 Okay, cool. We are online. How's it guys? It's MJ and in this video, I'm going to be talking about tax. So my last video, we looked at the risk-free rates of return. And now we're going to be talking about tax. Now I just want to give a quick little warning and that is I haven't prepared for these videos. So this is me just thinking or learning out loud. And what I'm going to be doing is just being very raw around the topics that I discuss. So I do want to give that that warning is that these videos are going to be very much opinionated. And I might be making mistakes. So feel free to comment or disagree with what I say in the comment section below. Like I said, it's going to be very opinionated. So sensitive viewers be warned. The topic today is tax and I absolutely hate tax. I think tax is the dumbest thing we have. And I find it very strange that it still has this place in our economy. Now, why do I say that? You know, why do I hate tax so much? I'm very much for funding the government. I understand governments need money in order to do their thing. But I think tax is an outdated system. The system of, you know, somebody doing work and then you taking a part of that money and sending it to the government. I think that is very much outdated. Tax has got a lot of disadvantages. There's the the frictional costs. Am I spelling frictional? No, I'm not spelling saying fictional friction. There's all the frictional costs. So when I mean when the Romans used to collect tax, the tax collectors used to keep a little bit for themselves. A little bit would get lost. All the stuff. So there are these frictional costs with tax. Then tax can get incredibly complicated. And we're going to see that later in this video. It's going to get incredibly complicated, which means it puts a lot of stress on people. You know, councils have to devote a large proportion of their time in trying to understand this and trying to understand what's the best tax vehicle. And it's just it's complicated. It's a waste of productivity. And it's not efficient. I mean, it would be much better if we came up with an alternative form of raising funds for the government other than tax. And I actually want to do like a whole video on that. But for this video, I want to rather focus in on tax and talk about it. Because when I'm doing these videos for this is for the specialist or the fellowship exam around finance. And I'm going through the syllabus. So the syllabus has got two things on tax. It says describe the typical ways in which investment rates are taxed and describe the effects of the taxation basis on the investor's behavior. So I think, and lucky I'm assuming my audience is very much you've done finance before. And these are advanced videos around finance. So we don't have to go, you know, the basics of what is what is tax, we can jump straight into the meat of it. An interesting thing here, or what the syllabus wants us to know is what is the behavioral effects that tax is going to have. Because remember, investors, investors want return. Okay. And they're going to take on a variety of different assets depending on what their return is. Now tax reduces return. So if tax is going to be reducing one investment more than the other one, there's going to be a shift to the other and not the other one. So let's look at some of the major factors that influence tax. What does tax depend on? Okay. So all else being equal, both individual and institutional investors will attempt to maximize net of tax returns. And this is going to depend on the total rates of tax on an investment. Total rates. And what we have to say total rate is because there's income, there's capital, there's all these other various different types of rates of taxes. Like I said, it gets quite complicated. So we want to look at what is the total rate. We also then want to look at it, how is it split between income and capital? Because if the government is taxing capital gains more than income gains, then assets that give a higher income yield are going to be favored by investors. And maybe let me just give you a quick example of where this might come out. So let's say you have two assets, asset A and asset B. Okay. Asset A is a luxury apartment and asset B is an industrial factory. Okay. So the luxury apartment is going to have low rent, but high appreciation. You know, the value is going to go up in time. Whereas the industrial factory is going to have a high rent relative to its price and quite a low appreciation. Now, which asset should you buy? Asset A or asset B? Well, very much you're going to look at the tax. If the government is taxing income more than their tax and capital, then the luxury apartment is more favorable by investors. And the price of those things will go up as you know, supply and demand. Supply and demand is one of the basic things that you must always remember. So one of the fundamental principles of finance and economics and anything when you're dealing with money and trading and all that type of stuff. Whereas if the government is taxing income more, oh, sorry, yeah, if they tax income more, then you want the luxury apartment. If they're going to be taxing capital gains more than the industrial factory is more important. So we're seeing how two assets, I mean, both of these assets are considered as property. But we're seeing how tax can influence the decision, which is I feel is wrong. I mean, you shouldn't be making your investment decision based on tax because like we saw with the the risk free rates of return or the interest rate sent by central banks, tax is made up. Okay, and what I mean by that is so the tax rate is made up. Okay, it's