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  1. #21
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    Quote Originally Posted by Aaron View Post
    It was never changed to 2 years it came in at 2 years and has changed to 5 years. The reason it came into being was probably vote grabbing as people became jealous of house flippers making heaps of untaxed dollars because existing rules were pretty weak.
    Ok, it was INTRODUCED at 2 years and CHANGED to 5 years. Being too critical are we? All the people I know that bought real estate in Auckland 10-20 years ago have made bank. Not a single i've known bought with the intention to sell within 2 or 5 years. Instead they kept buying more houses and if you ask me, owning NZ real estate has turned out a very good strategy for retirement planning. As i've pointed out, there's a huge difference in tax treatment between those that choose to invest with ie Kiwi Saver vs those that bought Auckland properties.

  2. #22
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    Quote Originally Posted by SBQ View Post
    Ok, it was INTRODUCED at 2 years and CHANGED to 5 years. Being too critical are we? All the people I know that bought real estate in Auckland 10-20 years ago have made bank. Not a single i've known bought with the intention to sell within 2 or 5 years. Instead they kept buying more houses and if you ask me, owning NZ real estate has turned out a very good strategy for retirement planning. As i've pointed out, there's a huge difference in tax treatment between those that choose to invest with ie Kiwi Saver vs those that bought Auckland properties.
    Just thought I would help you get your facts straight. Too critical?? I don't think so, I just thought I would help you with your facts. Don't disagree regarding housing having been a better bet than Kiwisaver though.

    To be fair I am not adding to the debate.
    Last edited by Aaron; 20-05-2019 at 11:19 AM.

  3. #23
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    Quote Originally Posted by SBQ View Post
    Most simply tell me straight out that from a tax point of view, you're better to invest in NZ real estate; after all, the key reason why the NZ gov't has been trying to attack rising house prices with CGT is to address the gross differences between investing in managed style funds or in real estate. BWT, none of the financial advisers informed about using IRD's website but instead, say they know a great 'tax consultant' I can be referred to.
    SBQ, I am not a property investor, unless you count owning your own house as an investment (I see it as somewhere to live). So if any property investor is reading this and I have got what I am about to say wrong please feel free to correct me. But I think that the tax treatment of NZ property investment verses NZ based managed funds has been largely evened out.

    1/ Claiming depreciation on building structures is largely not allowed. It used to be the case that a rental property owner could claim depreciation on a house that was clearly appreciating in value. While any such depreciation claimed would have to be paid back to the IRD if a rental house was eventually sold at a capital profit, the net effect for the landlord was to get an interest free loan consisting of the cumulative depreciation claimed. That rort is no longer available.

    2/ Landlords can still claim depreciation on certain fittings such as carpets and curtains. This leads to a lower tax bill, because net rental income is reduced. Some might argue that this is still a cashflow advantage to the landlord. But these fittings do wear out and will require real cash to replace. So I do not see this as a rort.

    3/ I think there are certain 'ring fence' rules as well where you can't offset losses on one rental property against gains on another. I am a bit vague on this so I would appreciate if any property investors can further explain. This restriction does not apply to share and managed fund investment where everything is managed on a portfolio basis.

    4/ Certain equity managed fund investments have a tax structure known as a PIE. That means shareholders are taxed at a maximum rate of 28%, a concession rate not available to own your own property investors.

    5/ All banks will loan more money against a property than a share investment portfolio. But this is only an advantage if the underlying investment does increase in value. I would argue that at current market prices, the outlook for equities is better than the outlook for property.

    6/ The loop hole where non-residents of NZ can buy property in NZ for tax free capital gain to be raked off overseas has been mostly closed (Australians and Singaporeans can still do it). This should see house prices in the future only increasing in value to the extent that NZ buyers increase their own underlying earning/borrowing ability. And that means headwinds for the property market in the medium term.

    SNOOPY
    Last edited by Snoopy; 21-05-2019 at 09:04 AM.
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  4. #24
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    Quote Originally Posted by SBQ View Post
    No where did I imply profits to be maintained in a company to buy out a losing company - where did that idea come from?
    The only legitimate way to reduce company tax is to reduce company profits. If a company that is making a profit buys a company that is losing money, that is a sure fire way to do this. There is no other way to legitimately 'manipulate' (sic) the tax system in NZ that I am aware of.

