someone else's desire to have what I've got. To be honest I have no idea what the answer is

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Yes I know the feeling....the FIF regime and FDR and CV methods bleed me.
When I lived offshore the FIF regime in NZ only applied to investments outside the grey list countries. Coming home it had been expanded.
I am trying to resist just sticking cash in property and collecting tax free gains over time but I may just have too...

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May as well just join the party mate.. 8% tax free compounded ain't bad. I'm sick of all the bleeding hearts bleating about tax free gains - they're only whingeing cos they ain't getting any.. typical NZ way

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I am on trade me now looking.....haha

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Nice.

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I am not going to rent them though. Just buy and hold. Once I get possession get a good Alarm installed and send a Gardner around once a month. So my yield maybe a little lower. What do you think?

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A worthy idea - fix some timers to the light circuits too. Yield might be lower but significantly less headaches. If it was me I'd buy a few English Mastiffs as "security"(two per property cos they like company), open the doors and let them set the motion switches off, tied to the light circuits - keep the neighbors guessing. I'm not a rental owner so not sure how the rates, maintenance and security costs would stack up. 8% tax free is quite alluring tho

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I really didn't want to be one of those vacant property owners in Auckland but Cindy, Robertson and Orr are forcing me into it by over taxing via unrealised amount/gains on foreign equities and creating an artificial interest rate so I get zero on bank deposits with no guarantee.
The only caveat is that I will stay liquid until after the election as if we have to have a two headed monster government and wealth taxes I am out of here. I would rather just take my family overseas and spend the equivalent of the wealth tax each year than pay it.

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Yeah, I'm certainly hearing you. I'd do the same tbh but I like my block and the missus wouldn't be able to convince her parents to follow. I'd like to wrap everything into a Trust but I think they're up for some scrutiny soon. Probably just keep it in a Company and see what happens. To be fair, the rest of the world is a bit of a basket case anyway - maybe go to Raro and just kick back in the sun, spend everything and come back and live on Cindy's tab?

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Fortunately between my wife and I we have collected passports and have 3 options one being Australia.
I reckon if its brought in they will have some sort of exit wealth tax at the border as everyone I know that will be impacted is making some form of plan to get out even if its just to Queensland to not get caught up in it.
That is one positive of cash and stocks you vote with your feet and just leave.....

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In the same boat mate with Australian citizenship keeping a close eye on options over the ditch.

Needless to say the French experiment resulting in capital flight had dire consequences on that country yet the lesson is completely lost on Cindy and Shaw.

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You mean like the desire that as i pay personal tax on my labour at a higher rate so others can make tax free income on CG?

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How's the CG going on that farm of your's RC?
You pay tax on your labour because you provided an untaxed input - your time. People who gain a CG benefit have used after tax money (initially) to purchase the asset, they are also rewarded for the risk rate. As an employee there is no initial risk - you go to work and you get paid. Percentage wise there is a far lower risk of going to work and not being paid than there is of a negative return on most investments - housing or otherwise

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Why should the amount of tax you pay depend on the amount of risk you take on, though? We don't do that with income tax - people in risky jobs like forestry and mining don't pay less income tax than people in safer jobs.
Also, time is not the only input from a worker - skill is too. People pay to acquire skills through education using after tax money, but they don't get to pay less income tax because of it.
I think its pretty simple really - how you make your money shouldn't matter, on the face of it, when it comes to tax. So the burden is on those who oppose the CGT to show why the money people make on property is so different from other types of income that it deserves special tax treatment- and 'it involves risk' and 'it took an input of already taxed money's is true of some income earned from work too, so those explanations cant be it.

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As a young person I would not like to have to deal with a cgt on investments when all those of earlier generations have got off scot free. They collected the massive windfalls over the last 30 to 50 years and wont pay a cent in tax on those gains even if a cgt were brought in tomorrow. Which it wont as both leaders JA and JC are opposed to it.

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Those massive windfalls have driven up mortgage repayments (only mitigated by subsequent interest rate drops) making it harder for people to even get ahead, let alone start seriously investing or topping up their Kiwisaver. By the time/if I retire, I'll be lucky to own a house outright and have anything other than the bare minimum stashed away, after a career in what used to be a stable and profitable middle-class profession, which was kind of the point of taking it up in the first place.

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HW2: Suggested advice to you is stop worrying about what others have it cabbages up the brain. Focus on working hard if you want your share of the wealth. Try working hard 70 to 100 hours a week for as long as you can and save and invest. Dump the I want it now mantra and others have it easier.

