Wednesday, November 15, 2006

Tapping Capital gains

Now I'm sure I could do a lot better, but I'm not being paid, nor am I being graded, so here's a very simple explanation of what the SG government wants to do with its latest constitutional change. (posted over at mollymeek!) in response to a question on what it meant.

Capital gains - profit that results from the appreciation of a capital asset from its purchase price (source: Wikipedia)

Translated into simple buy and sell.

I buy a house at $200k in 1980.
Today in 2006, I sell the house for $2000k (say 10x value).

The capital gains will be 1980k.
(odd how the sums add up!)

Previously, because of the agreement with the people, all 2000k must be kept in the reserves. I cannot use them for anything other than reinvestment (buy more house hor.. and build up bigger nest egg for a rainy day).

By changing the constitution to allow them to "TAP' the capital gains:

I sell the house for 2000k. I return 200k to the reserves. 1980k, I can now go out and spend on all sorts of excessive consumption (such as million dollar ministerial salaries). The 200k will be reinvested, and any future gains will be spendable again, while the core 200k cannot be spent.

Now, capital gains takes into account 2 things - the increase in value, and INFLATION. By being allowed to spend all 1980k, there is no accounting for inflation (not by much, since accounting practices just lumps it all under capital gains). Which means, the core 200k loses value everytime it is turned over (sold/reinvested).

which means, the 200k you invested today, will only be worth 190k the next time you invest it (in today dollars) and so forth.

Smart of them to try to figure out more ways of spending that rainy day kitty.





Anonymous gecko said...

Hi Kiweto,

It is a scary thought. The principal sum depreciating in value if the government decides to take out all the capital gains for use. They probably won't do that. But it is still a thought that more people need to know about.

4:47 AM  
Blogger nofearSingapore said...

Hi Kiweto,
We really need to think about the implications.
I don't like the fact that MSM seem to just sweep this under the carpet.
40+ S'porean commented on my blog that he feels it is a positive development that reserves are being unlocked for use instead of being untouchable.
I really don't know.
I always thought savings are for "rainy days"?
Are we headed for rainy days already?


12:27 PM  
Blogger KiWeTO said...

The problem with determining 'rainy days', is that it can only be determined 'ex post'. (after it has occurred).

Have we reached it? I don't see KL/Jakarta becoming like SG tomorrow.

So why do we need to tap the capital gains now? What will we then use it for? to fund more bad purchases like ShinCorp?
(some due diligence was done, apparently it wasn't enough!)

MsM has the ability to not give the complete story. tapping capital gains is NOT unlocking assets, its moving assets from low-risk investments that give a steady return into higher risk vehicles such as the ShinCorp purchase.

Sadly, most people don't want to know, nor care.

The social conditioning to be a peon is too strong in this country.


12:23 PM  
Anonymous gecko said...

It is near impossible to question and affect the government's decisions unless one is a key power holder.

Even then, the pressure of groupthink and the party whip prevents the ruling party politicans (who should be the ones most accessible to the right people making these troubling decisions) and the intellects/professionals outside the political system from effecting any real change.

All these questions raised by the many voices of on the internet becomes trapped somewhere upstream.

4:25 AM  

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