Tax – How Much Does It Influence Your Decisions?

[Perry]

Tax – How Much Does It Influence Your Decisions?

When you think about it, tax is the ultimate in passive
income – right? No wonder the Wellington Commissariat
loves it, so much.

Seriously . . . .

How much does taxation influence your 'business decisions?'

Comrade Commissar Cullen has oft-avowed that he wants
taxation to be even, equitable, whatever, in such a way that
its application does not 'unduly' influence business decisions.

Is he dreaming – in Fantasyland?

An accountant once said to me that tax was never 100 cents
in the dollar, so extra business effort was worthwhile. I have
my doubts, when reward for extra effort is diluted in the
way that it is.

Taxation issues do influence my decisions. I suspect they do
for all PIs. But how much? Does anyone (has anyone?) got to
the point where it's a shrug-and-put-up-with-it matter. I.e.
I'll just go ahead and if I lose a third to the W'gton
woodenheads, that's just the way it is. <deep and long sigh>

[Niall]

This will be an interesting thread Perry,

I look at it like this:

The more tax you pay the more money you must have earned.

So from that point of view wouldnt it be great to say.....

"I have paid $1,000,000 dollars in tax this year"

Wow. what must your income be to pay that.

ps. I have not had to pay a million dollars tax as yet

All the best,

Niall

[Dean@Massiveaction]

Great point Perry. I guess the issue with tax is that if the government didn't want you to factor it in to your investing why have the IR23BS facility??
Fact is the tax benefits in the medium term alow more people to invest. In theory Helen and the rest of the collective will get their money when those assets are realised and the cashflow is stronger.
Resistance is futile!!

[cube]

When 'Working for Families' was introduced, it was possible to work harder and get less, as a result of decreased payouts and hitting a tax threashold - great incentive!

So long as my tax saving is greater than my accountant's bill, I'll be happy!

cube

[Josko]

It depends what you mean by extra effort.

Most property investing by your run of the mill type investor is not a true business no matter that we all promote it to be run as such. It offers no real benefit to the economy and as seen at the moment with the struggles echoing from the Reserve Bank it can be detrimental to the economy.

I suppose the time an investor will consider the tax issue is if they are negatively gearing, trading, developing or sitting on a large portfolio that generates an income that is taxable at the highest tax rate, even then tax consideration would not be from a business perspective it would purely be from a selfish perspective.

Can you give an example when tax considerations would irritate your investment decision?

[Perry]

It depends what you mean by extra effort.

Extra effort = effort expended to make extra revenue.

Most property investing by your run of the mill type investor is not a true business no matter that we all promote it to be run as such. It offers no real benefit to the economy and as seen at the moment with the struggles echoing from the Reserve Bank it can be detrimental to the economy.

I'm concerned about the individaul's economy, not the Commissariat's.

I suppose the time an investor will consider the tax issue is if they are negatively gearing, trading, developing or sitting on a large portfolio that generates an income that is taxable at the highest tax rate, even then tax consideration would not be from a business perspective it would purely be from a selfish perspective.

Agreed - nothing wrong with that, is there?

Can you give an example when tax considerations would irritate your investment decision?

Not personally specific. However, as a general observation,
once the $38k threshold is passed, effort that produces
$1k of revenue results in just $610 of disposable, personal
income. Prior to that, effort that produced $1k of revenue
resulted in $780 of disposable, personal income.

So the 'reward' for the extra effort is a tax 'penalty' of an
extra $170 lost to Comrade Commissar Cullen & Co. But, once
accustomed to the idea, it's simply $610 in the PI's pocket
for every $1k of effort.

I presume some people just shrug and "get used to it."

Footnote
This excludes GST, which scews and screws things, even worse.

[CJ]

Tax should be a factor in every decision as it affects cashflow. ie to compare like for like, you should be comparing the after tax position.

The "leveling the playing fields" is all about making sure one investment isn't favoured JUST because of the tax position. Ie you would choose the same investment whehter you compared it to the alternatives on a pre or post tax basis. eg. passive index sharefunds currently (till 1/4/07) have a tax advantage over active sharefunds as capital gains aren't taxed.

[Perry]

Resistance is futile!!

Agreed. What the Commissariat concedes at the start, they
get back, with a dividend and interest, at the end.

[CJ]

Can you give an example when tax considerations would irritate your investment decision?