    Your alternative suggestion of a profitable company not paying dividends to shareholders will not reduce the tax liability either directly or indirectly to shareholders. At least it won't in NZ.

    Let me clarify to the elementary learner. If a company looks to do expansion, they require capital ($$) to deploy. What are the ways a company can raise $ ? Actually I can't believe i'm questioning this as every finance major (and thus every Financial Adviser) should know the main ways for raising capital.

    i) Borrowing direct from the bank or from external entities
    ii) Issuing Junk Bonds
    iii) Issuing more shares ; common or preferred, and
    iv) Retained Earnings or Shareholder's Equity.

    Which one poses the least impact on the state of the company's finances? Ding Ding! it would be the latter, using after tax profits it's retained in equity. But The Warehouse group didn't do that. No no, for decades they dished out a stupid 5 or 6% dividend policy while doing the worse, issuing more common shares.
    There is one other way to create new equity. Simply watch it materialise 'out of the ether' as evidenced by the increasing underlying value of existing assets on the books. This is what I have termed 'thin air capital' creation, and this is how Mercury Energy funds building their new power stations.... but I digress.

    Paying dividends is a way to create demand for shares from another pool of investors. That should help support a share price and enable new shares to be issued at a higher price (theoretically good for all existing shareholders), as there will be less dilution if/when new capital is raised.

    I won't defend the way WHS has been operated over recent years. I would say that I believe issuing junk bonds is actually the cheapest way to raise development capital, not utilising retaining earnings. But all this presupposes that the new capital raised will be wisely invested. And I think WHS shareholders of recent years can rightly question whether this has happened!

    SNOOPY
    Last edited by Snoopy; 22-05-2019 at 07:25 AM.
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  5. #25
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    Quote Originally Posted by Snoopy View Post
    The only legitimate way to reduce company tax is to reduce company profits. If a company that is making a profit buys a company that is losing money, that is a sure fire way to do this. There is no other way to legitimately 'manipulate' (sic) the tax system in NZ that I am aware of.

    Your alternative suggestion of a profitable company not paying dividends to shareholders will not reduce the tax liability either directly or indirectly to shareholders. At least it won't in NZ.



    There is one other way to create new equity. Simply watch it materialise 'out of the ether' as evidenced by the increasing underlying value of existing assets on the books. This is what I have termed 'thin air capital' creation, and this is how Mercury Energy funds building their new power stations.... but I digress.

    Paying dividends is a way to create demand for shares from another pool of investors. That should help support a share price and enable new shares to be issued at a higher price (theoretically good for all existing shareholders), as there will be less dilution when new capital is raised.

    I won't defend the way WHS has been operated over recent years. I would say that I believe issuing junk bonds is actually the cheapest way to raise development capital, not utilising retaining earnings. But all this presupposes that the new capital raised will be wisely invested. And I think WHS shareholders of recent years can rightly question whether this has happened!

    SNOOPY
    I don't get your logic at all but I respect that. We all have differences in view. I'll try to explain my logic.

    Where is the need for the company to reduce tax? What emphasis should a company reduce tax liability that i've mentioned? I did say that at the individual shareholder level, yes tax minimisation is #1 in any investment planning. If you're a share holder of a company that has that kind of logic ; then I would have to say that's not a very good company to own. It's not even remotely the concept of a company to exist if they have a motive to draw down expenses in all sorts of means just so they can lower their income. My view is simple, pay the going 30% corporate tax rate and KEEP THE $ in the 'shareholders equity' on the company's balance sheet. This will automatically raise the company's book value per share which is GREAT for the share holder. Never in the way of a 'growth' company should they have to rely on borrowing funds externally when they have enough after tax profits to be used to fund expansion.

    How is demand created for shareholders? Well certainly not by paying dividends that draw down the book value of the company. In finance class, we spend a lot of time around the balance sheet and looking at external controls such as when the company floats more shares. There is NOTHING worse to the existing shareholders than when a company practices 'share dilution'. It's just pure evil. But what i've seen happen in NZ listed companies all too often, is they try to blind their current shareholders by issuing a sweetener dividend while at the same time, float more shares. That's ok, i've never expected the avg NZ shareholder to understand the ins and outs of financial statements. All that fancy annual reports that talk a lot a waffle but no direct disclosure of EPS (Earnings Per Share) ; you have to dig and calculate that yourself for most listed NZ companies.