just it man says this is what the tax is whether 2%, 10%, 100% it's made up. Something that isn't made up is what I also said in the previous video is something like mortality rates. Okay, mortality rates, we see them happening in nature and they're more natural. So mortality rates are natural, but tax rates just like interest rates are made up. And it's quite sad that we basing our opinion on which investment to buy into based on something that is made up. Instead, what we should rather be looking at is thinking, okay, well, what is the demand for industrial factory space? What is the what do I what am I speculating the position to be on luxury apartments? Is this a desirable area? Will more people be coming into here? Will that push the prices? You know, these are the things I mean, finance and investing is complicated enough with all these various economic factors that to now throw in tax as another curveball, just it's very it's unnecessary complications. I mean, like I said, there are other ways for the government to fund its operations and, you know, manage the country. I'll actually give you one quick one now. And that is just by printing more money. The government just said, okay, guys, we're not going to take up any tax. We're not going to be charging tax on anyone. What we're going to do is we're just going to solicit instead of us raising 10 billion Rand worth of tax this year, we're just going to print 10 billion Rand more of the money. Yes, that will cause inflation. Yes, everybody will feel a little bit of a pinch. Their money will be purchasing power will be decreased. So they will be in effect contributing to the government, but it will be efficient, no friction, and so much less complicated. So anyway, let's get back into back into the factors that then affect the tax. Like I said, these videos are me just winging it. So there is no, you know, ground structure and stuff like that. So well done for for hanging in if you're still listening, listening to me rent and rave about tax. Okay, another big important thing is when the tax is paid. So let's go back to blue. Okay, when tax is paid. And this is an interesting one. You want to always delay the payment of tax, because think about it, if the government says you sell your your asset or whatever, you either have to pay 10 Rand tax today, or 10 Rand tax tomorrow. Most people will choose to rather pay the 10 Rand tomorrow, because they could put the 10 Rand today in a bank account, maybe earn a little bit of interest. So they're actually in a better position by delaying the payments of tax. And we're going to see different investments will have different time intervals of when that tax is paid. Okay. Another one is whether the tax is where is it deducted? Okay, is the tax tax deducted at source? Or do you need to pay it subsequently? Okay, so a little example of this is when I was working, and you get paid your salary, you kind of get taxed at source in the sense that the employer pays the tax for you, you then have to fill out a hopeful tax return. And oh, look, maybe you can get a tax refund, depending on various factors. Whereas, so that one has got that disadvantage in the sense that maybe you pay too much taxing, you have to claim it back and to fill out a complicated form. Whereas the other one, substantial tax is you don't get taxed at the source, you get paid your salary, but then it's up to you to figure out how much tax you need to pay. And if you miss the deadlines, then you're going to be hit with penalties and all those other things. I mean, tax, tax is horrible. And then one of the other things is whether, when it's taxed at source, is it refundable or can it be reclaimed by the investor? And this gets very interesting or even more complicated is when you start buying foreign assets and you buy a foreign asset and that country taxes you, then your home country also taxes you. There's this double tax, but sometimes these two countries could have an agreement. So you might be able to reclaim your tax or maybe you have expenses and you can reclaim your expenses regarding tax. This is another thing which I hate about tax is how it screws around accounting. Okay, so accounting is a really cool system of keeping track of your financial position. I've got so many assets, got so many liabilities, this is my equity, this is my income, this is my expense, blah, blah, blah, blah, blah. And it gives quite a good reflection of a company's financial position until you introduce tax because accountants are very clever people and they introduce some weird and wonderful things like depreciation and this and that and all these weird expenses to try bring down tax. If they can distort the profit and make it lower than what it actually is, then they can pay less tax. And this is why you might not pay your shareholders purely in dividends, you might give them gifts or I don't know. And the thing is it gets really complicated because then government tries to crack down on this and then there's more rules and I mean the accounting textbooks become one massive rule book of amendment after amendment and like I said, I'm not joking when I'm saying that tax becomes complicated, messy and accountants have to dedicate a lot of their time to understanding it and giving advice around tax when there are way better ways of funding governments spending and stuff like that. Another thing I also don't like about tax, sorry I'm going again on a tangent here, is that government can use tax to manipulate the market. Just like how we saw here with luxury apartments and industrial factories, government can now influence which assets are purchased and