There are actually plenty of older people with nothing. No assets and no cash.

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Oreo, it's perfectly reasonable to be concerned about fairness when it comes to discussing tax settings. If the discussion were about what young people should do *given* the current tax settings, your advice might be relevant. But it's not - it's about what the tax settings *should* be. And in answering that question, it's important to think about what the effects of any change would be (who would benefit, who would lose, what kind of behaviour would the change incentivize, etc).

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Good thing paid overtime exists as an option for many or else this would be a completely fruitless approach to work for many. Oh, wait.

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Not a farm owner here sadly. All I have is my labour a skills, fully taxed.

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I agree 100%. Well said.
The only reason why I am sticking with overseas shares is that the long term returns I expect out of them, even including this shameful tax, tends to outpace any other investment class, including property. At least this is what I have experienced in the last 30 years.
But if this ridiculous tax has to stay, then at the very least it should also be equally applied to residential property, excluding first home owner-occupied property.

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The Greens wealth tax would smash businesses and farmers...
Only Top will tax unproductive speculation and not productive business.

https://www.top.org.nz/property_tax

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Are you sure about that???

Geoff states that “TOP’s proposal is that all significant assets (in practice it would be mainly property) should pay as much tax as a bank deposit.“

https://www.interest.co.nz/opinion/107224/geoff-simmons-makes-case-why-…

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If the asset is being used productively and generating a return that income is already taxed so would pay no additional tax.
So a tenanted rental or productive farm would pay no additional tax.
However an empty property in Auckland for example would pay an asset tax.

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Factually incorrect.
One of a million examples - An avocado grower earns no income for a number years due to drought, yet they still receive a tax bill for those years based on the value of their orchard equipment, land, trees etc.

Moreover, TOP propose to tax either actual income or imputed income, whichever is GREATER.

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Would be nice to have some significantly polling - innovative tax and productivity parties to vote for.

Other than the two same-same but different-different Banker's parties, incoherently juicing immigration and asset price parties.

Maybe one day... we won't repeat the same thing, looking for different and better results.

It starts with one vote - please readers, take some time to explore the policy space here especially what TOP has put on the table - compare and contrast.

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"Inland Revenue has issued up updated guidance on the taxation of cryptoassets. It now seems that it's decided to apply much more pressure on this industry and investors"

This is interesting the higher ups must be worried that the RBNZ's LSAP is eroding faith in our fiat currancy. Going on the attack of any "alternative" currencies. Good luck with that.

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Haha.. donny11 I don't think IRD and "luck"necessarily belong in the same statement. Granted it will be interesting how this latest directive pans out. The biggest thing I see is the ability to compel the divulgence of investor details, maybe a front for AML investigations?? Who knows.

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Two Questions

Of the top 100 companies in NZ
1. How many actually pay the legislated rate of company tax of 28 cents in the dollar
2. What is the actual yield as a group - is it 15%, 20%, more

Nearly 20% of the NZX50 companies pay zero tax

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1: They all pay 28% on profits
2: Depends what you call "yield". Dividend yield was, up till C19 about 5%pa after tax. Growth yield up to March might have been much the same. OC will have the figures no doubt. I made about 5% Divy yield and maybe 30% growth, give or take, but not all my holdings are NZX50

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1. Wrong again Hook
2. Tax yield

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1. They do pay 28% on profits. Unfortunately there is often little to no profit after paying licensing fees & IP fees to the foreign parent company. The foreign parent company is coincidentally always located in a country with a 0% business tax rate

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There are withholding taxes that are payable on such payments and these are limited at the rate in the DTA between NZ and where the money is being paid.
NZ has extensive transfer pricing legislation that can be utilized where such transactions are not arms length. Known as a transfer pricing adjustment. Every taxpayer like this has to have transfer pricing documentation that can be reviewed and challenged by the IRD. ATO is good at this. Some adjustments in Australia have been up to $600m.
So its not as simple as what you make out above.
Having said that the IRD from what I have seen has dumbed down its organization in recent years. If it was up to me I would invest in buying top architects of tax structured finance transactions etc and use them to attack such arrangements in NZ. The ATO have done this.

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1: try owning a business before you start blathering. All Businesses pay 28% tax on declared profits. Period!! A Company could pay out 100% of it's profits to it's shareholders who then pay tax at their marginal rate. NO NZX100 Company pays out 100% of their profits. As usual, you aren't actually involved in the world you're bleating about.
2: How can you calculate a "tax yield" when there is no "tax input"?