  6. #26
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    Quote Originally Posted by Snoopy View Post
    SBQ, I am not a property investor, unless you count owning your own house as an investment (I see it as somewhere to live). So if any property investor is reading this and I have got what I am about to say wrong please feel free to correct me. But I think that the tax treatment of NZ property investment verses NZ based managed funds has been largely evened out.

    .. points 1 -> 6

    SNOOPY
    Far from being an even playing field between share investment vs owning houses. I did not mention depreciation either so that should not be part of the mix. You didn't have to and the NZ gov't should of stopped this practice long long time ago. Just look at the 2 asset classes alone

    a) Share investment ie Kiwi Saver / PIE funds you name it. Paying 28% in tax vs

    b) A house in Auckland, which pays a very small portion of taxation of maybe 5%? [Rates + Insurance and any miscellaneous outgoings].

    You don't even have to work out the difference, just open your eyes and see why so many people in NZ have invested in real estate hand over fist than plunking down a million dollars in some Kiwi Saver fund. No one is going to put in $1M into a managed fund that is stung 28% tax on the gain every year. You know why? Because the banks themselves don't do it, but they would gladly lend on the real estate asset.

    Let's recap. Since when houses in NZ have lost value over a multi-decade time frame? After all when you choose a retirement strategy, it happens on a "long term" approach. So we're talking 20 or 30 years. The banks know better that houses don't lose value over a 20 or 30 year time frame.

    Not trying to say share investments is a bad thing. If I was living in the US or in Canada, then the table would be flipped around as they have extensive capital gains tax laws that makes real estate less attractive than owning equities.

    Don't take my word for it. I've spoken to many financial advisers in NZ. Years ago I asked about a managed fund in NZ that invested with the same view of Warren Buffet's Berkshire Hathaway. They thought hard and told me there was none, even in Australia that they knew off the top of their head. They went on to explain that it's not the focus of what NZ investors seeks ; again going back to, the preference is they seek dividend payment as the measure of the company's performance. FYI, BRKA share price in 1964 was $19 - go look at it what it's worth today.

  7. #27
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    Quote Originally Posted by SBQ View Post
    Far from being an even playing field between share investment vs owning houses. I did not mention depreciation either so that should not be part of the mix. You didn't have to and the NZ gov't should of stopped this practice long long time ago. Just look at the 2 asset classes alone

    a) Share investment ie Kiwi Saver / PIE funds you name it. Paying 28% in tax vs

    b) A house in Auckland, which pays a very small portion of taxation of maybe 5%? [Rates + Insurance and any miscellaneous outgoings].
    A retail property investor pays income tax at their marginal tax rate. This is never as low as 5%. If they are paying no income tax, this means their outgoings on the property exceed their rental income from that property. They aren't paying income tax because they aren't earning any net income!

    You don't even have to work out the difference, just open your eyes and see why so many people in NZ have invested in real estate hand over fist than plunking down a million dollars in some Kiwi Saver fund. No one is going to put in $1M into a managed fund that is stung 28% tax on the gain every year.
    No, they pay 28% on the income earned by that fund. Any capital gain is tax free, just like any capital gain in the revaluation of a rental property is tax free.

    You know why? Because the banks themselves don't do it, but they would gladly lend on the real estate asset.
    Banks are prepared to lend more on property, because there are government mandated rules that allow loans on property to have a lower risk weighting factor when evaluating the creditworthiness and robustness of a bank loan portfolio. For that reason, you shouldn't use the leverage you can obtain on any investment as representing the future earnings you might expect from that investment going forwards.

    Let's recap. Since when houses in NZ have lost value over a multi-decade time frame?
    Ask anyone who owned a house in certain suburbs along the Avon river after the Christchurch earthquakes. The houses and the underlying land was destroyed for living purposes. Worthless, very likely, for decades.

    After all when you choose a retirement strategy, it happens on a "long term" approach. So we're talking 20 or 30 years. The banks know better that houses don't lose value over a 20 or 30 year time frame.
    Ever heard of a mortgagee sale?

    The problem for retail property investors is not the value of their property in 20 to 30 years time. The problem is surviving in the vicissitudes of the real estate market up to that point. If you have a 20% deposit on a rental property and house prices drop by 20% then all your capital is lost. The fact that this same property might be worth more ten years down the track will be for the benefit of the subsequent owner the bank sells the property on to - not you.

