If You’ve Never Heard of Unrealised Gains Tax, You Better Read This!
Australia’s recently re-elected Labor Party may introduce Unrealised Gains Tax. If that ever happened, Australia is doomed economically.
Well, well, well.
For those of you that have just voted in Australia’s Labor Party, prepare yourself for quite a shock, because most of you have probably not have heard of Labor’s proposal to introduce taxation for unrealised gains.
Ah ha! See. That’s it. Most of you don’t know what the hell that means, do you?
Even my young son at primary school will tell you that taxing unrealised gains is bullshit. After all, how can anyone tax him for selling lemonade without selling the lemonade first? But, you know, I think he’s smarter than most Labor-led politicians.
But that’s ok, because it ain’t going to happen. Introducing this insane unrealised gains tax proposal will never happen.
It can’t, and I’ll tell you why.
Now, I dare say, that a small percentage of those reading this will not even know what unrealised gains taxation is in the first place. Moreover, most who voted for Labor probably never even heard of it at all. Labor have kept it very low key during its campaign.
Well. That’s a pity. Because it shows how ‘sheeply’ we are. The blind leading the blind, so to speak. Like lemmings being led off the proverbial white cliffs of Dover.
Before I explain what unrealised gains tax is, I am strong in my beliefs that if ever this was implemented in its most draconian sense, the country is doomed. We would be witness of the biggest capital flight ever, rendering the country in a state of near economic devastation.
Sounds a little hyperbolic?
Well, let me explain.
Here’s a very simple example.
Mr Fred Smith, a low-income family man living off a weekly pay check, takes a gamble and places a thousand dollars of his hard earned money on a new tech start-up company he knows through a friend. He struggles to talk this over with his wife who thinks better of spending the family’s money on such a risky venture. However, he provides enough evidence of the new start up that it could be a fruitful investment. She gives him the go-ahead to invest.
The months go by.
The share value dwindles about half of what it was worth.
None in the family talk about it anymore. It was a gamble, but they decide not to sell. The shares are worth half of what they were than they bought it, but because they are not selling it, this is what is known as an unrealised loss. They still have the same number of shares in the company.
There is an old mantra that says you only lose when you sell.
Well. Labor’s proposition is going to put a stop to the wisdom of that mantra by upsetting the whole balance of how trading works. And if that happens, no sane trader will be dabbling in the Australian markets, which, of course, has an enormous impact on Australian businesses. In essence, most start-up businesses will be well and truly fucked. Because, no one will want to invest in them.
Now let’s delve deeper into this quagmire of trading.
Most start-up companies have relatively little capital behind it. In other words, they are not worth much in the grand scheme of the stock market, and therefore, have small market caps.
Buying and selling large percentages of small market cap ventures is notoriously difficult. Especially if there is little trading activity, which can lead to big spreads, or differences between buying and selling prices. Even relatively small amounts of trade can affect the share price because many watching that market will react very quickly to either buy or sell. Most people make very poor traders. They see a red candle, and they will jump to sell as soon as possible. They see a green candle, and they will experience FOMO (or fear of missing out), and buy impulsively.
Now, returning back to Mr Fred Smith and his ‘forgotten’ investment.
Fred and his family have forgotten about this investment after several years have gone by.
However, something horrible happened.
The tax office had sent Fred an email that he owed twelve thousand dollars in tax on his shares.
Fred, not knowing anything about Labor’s proposal on unrealised gains tax, shrugged his head and thought that there must be some administrative error. Incidentally, Fred, having been given years of mainstream media force-fed through the TV set, thought that Labor would be the best party to choose for the working man.
He was proved wrong on this occasion.
Fred contacts the tax office to say that, somehow, there must have been a dreadful mistake. However, Fred is informed that there has been no mistake. Fred had been reminded that the shares he purchased several years ago had shot up nearly one-hundred fold since he bought them making them worth one-hundred thousand dollars.
Just to remind the reader that Fred leads a simple family life earning a modest pay check week after week to keep the groceries on the table. He shares little interest in the headier subjects of life and certainly pays little credence to political banter.
Naturally, Fred is uplifted to find out that he is in possession of one-hundred thousand dollars’ worth of shares. That will help pay off his mortgage for sure!