which assets are not purchased or they might say, you know what our government bonds, the capital appreciation on that is not taxed, but corporate bonds, there is a tax and they can manipulate the market to flow money into certain places that might not be the most efficient had there not been tax. So yeah, that's a very bad thing about tax. Another thing which also gets quite complicated is this idea known as offsetting and I kind of touched on that with the accountants. So how much of your investment, your capital gains can be offset by losses or something like that. So if you have a portfolio of property and you sell some for a gain or for a higher amount and some for a lower amount, how much can you use the lower amounts to offset the higher amounts to reduce the amount of tax that you need to pay. And that's going to become quite important is assets that allow you to do that might become more attractive to investors. Because investors in this situation, they're looking at return and tax reduces return return, but tax reduces the return of various assets in different ways. And that's why it influences their behavior. So what are some other factors that influence tax? I mean, when you're looking into tax, you need to understand what is the overall tax system. What do they have in place? What are the tax rates? Is it 10 percent? Is it 20 percent? What are the exemptions? So like I said, government assets might have an exemption of tax, certain goods when you buy them have less of a tax, such as bread or necessities to encourage that. Governments love to tax exports to discourage exports, give tax exemptions to locally produced goods. The tax system does manipulate the market in that sense. But then what's also quite interesting is each set of assets has its own rules. So the way a share is taxed will be different to how a bond will be taxed to how a property will be taxed. So all these assets have different rules. So not only do you have to understand how all these assets work, what's their risk, what's their return, you also need to understand the tax rules that are around them, which is difficult because you can't just think it out of your head because they are made up. You know, where risk and say return might be more natural rates, tax is made up. And so it's very difficult. Hence why it's complicated and all that type of stuff. Okay, another thing that influences tax is the individual's status. Okay. So one way of this or the individual or the organization or the institution. So for some reason churches don't or have different tax rules. So if you're a religious organization or a nonprofit organization or a charity or something like that, you have different tax rates, which now opens the door for say corruption or some for some foul play people to register their business as a church was a nonprofit organization. And then instead of having a profit, they charge like an admin fee or a ridiculously high admin fee that changes on month to month, depending on how much profit they've made. And again, more rules need to be created to amend all these loopholes that people are coming up with. So your status, I mean, I think, whether you married or not married, that could have an impact on your, your tax. I mean, it's, it's totally bizarre. And it's, it's a way of the government to control the population by giving certain things exempt. They're encouraging people to do that. And I kind of feel like that's not tax kind of messes up with the whole free market idea. You know, the free market saying the market will eventually reach equilibrium and or, or, you know, becomes efficient in the long run tax stuffs that up. Okay. Another thing is the investors very own financial position. So let's look here at the investors financial position. And again, this is another thing that's made up. It's another rules, another layer of complexity. But the idea here is that the richer you are, the more tax you should pay. So what we do is we punish people for being more economically productive. So let's say we have one person who's making a hundred random months, and we have another person who's making 10,000 random months. The hundred random months might be taxed a 10%. So he pays 10 rad, whereas the 10,000 guy, he could be taxed 20%. So he has to pay 2000 rad. So what we see is different tax rates apply to different people, you know, different people. And the idea is that this rich guy over here, you know, well, he doesn't really need all this money. So we can tax him more, whereas the poor guy, you know, needs his money more. So we shouldn't tax him as heavily. The problem is that kind of, I mean, we see it in, there's like this little place called Monaco in Europe that has got very lenient tax rules for the rich. And we see the rich kind of flock there and they make it quite a, you know, they create jobs because now rich people want their coffee and their cappuccinos and all that stuff. It creates employment and all that other stuff. Whereas, so you want rich people in your economy because they're big spenders and they bring, introduce a lot of demand into the market, which encourages supply, encourages product productivity. So it's kind of crazy to penalize them so much more. Because I mean, if they both had the same rate, so if it was 10 and 10, then the rich guy will still be paying more tax, you know, a thousand to 10. So he still will be paying more tax. It's just, you know, because he's made more money, but you're double hitting him quite hard. And that's why a lot of rich people start to hide their assets. So we see people start hiding their assets. I mean, Lionel Messi and all those various guys hiding