Hard News by Russell Brown

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Hard News: A Capital Idea?

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  • DexterX, in reply to Rich of Observationz,

    The minimum tax profit equation makes me ill - what ill concieved nonsense.

    Auckland • Since Nov 2006 • 1224 posts Report Reply

  • Islander, in reply to BenWilson,

    I've definitely been considering it, Ben (basically looking south to places like Oamaru.) It has the good possibilities that you suggest, but ranged against them is the 40+ plus years I've made my home on the Coast, and the weird inertia that sets in at the thought of -shifting -the -library et al...

    Big O, Mahitahi, Te Wahi … • Since Feb 2007 • 5643 posts Report Reply

  • DexterX, in reply to BenWilson,

    The only other ones that seem to be nearly as bad tend to be all about other financial instruments. .

    So here you are dishing Kiwisaver and investment in managed funds etc??.

    What all these guys don't get is that money flowing around and around doesn't make squat. Only production makes something. So actually building or improving homes is practically the only good capitalism involved in the property market. .

    Just to make it clear that money - the means of exchange - flowing around and around keeps people in work and business in business - we have a problem because this has stopped circulating

    Add to this that post GFC the Govt failed to foster a recovery and just when it was starting to lift they actually killed it off with the GST hike which only hurt the lower paid.

    Look at the price of your daily bread for example.

    We also have a problem is that huge sectors of the populace have had their savings wiped out by the Stock Market Crash and the recent Finance Company collapses - so all those surpluses that people exposed to the various crisis had are largely gone and now people are looking to have their savings invested off shore through Kiwsaver products.

    Auckland • Since Nov 2006 • 1224 posts Report Reply

  • JackElder,

    Serious question about the whole thing of deliberately pricing rental properties to make a (short term) loss - I know this is the whole reason that LAQCs got abused so much, but I think I must be missing something. Say, you have a property which you're renting out, for which you set the rental such that you end up making a net $10,000 loss for the year. I know that you can arrange your affairs so that this loss counts against your tax liability: so on a personal income of $80k, say, you end up paying tax on $70k. Righto? What I don't get it how this is so tempting. Yes, you've got $10k of your income upon which you avoid paying any tax (which you would otherwise have paid at the top tax rate); but you've still lost $10k. At the end of the day, you're more out of pocket than you would have been if you'd broken even on the rental and just paid your full whack of personal tax. The ability to claim back the loss against your tax helps soften the blow, but certainly doesn't eliminate it. So this is where I think I'm missing something, because I can't see how that's a tempting proposition. The only way it makes sense is if you accept that you're going to take a short-term loss for a few years, until you can either raise the rent to the point where you cover the ongoing costs, or sell the place and realise the capital gain.

    Seriously, if there's something I'm missing here I'd be interested to find out.

    Wellington • Since Mar 2008 • 709 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    tax basis of large corporations

    Is what I said. Not new businesses. And one could easily envisage an exception for startups of scale

    What's "large"? 2degrees probably fits into any reasonable definition - annual revenue is eight figures, annual expenditure is eight to nine figures. And what's a startup? 2degrees has existed in various guises for a decade, and probably won't make a gross profit for several more years despite having been taking general customers for nearly two years and having achieved market penetration to at least 1/3 the level of its major competitors.

    Seeing the problem yet? How do you achieve workable definitions without creating loopholes that will be exploited by the corporations you're trying to attack. We need 2degrees to succeed, but I see no feasible way of exempting them, except possibly through a schedule of excepted companies, without introducing opportunities for other organisations to avoid tax. Not to mention that you'd create an incredible incentive to do so.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • Matthew Poole, in reply to JackElder,

    As I said above, now that the depreciation loophole is closed the incentives are lower. But when you could set the rent at a level to just cover expenses, deduct the mortgage interest payments as an expense, and deduct depreciation, you weren't paying a cent out of your personal income but you still got a healthy tax loss. Without depreciation there's less to be deducted, but you still get to deduct the mortgage interest payments as an expense, plus any repairs, and a lot of landlords will have their rent set at a level such that they're probably only just making money once mortgage repayments and maintenance costs are covered.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • DexterX, in reply to Matthew Poole,

    That is all they needed to do IMHO and they should move on.

    Auckland • Since Nov 2006 • 1224 posts Report Reply

  • Rich of Observationz,

    We need 2degrees to succeed

    I’d dispute that. We’d be better off with a natural monopoly like telecoms being community owned through something like a worker/customer coop. I’d be happy to see such an enterprise pay negligible tax, as the profits are going to people entitled to them, not wealthy rentiers.