However, Fred is getting by fine without the need for extra money at this stage. Like the Super (or pension) that he has been putting away for future years, Fred thought that it might be prudent to keep it tucked away for a rainy day, so to speak.
The trouble, unfortunately, is that the tax office is ordering him to pay for the tax on what his unsold shares are worth.
You see. Fred has an unrealised gain of ninety-nine thousand dollars. He invested one thousand dollars of cash, but the shares are now worth one-hundred thousand dollars. But it is unrealised because he has not sold them yet for actual cash in the bank.
Fred is now forced to sell some of his shares to pay for the unrealised tax gains the tax office is asking him for.
That, of course, is not the most straightforward exercise because, although the share price has gone up, his percentage holdings in the company hasn’t changed.
Fred finds out that it’s not terribly easy to sell because the instant Fred puts an order in the market to sell for ten thousand dollars, the shares start to drop. Out of desperation, Fred sells for a price he is not comfortable with ending up with a smaller percentage of the company even when including the amount he has to pay for the tax office.
In essence, Fred has been royally screwed by the tax office to forcibly sell his shares in order to pay for unrealised gains on his shares.
By now, I really and sincerely hope that the reader will see how outrageous this would be.
Think about this for a moment.
Would you, as a prospective trader, ever think about trading in the Australian market?
No. I didn’t think so.
I ask another question.
Let’s say that one invested in a company and the share price plummeted.
If the tax office can make claim to tax unrealised gains, should not the inverse be applied?
In other words, if unrealised gains are to be taxed, then surely, unrealised losses should be refunded by the tax office.
But no. The tax office would write exclusionary clauses to make sure this would never happen, thus fucking up the investor once again.
This proposal of Labor’s to tax unrealised gains will, of course, screw anyone up with saving Super, or pension funds. Why would anyone now rely on saving up in Super when one can invest in actual bricks and mortar, or invest in a foreign market with a foreign bank account, or through decentralised cryptocurrencies.
Of course, the tax office will make it quite easy to tax those with properties which have increased in value. After all, one can’t hide a property in anonymity.
We already have capital gains tax. In other words, if one sells a property and it is worth a lot more than it was bought for, the income goes straight to your bank account. This, of course, is a source of income and the tax owing is easily calculated. But that’s only if you sell!
But!
Imagine a low-income worker acquiring a small home in a rather poor area and, having lived there for a couple of decades, the suburb booms into a wealthy neighbourhood because of some industry that had moved into the area. Can one imagine the shock and despair of having forced to sell and move out to pay for the unrealised capital value on the home?
Well, this is what Labor is proposing and is astonishingly repugnant.
Should Labor ever get this through, I will tell you what will happen. There will be the single largest exodus of financial movement ever to have taken place on Australian soil.
Industries would move overseas. Investors will transfer their money through decentralised cryptocurrencies to countries in which they can freely exchange their crypto for hard cash. And, by the way, most politicians are too stupid to understand that decentralised cryptocurrencies can never be withheld by anyone else except the owner, unless, or course, the owner of that cryptocurrency is tortured to reveal the private keys. This is one of the reason why the ridiculous proposition to make exchanging cash exchanges of ten thousand dollars or more illegal back in 2020 fail miserably. I wrote about this in another article titled, Australia’s Proposed Cash Ban Will Not Work.
Labor’s proposal to make unrealised gains taxable will destroy Australia’s businesses and its economy.
Before I close this article, some may be wondering about treasure hoarding in lieu of trading or holding property.
Well.
The tax office has got shift of this as well.
They will propose that your treasures be assessed for increase in capital value. This could be collectable postage stamps, precious metals, paintings, porcelain, comic books, or anything else which warrants a sitting on the Antiques Roadshow.
My big question is this.
How could these be possibly assessed? Who will assess them?
Say you had a particularly fine collection of Australian postage stamps dating from the 1800s. Who’s going to know about them?
Say you had a painting hanging on your wall which you had no idea who painted it or how much it could be worth. If it was an undiscovered Picasso, who would know?
Yes! If anyone sold these treasures and the money goes into your bank account, it will be perceived as income. After all, this is easily trackable.
And yes, it is partly fair in a way. Many of our civilised societies do have income taxes to provide the intrastructure, health care, and other services we need.
But as to unrealised gains tax?
This is an abomination and could never be put into practice without destroying Australia’s economy.