The decision to buy a house for either a buy & Hold or quick flick. Not only does your choice effect the entity you have to put it into (at considerable cost to set up), but under one situation, capital gains are tax and the other they arn't.

So you cant jump into a deal quickly and decide what you are going to do with it once the dust has settled.

[stacrafty]

[i]
Not personally specific. However, as a general observation,
once the $38k threshold is passed, effort that produces
$1k of revenue results in just $610 of disposable, personal
income. Prior to that, effort that produced $1k of revenue
resulted in $780 of disposable, personal income.

So the 'reward' for the extra effort is a tax 'penalty' of an
extra $170 lost to Comrade Commissar Cullen & Co. But, once
accustomed to the idea, it's simply $610 in the PI's pocket
for every $1k of effort.

I presume some people just shrug and "get used to it."

whatyoutalkinboutwillis?

I thought it went

< 38k: 19.5%
38k - 65k: 33%
>65K 39%


In summary:

[Perry]

< 38k: 19.5&#37;
38k - 65k: 33%
>65K 39%

You're right. I got the figures wrong, missing the middle
bracket. However, the 'ACC earner premium' (a stealth
tax) does add a small amount to those figures you give.

How does this look:

As a general observation, once the $38k threshold is
passed, effort that produces $1k of revenue results in
just $660 of disposable, personal income. Prior to that,
effort that produced $1k of revenue resulted in $790
of disposable, personal income.

So the 'reward' for the extra effort is a tax 'penalty' of
an extra $130 lost to Comrade Commissar Cullen & Co.

The figures are illustrative and I should've checked them
more carefully - sorry. However, the general principle
remains the same. There are thresholds at which reward
for effort diminishes. How far does one go?

[Monid]

And there are diminishing returns of having more money as well. An extra $1000 means a lot to someone earning $15000 much less to someone earning $150000

Fortunately I'm not convinced financial incentives are the only or the most important factors motivating human behaviour...

David

[stacrafty]

You're right. I got the figures wrong, missing the middle
bracket. However, the 'ACC earner premium' (a stealth
tax) does add a small amount to those figures you give.

How does this look:

As a general observation, once the $38k threshold is
passed, effort that produces $1k of revenue results in
just $660 of disposable, personal income. Prior to that,
effort that produced $1k of revenue resulted in $790
of disposable, personal income.

So the 'reward' for the extra effort is a tax 'penalty' of
an extra $130 lost to Comrade Commissar Cullen & Co.

The figures are illustrative and I should've checked them
more carefully - sorry. However, the general principle
remains the same. There are thresholds at which reward
for effort diminishes. How far does one go?

You gave me a fright is all. Trashcat is now happy.

To answer your OP tax does not influence my decisions for property. Thats because the way I see it, it always stays the same, you get a [insert personal tax rate here] discount on your expenses, and if your expenses > income for that property, you get a refund, if not you get a discount on the tax you pay.

[Josko]

I don't know that it is a matter of being used to it Perry, and as Monid indicated consideration needs to be given to the many motivations of human behaviour. In addition there is also the realisation that apart from manoeuvring your investments through different structures to achieve a beneficial tax position there is sweet bugger all you can do about it except vote in a different tax structure.

Tax has always been there so effort/reward appreciation needs to be more holistic, beyond the individual consideration. It is why it is thought to have a mindset to be happy with paying more tax as it means you are earning more.

I can only see retirees putting effort away for the realisation of a reduced reward once general societal milestones such as level of tax on income has been achieved.

Are you thinking of retiring Perry?

[Perry]

I can only see retirees putting effort away for the realisation of
a reduced reward once general societal milestones such as level
of tax on income has been achieved.

Are you thinking of retiring Perry?

Damn - I thought I already was!

My question is, to an extent, when is enough,
enough? And how much influence does taxation
have on determining that?

My wife works in elder care. She has oft-commented
on how sad it is to see retirees, who 'believed' that the
gov't was going to provide for them in their retirement,
bewailing the fact that they don't have enough money
to visit the (NZ-resident) children and grand children,
unless the children pay the transport costs;

that assorted festivals like Xmas are dreaded, because
buying presents for all the grand children is a financial
impossibility.

Everywhere I look, I see questions and so few answers.
(Perhaps I should stop asking them?)