    I think the key difference between us is that you want to improve capitalism, whereas I want to get rid of it.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Simon C, in reply to JackElder,

    In at least some cases it's not so much delibrately setting the rent at a lower level to make a loss and more that the property costs so much that the maximum rent you could reasonably get still makes a loss.

    But you are right that it is the expectation of making a capital gain down the track that drives investors to buy in that situation.

    Auckland • Since Aug 2008 • 10 posts Report Reply

  • James Butler, in reply to Simon C,

    In at least some cases it’s not so much delibrately setting the rent at a lower level to make a loss and more that the property costs so much that the maximum rent you could reasonably get still makes a loss.

    Well, in an ideal free market those are both the same thing, right? Property costs heaps because of capital gains, which in turn allows rents to drop by offering an alternative avenue of profit, which in turn encourages investors to invest for capital gains, and so on...

    Auckland • Since Jan 2009 • 856 posts Report Reply

  • Rich of Observationz,

    Also, let me tell you what will happen to 2degrees if they succeed.

    Vodafone (or maybe Telecom) will buy them. They'll take a write off of all those accumulated losses against their taxes (ensuring they avoid any contribution to the community for a year or two). They'll then take a further write-off against the value of the acquisition (as they did here).

    End result - we're back to a duopoly and the telecoms industry has avoided a whole load of tax.

    [I'll look forward to pulling this back from Google in a few years time when it happens..]

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Richard Grevers,

    A couple of points about Australia's CGT (from Wikipedia, rather than experience) - CPI indexing was abandoned after 5 years - presumably the extra complexity wasn't worth it. And it applies to all assets over threshold values - so that buying art for capital gain doesn't become the next loophole.

    New Plymouth • Since Jul 2011 • 143 posts Report Reply

  • Angus Robertson,

    The timing of introducing a CGT could be better. Does anybody actually expect NZ realestate to have Capital Gains?

    NZ is at or near record highs for property prices in proportion to average income. A lot of that is rental property. In Ireland, UK and America they also had similar record highs and their prices fell by 30 - 50%, but NZ prices only fell by 5 - 15%. This suggests there might be more downside than upside for capital gains for NZ.

    If we introduce a CGT and the market goes up then great we get some tax, but it probably won't go up.

    If more likely the market goes down then we subsidise every landlord 15% on their captial losses through a tax rebate. Which would suck.

    What we should have done is introduce a CGT in 2000 before house prices went apeshit. Or we should do is wait until the market falls and get in at the bottom.

    Auckland • Since May 2007 • 984 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    I’d dispute that. We’d be better off with a natural monopoly like telecoms being community owned through something like a worker/customer coop. I’d be happy to see such an enterprise pay negligible tax, as the profits are going to people entitled to them, not wealthy rentiers.

    I think the key difference between us is that you want to improve capitalism, whereas I want to get rid of it.

    1) I dispute that telecommunications as a whole is a natural monopoly. The infrastructure side may be, but the provision of services is absolutely not.

    2) What, exactly, do you think a cooperative is? Communism? It's still a capitalist structure, just not a corporate one. There's property ownership other than by the state, and there's an exchange of money for goods/services provided. What were you saying about improving capitalism?

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    Also, let me tell you what will happen to 2degrees if they succeed.

    Vodafone (or maybe Telecom) will buy them.

    umm, no, they won't. Well, not unless Act destroy the Commerce Commission, which I grant is a possibility.
    There's no chance under our current arrangements that permission to buy out 2degrees would be granted to either Vodafone or Telecom.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • Kumara Republic, in reply to DexterX,

    We also have a problem is that huge sectors of the populace have had their savings wiped out by the Stock Market Crash and the recent Finance Company collapses - so all those surpluses that people exposed to the various crisis had are largely gone and now people are looking to have their savings invested off shore through Kiwsaver products.

    While budding Sam Morgans, Rod Drurys and Selwyn Pelletts are forced to seek foreign venture capital to build their ideas into export dollars.

    The property speculation status quo is basically a glamorised form of hanging out each other's washing.

    The southernmost capital … • Since Nov 2006 • 5446 posts Report Reply

  • Matthew Poole, in reply to Angus Robertson,

    What we should have done is introduce a CGT in 2000 before house prices went apeshit. Or we should do is wait until the market falls and get in at the bottom.

