Taxes taxes

It's good stuff, share it!Share on facebook
Facebook
Share on whatsapp
Whatsapp
Share on twitter
Twitter

There’s been a few developments in the realm of Singapore tax over the past few weeks which have caught SippingCoconuts’ eyes.

It started off with some news reports that the government and social expenditure is increasing and it is only a matter of when taxes have to be increased. In a relatively low tax environment like Singapore, that isn’t too bad especially since the impression we get is that the government is pretty careful with it’s spending. Furthermore, SippingCoconuts believe in doing our part in giving back to society, and one of the indirect ways is via taxes.

The tax conversation went up a notch when newspapers started speculating that some form of wealth tax is in the works. Now that definitely caught our attention, because regardless of your views of the merits of a wealth tax, it’s has significant implications on anyone’s plan to retire early in Singapore.

What is a wealth tax?

So what is a wealth tax? In essence, a wealth tax is a form of tax over any asset owned by a tax payer, as opposed to be more widely understood income tax. Practical examples of a wealth tax would be property taxes that are already in place in Singapore (or Quit Rent and Assessment Rates in Malaysia), estate duty (abolished in SG since 2008), or some form of net asset tax (more common in European countries) where a tax is levied based on the value (sometimes value net of liabilities) of a person’s assets.

The speculation is that any wealth tax in Singapore could come in either form of capital gains, estate and/or property taxes.

Impact on FIRE aspirers/retirees

So what does this mean for the FIRE community? Well for one, a wealth tax is kind of like a tax on imputed income that is derived from our asset base.

Say you have investments worth S$1m and you intended to live of 4% p.a. of that (S$40k). With an assumed wealth tax rate of 1% of total net assets based on examples from other countries (France up to 1.5%, Spain up to 3.75%, Switzerland up to 0.94%, just to name a few), this now translates to a notional 25% “income tax” of the amount you planned to live off in retirement!

Your original magic figure of S$1m now has to increase 33% to $1.33m to support your S$40k annual expenses.

Before you panic, take note that there usually is a threshold below which the wealth tax wouldn’t apply in the aforementioned European countries so presumably SG might adopt that too if it does implement it. What’s the right threshold for Singapore? Who knows at this stage…

Until we have more clarity, there can only be speculation as to the form and the rate of any wealth tax, and if it even gets implemented, so what we can do is to watch the developments closely and in the meantime build in additional buffers in our magic number. This isn’t fun because it could mean additional years of working or belt tightening for those already retired.

What are the chances of this happening?

It’s worth keeping in mind that Singapore abolished capital gains and inheritance taxes not too long ago with good reason, so reversing such a position will not come lightly because it may lose its international appeal as a wealth management destination. High net worth individuals might even decide to leave the country and stay elsewhere especially since the world is so connected and you can do business from anywhere nowadays.

Some people also view wealth taxes as a form of double taxation, because we get taxed when we earn our income and there’s another wealth tax on the balance of income that we don’t consume and save/invest. That wouldn’t go well with encouraging a culture of saving for a rainy day.

Conclusion

As the population of workers (also known as tax payers, haha) start to shrink whether due to an ageing population or more people deriving income from their assets, the taxable population also starts to shrink since only actively sourced income is taxed.

Even if today SG doesn’t tax dividends or capital gains…sooner or later these sources of income will come under the radar of tax authorities to ensure that there is sufficient money going in to support the government’s spending. It may take 5 years or it may take 50 years, but play out the current trajectory far enough and that’s a logical conclusion.

Will your portfolio be sufficient in size to accommodate these taxes? Hopefully…the speculation in the newspapers are just much ado about nothing for now. 🙂

However, it’s probably the right time to compute alternative scenarios and stress test your magic number, because if the Singaporean government is serious about raising taxes, there’s a risk that the magic number’s magical surprise is that it isn’t enough for retirement. *horrors*

What do you think about the prospect of higher taxes in Singapore? Do you agree with a wealth tax? How do you plans change as a result of this? Share in the comments!

Author: Mr.C

Mr.C – our resident investment expert and the muscle behind this entire movement for Sipping Coconuts. When his nose is not buried in anything financial, he’s either sailing or cooking or with the kids and always with a beer or a coconut nearby!

It's good stuff, share it!Share on facebook
Facebook
Share on whatsapp
Whatsapp
Share on twitter
Twitter

Leave a Reply

Your email address will not be published. Required fields are marked *