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iconoclast accounting profit and taxable are not the same thing. There are timing mismatches and some permanent differences.
Accounting has moved to mark to market on investments companies hold for example so Accounting bring's into income unrealized gains and losses.
Whereas the for Corporate tax this income maybe along ways down the track or possibly never. Hence the reason for deferred tax assets or liabilities shown in the accounts.
Life would be very simple if Accounting profit = Taxable profit but the tax professions would be out of business!
Re the ones paying zero tax they are not making taxable income then.

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As one simple illustration of difference between accounting profit and taxable profit, check out the differential depreciation rates on assets. Tax depreciation rates and regimes (which are in legislation and applied universally) often differ markedly from the accounting-policy regime (which are determined by the company). An asset might be depreciated at 33% diminishing value in the accounting book, but at 20% straight-line in the tax book.

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Have you checked recently
You might be surprised
Nothing to do with deferrement or timing diferences

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I am not sure what to say....
The difference between tax and accounting profits is the deferred tax liability or asset. Some items are timing. Some are permanent.
If you don't agree I would kindly say you do know what you are talking about......

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Are you equating unrealised increase in share price as investor yield?

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No

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Taxation of capital itself or the imaginary income it earns is an absurd idea that would be terrible for the country.

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By 'country' do you mean home owners/landlords? So not the whole country.

And remember that is your opinion and not a conclusive/factual statement, if you can see the difference it would be great if you communicated as such.i.e. you could wrtie 'in my biased opinion as a property investor, a capital gains tax would be very bad for me and my property investor mates' Think you could try that in the future?

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Perhaps in the future you could also state your bias - i.e. as a socialist purveyor of "investment bad - welfare good" you could provide a more balanced input into the argument that espouses all people should work for a living, not invest, not better themselves or their families and allow the Govt to pursue an ideologically driven definition of equality.
After all - why try to advance or improve your "lot" when the Govt will pull you back down to the lowest common denominator??

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I’m an investor Hook so you’ve got this wrong (that would technically make me a capitalist). I’d pay a capital gains tax and happy to do so.

My bias is a desire to make our economy and quality of life in NZ better for future NZ’ers as opposed to making myself as rich as possible at the expense of the quality of life of others. Is that an ok bias to have? Does the concept of having empathy for younger people and seeing the unfair distortions in our economic system make me a socialist in your view? If so I think you misunderstand me.

Want to have another go at the comment above?

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' And of course, when you hear people saying, “Oh, it's too complicated”, a cynic like myself is always wondering just how much they're arguing that out of self-interest. '

.. and a cynic in me is always wondering how much a tax accountant like Terry would be arguing in favor of complex tax regulations out of his professional self interest ; funny he should omit to mention that angle ..

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If you cant work the tax via a FIF calculator or spreadsheet your an idiot.
IRD use to have a calculator but is seems to be offline.
Even if you had 100 stocks you could work it all out in 30 minutes max.

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Indeed . This is why Terry's argument - which boils down to " FIF is a form of wealth tax .. therefore wealth tax is not hard .. " - is utter bollocks.

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Yes applying it to listed assets is easy. The market yells out a price at your each day for the stocks.
One of the biggest issues I have is its applied on one day being 1 April and at the FX rate on that day. Which can be vastly different the next and at the end of the month and so on. In fact as has been shown during covid the value the next day can be 30% less or more.
Applying this to values of non listed assets would be a nightmare.
The FIF implications for me personally are severe enough to warrant leaving the country. If we have any form of wealth tax I will have to leave....

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" If we have any form of wealth tax I will have to leave." - ditto .
"good riddance" I hear many say - but I do pay over 100K/year in income tax - and would be paying it elsewhere instead.

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Exactly. In addition zero on deposits in the bank and zero deposit guarantee. An out of control RBNZ thinking they are life savers for the debt fueled and a FIF tax on offshore equities and now a wealth tax to boot.
So yeah that's right any wealth tax and I am out of here. Its nice but lots of places are nice if you have money. Do I pay 100k wealth tax a year or go somewhere else and spend a 100k a year on whatever I want

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When there's a will there's a way.. a saying - but when self interest at stake, every where in this world. We shall see the same natural response to it - Do whatever it takes to delay any changes. Delay=Time=Money for...?

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