    Or we should apply it retrospectively to any property purchased in the last 10 years, instead of just applying it going forward.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • DexterX, in reply to JackElder,

    There is a bit that you are missing out on - that covering the loss akin to forced saving - when you consider it over the term you are to hold the ppty - say that term is 25 years.

    If you look at that 25 year term say you had taken the money you were covering the cost of the mtge and invested it in the Stock Market, Managed Funds or Finance Company Debentures and experienced a crash or a loss the value of your investment would be lost.

    An invesmtent in ppty is more likely to retain a core value and utility that are real - whereas financial instruments can be meaningless and of no value in an adverese economic situation.

    Investment in land is a discipline that a person is more likely to research well and stick with.

    Auckland • Since Nov 2006 • 1224 posts Report Reply

  • BenWilson, in reply to DexterX,

    So here you are dishing Kiwisaver and investment in managed funds etc??.

    Not at all. They're both good things, but they certainly shouldn't be majorly profitable in themselves. If they are, they're sucking it out of the marrow of the economy that actually produces things.

    Just to make it clear that money - the means of exchange - flowing around and around keeps people in work and business in business - we have a problem because this has stopped circulating

    It's like engine oil. You need it to keep the car going, but it doesn't power the car. There can be too much of it, and too little.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • BenWilson, in reply to Richard Grevers,

    CPI indexing was abandoned after 5 years

    Interesting. I wonder if it was less about complexity and more about increasing the tax take.

    Auckland • Since Nov 2006 • 10657 posts Report Reply

  • Rich Lock, in reply to Keir Leslie,

    one of the great ironies of New Zealand is that we both over-invest in property and yet have consistently sub-par houses.

    When we were doing up our house, we wanted it to be both a pleasant place to live and functional for the foreseeable future.

    I recall making a trip to a bathroom supplies company, where the salesman showed us two racks of identical-looking bathroom fittings. 'These ones on my right are the good-quality ones', he said. 'they will last a good few years before failing, and they are premium-priced accordingly. These ones over here on my left are the crap ones that look good on the shelf but will probably break in a few months. But you don't need to worry about that, because obviously if you're buying a house in New Zealand, it's for one reason and one reason only: so you can make money selling it on in a few months time. So who gives a shit if they break after you've sold it, right?'

    I paraphrase, but only slightly. We tried several times to explain to him that we were doing up a home, and wanted to live in it for the foreseeable future, but I'm not sure we would ever have been able to make him understand...

    Short version: sub-par housing is an inevitable result of a property investment merry-go-round, where spending money actually doing anything more substantial than painting over the cracks eats into your profits.

    back in the mother countr… • Since Feb 2007 • 2728 posts Report Reply

  • Rich of Observationz,

    What, exactly, do you think a cooperative is? Communism?

    I think you need to do some reading around the concept of Syndicalism. A true cooperative (which is very different from a company where workers have minority, unequal shareholdings) enables ownership and control to be vested in those with an interest in the enterprise's success. It's not "communism" (where a centralising state owns everything) or capitalism.

    not unless Act destroy the Commerce Commission, which I grant is a possibility.

    Well, NACT have already overruled CoCom in a few areas, like 10 year regulatory holidays. I'd say there's every chance they could get a waiver for a telco merger, especially with a few hundred million in slush money behind them.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    Well, NACT have already overruled CoCom in a few areas, like 10 year regulatory holidays. I’d say there’s every chance they could get a waiver for a telco merger, especially with a few hundred million in slush money behind them.

    Yeah, but nah. It's pretty rare for the Minister to ignore a recommendation regarding the buy-out of a major company by a competitor. And by the time 2degrees gets to the point of being an attractive take-over target, we'll have turfed the current lot of numpties.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    A true cooperative (which is very different from a company where workers have minority, unequal shareholdings) enables ownership and control to be vested in those with an interest in the enterprise’s success.

    Yeah, nice in theory, impossible in practice on a global scale. And when you're talking about things like telecommunications, where the hardware to supply service is expensive, high-tech, and cannot feasibly be produced in NZ without international contribution, doomed to fail in the absence of capitalist activities such as spending real money with offshore corporations.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • Rich of Observationz,

    we’ll have turfed the current lot of numpties

    They'll be back, unless we manage truly radical change.

    They've got the money, they own the media, they can convince the drones that making people put their name on election material is dictatorial corruption and we should vote for a change. If that doesn't work, they'll entryise Labour - it happened before.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

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