that in Panama and hiding a chair, hiding it there to try and get around these tax rules that are made up. And this just adds to the complexity and adds to all these various frictional costs because now you need lawyers and it's just really dumb. But we need to learn it for the exams. And you can't say in the exam that tax is dumb because I don't think you will get a mark for that. So let's maybe let's maybe return to the theory. Another important thing is the tax efficiency of the vehicle used to hold the asset. So vehicle, I always spell vehicle wrong, such a weird word, vehicle tax efficiency. Okay, get ready for another wave of complexity. So if you hold your assets in your own name, you will get taxed at a different rate to whether you hold your assets in something known as a trust. So what people do is we have this thing known as inheritance tax in some countries. So what you have is you have a mommy and you have a little daddy and they have a little baby. Okay, now when they die, if they hold say an amount or an asset in their own private name, the government hits an estate tax. Okay, an estate tax that once you're getting taxed for dying. I mean, it's again, another really cool made up tax law, you're getting taxed for dying. And the idea is that the little baby only gets say 800 grand of the thousand because 20% of it gets taken by the government as an estate tax. So it's the tax for dying. However, if mommy and daddy consulted an accountant, then what they would do is they would create a legal entity known as a trust, put the 1000 grand asset in there and make the baby a little beneficiary. Okay, and then what happens now is that when mommy and daddy die, the trust stays alive. You know, there is no more estate tax. And now the little baby can go and withdraw 1000 grand. And now this is terribly unfortunate because what we might happen is that the rich people will have better understanding or better knowledge of how these trusts work and they'll have better access to accountants and all that stuff. So by having these loopholes, you're punishing the poorer guy who didn't think of or didn't know that there were such things as trust and all this type of stuff in which to escape, you know, estate tax and inheritance and all that various stuff. So again, it's, it's almost like tax. You've got, you've got this, if we had chair, we have the poor, the rich, and then the very rich. Okay, so tax kind of does this, this is the punishment for tax. Okay, kind of, if you're very, very rich, you can exploit the loopholes, you can hide your assets offshore, and you actually don't pay that much tax. So you're actually getting hit if you're fairly wealthy. And you can see I'm hating, I'm hating a lot on tax. You know, I really just don't like how it, how it manipulates the market, how it influences investors behavior, how it causes for all this unnecessary complications. And then like I say, there's all the frictional costs, because now someone submits their tax return and there's a mistake, you need your tax system to employ people to check up on tax, to, you know, chase people down. And it's just such a mess. And I mean, like I said, we haven't really spoken much about how income and capital gains tax or tax differently, and how the different tax treatment may distort, you know, the market, maybe influence the investors preference between, you know, which type of asset they're going to buy, the luxury apartments or the industrial factories. And it just creates all this, all this confusion. And Joe, I mean, I guess I could kind of finish off this video, I think I've gone really, really long. Just talk about quickly, you get something known as the classical tax system, where company profits are taxed both in the hands of the company and the investor, you then get the split rate, which is kind of the same. But here, investors and, and the company are taxed at different rates, they might be 9%, they might be 23% or something like that. Classical, they both get charged the same amount. And then you get also something known as the imputation system under which tax paid by the company is deemed to cover part of the investor's tax liability. But you can see the interaction of the taxation of investment returns and corporate profits all becomes very, very complicated. And this is frustrating, because I mean, here we are, we're trying to learn about investing about, you know, how do I maximize my return and minimize my risk. But I always need to consider, well, what is tax doing and how is tax influencing the market. And what really sucks is that you might set up your whole portfolio and all this type of stuff, taking into all these tax considerations, only for them to change it. I mean, governments love to change tax rules, which now means you have to restructure your whole portfolio. There's more frictional cost in buying and selling. Also, they don't like these, these loopholes. So they might start closing them up, which means it just becomes a game of cat and mouse. And I really think tax is really dumb. And we should rather explore other options for funding government activities. Like I said, there's printing more money, quantitative easing, I know they really do that. So maybe just do that on a larger scale and reduce this tax burden, eliminate it. I think it's dumb. And Joe, I guess you don't want to print too much money into hyperinflation. So as long as you do it in a controlled way, everything should be hunky dory. But there we go. I've spoken way too long. And this has been a video, this is video number two, and it's on tax. So yeah, it's raw, it's unedited. I hope you enjoyed it. Cheers, guys.