Forum Archive Index - February 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Derek,
 
>
>
>I wonder if there will be a run of unlisted companies raising funds 
>on the grey market? As a holder of Ilion I wonder if I would have to 
>pay tax on that holding, I can't see how since I have no idea what 
>the current valuation is.
>
>


Given New Zealanders attitude to avoiding tax, I am sure there will 
be all sorts of grey market fund raising started up.  And investors 
who partake in such schemes will have almost no protection should 
things go wrong.  I've never heard of Ilion, and if it isn't listed 
your money invested in there will be quite safe from the taxman 
Derek. Steering New Zealanders towards grey market investment, just 
as the main market is 'coming right', will be bad for New Zealand 
IMHO.


>
>
>Your mention of non-attributing losses is interesting, at the moment
>risky investments are in fact subsidised by the Govt to the value of
>say 36% or whatever a persons marginal tax rate is (that is if they
>bomb). In this way I believe that risky investments are not as risky
>as many people think and in fact I have found value in this. 
>
>

That 36% 'subsidy' as you put it, only applies if you are a share 
trader.  If you are more a 'buy and hold' investor and you invest in 
a start up company that goes down, then you lose all your money and 
there is no tax relief for you.   It is curious indeed when some of 
these companies that have a long time to go in the pipeline before 
profits materialise are most tax effectively supported by short term 
traders!

Long term investors are generally happy to put such shares in the 
bottom drawer for a few years.  But with Cullen's wealth tax, this 
could change.  Not only will the long term investor have to forgo 
dividends (as is common in developing companies).  The long term 
investor will have to *pay* each year just to hold the shares!  
Cullens proposal is liable to devastate the funding options of 
emerging copmpanies IMHO! 

>
> 
>
>On the other hand risk would be rewarded in the Risk Free Return
>Method formula (as long as the capital gains element is eliminated),
>provided that the investments were a success.
>
>
>

Yes, but startup ventures are by their nature risky.  For every 
venture that is a success, there will be at least five that are not.  
Unfortunately it isn't clear before the event which emerging 
companies will be the winners and which will be the losers.  Overall 
I think the proposed wealth tax is negative for emerging companies, 
because of this success/failure imbalance.


>
>
>Given this I imagine that the possible changes are about neutral as
>far as riskier investments are concerned. 
>
>


I think given that most green fields companies are not successful, 
the overall effect of a wealth tax will be negative on riskier 
investments.   Why invest in an entrpreneurial company when it is 
much more tax effective to buy a house in Auckland?

SNOOPY







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