    SNOOPY
    Last edited by Snoopy; 21-05-2019 at 08:34 PM.
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  8. #28
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    Quote Originally Posted by SBQ View Post
    I don't get your logic at all but I respect that. We all have differences in view. I'll try to explain my logic.

    Where is the need for the company to reduce tax? What emphasis should a company reduce tax liability that I've mentioned? I did say that at the individual shareholder level, yes tax minimisation is #1 in any investment planning....
    Stop right here.

    If you accept that tax minimisation is at individual level is no.1 at individual shareholder investment planning, that means you also accept it is also the number one need for the company in which the shareholder owns shares to reduce tax. This follows because the tax incurred by the shareholder is exactly the same tax debt incurred by the company. The tax is paid by the company on behalf of the shareholder. If the tax was paid in cash, then the serial numbers on those dollar bills are the same as the serial numbers on the same dollar bills that the shareholder has handed over. They are exactly the same piles of money. You cannot separate one from the other.

    SNOOPY
    Last edited by Snoopy; 21-05-2019 at 09:13 PM.
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  9. #29
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    Quote Originally Posted by SBQ View Post
    If you're a share holder of a company that has that kind of logic (buying a loss making company to extinguish your profits); then I would have to say that's not a very good company to own. It's not even remotely the concept of a company to exist if they have a motive to draw down expenses in all sorts of means just so they can lower their income.
    There was once a company on the NZX, in the pre internet days, called 'Brierley Investments Limited' that operated in this way (edit: Actually they targeted companies with lazy assets on the balance sheet. 'Making an operational loss' was not a must have purchase consideration, although loss making companies would likely be purchased for less). Very successful it was too, for 20+ years. The loss making companies were asset stripped and sometimes returned to the market in a leaner more focussed form. The objective in buying such companies was not, of course, to make a permanent loss on the deal, but to turn these companies around. The fact that there was a tax free period of acquired subsidiary ownership was useful and increased the day to day cashflow that Brierley Investment's had.

    SNOOPY
    Last edited by Snoopy; 22-05-2019 at 07:08 AM.
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  10. #30
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    Quote Originally Posted by SBQ View Post
    All that fancy annual reports that talk a lot a waffle but no direct disclosure of EPS (Earnings Per Share); you have to dig and calculate that yourself for most listed NZ companies.
    Taking your last line first, I couldn't agree more. 'Eps' growth is what any shareholder should be looking out for.

    Quote Originally Posted by SBQ View Post
    My view is simple, pay the going 30% corporate tax rate
    For someone so concerned with tax, I am surprised you have not caught up with the fact that the NZ corporate tax rate is now 28%, and has been for several years.

    and KEEP THE $ in the 'shareholders equity' on the company's balance sheet. This will automatically raise the company's book value per share which is GREAT for the share holder.
    Generally I agree with you. However, unless that new retained earnings capital can be profitably reinvested, then it may not be so great for shareholders. There is no law against management reinvesting their new retained earnings foolishly.

    Never in the way of a 'growth' company should they have to rely on borrowing funds externally when they have enough after tax profits to be used to fund expansion.

    In finance class, we spend a lot of time around the balance sheet and looking at external controls such as when the company floats more shares. There is NOTHING worse to the existing shareholders than when a company practices 'share dilution'. It's just pure evil. But what i've seen happen in NZ listed companies all too often, is they try to blind their current shareholders by issuing a sweetener dividend while at the same time, float more shares. That's ok, i've never expected the avg NZ shareholder to understand the ins and outs of financial statements.
    What you have outlined above is exactly why 'earnings per share growth', not 'earnings growth' is what shareholders should seek. Yet you don't acknowledge that having a lesser amount of equity and some debt can be a way to increase 'earnings per share'. Not all company debt is 'bad'.

    How is demand created for shareholders? Well certainly not by paying dividends that draw down the book value of the company.
    Have you considered that not all shareholders want the same thing from a company? If you want dividend income and a share doesn't pay any dividend, then you won't put in a bid to buy. Paying a dividend can open a share up to a whole new class of investors. Constrained supply and more demand means the share price will probably go up.

    SNOOPY
    Last edited by Snoopy; 21-05-2019 at 09:56 PM.
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