Thailand’s LTF Changes
How This Affects Thai Citizens Investing Potential
For the past decade, investors in Thailand have found LTFs to be a safe haven for all levels of income, as they have shown themselves to be accessible, profitable, and most importantly, a tax haven. However, game-changing alterations to the LTF structure are pending which will require Thai investors to react appropriately to enjoy the same returns they have experienced in the past.
Why LTFs Have Worked – and How the Game is Changing
LTFs entered the Thai market in 2004 and soon found themselves popular with investors, as they could deduct up to a minimum of 15% of taxable income or 500,000 baht, whichever is lower – and this made them very similar to the 401(k) investment vehicle which proved very popular in the United States. The most immediate benefit is the tax haven, as this means that even if an investment dips in value it may break even at the bottom line as compared to using that same money as a taxable investment, especially since LTFs were exempt from capital gains. Of course, there were stipulations involved, as investors must hold LTF units for a minimum of seven calendar years, but it was simple to implement them as a long-term investment option in a balanced portfolio.
That, however, is now changing. Although the Thai Finance Ministry has extended the LTF tax haven in the past, it will not be extended for 2019. A substitute option is being proposed, which increases the investment holding period to ten years, restricts the fund options further to a set of infrastructure and Thailand Sustainability Investment funds, and reduces the tax write-off from 500,000 baht to 100,000 baht. Though none of these changes are particularly desirable for investors, such a marked decrease in the taxable income write-off will particularly sting. An 80% reduction in the tax haven means that investors may be better served seeking another vehicle for the balance.
RMFs represent another tax-advantaged option, as the 500,000 baht yearly deduction will remain in place. However, once RMF contributions begin, they must continue every year with at least 3% of annual taxable income. Additionally, the investment must be held until age 55. For young investors looking for long-term gains that intend to eventually use that for, say, a property purchase later on, they become wholly unsuitable for such a purpose; a function that LTFs functioned quite admirably prior to the pending changes. Therefore, it stands to reason that diversification is necessary.
When A Door Closes, A Window Opens
Both RMFs and LTFs represent options for long-term minded investors. As stated previously, both RMFs and the proposed LTF replacement have drawbacks that investors might find as deal-breakers. The LTF replacement is severely curtailed in the amount that can be invested pre-tax, while RMFs represent a commitment that may be untenably long and laborious. Blockchain and crypto assets are an exciting new option to potentially fill this void.
The first benefit of crypto is that it represents the best of both worlds for a long-term asset: one that has already demonstrated proven, verifiable returns, and one that also has enormous room for growth. Even though bitcoin had a significant price drop over the past year of nearly 80%, the value gain from five years prior is still well over 300% even after accounting for this historic event. Going back earlier still, the value change can be measured at 10,000% or even higher. Crypto has been quite unfairly positioned as a “get rich quick” scheme when the statistics paint quite the opposite story: those that have purchased early and held the course have reaped rewards far outpacing stock market gains over the same time frame. For the long-term investor seeking the flexibility to access their funds when needed, blockchain holds many of the positive aspects of existing, traditional investment options.
Secondly, there is a wide-open vista for cryptocurrency that has so far been widely untapped. Despite the overall price gains of the past five years, only 3% of the worldwide population participates in the cryptocurrency market. There are new service offerings being launched over the next year that will grow this market by leaps and bounds as procedural and technical barriers to entry get broken down. With the impending launch of Bakkt, a global cryptocurrency market that will empower users to not only pay for common, everyday purchases with crypto, but also provide a regulated environment for developers to pursue new projects in. With increased demand spurred on by new user adoption, this will create more room for new crypto and blockchain offerings, which translates into a strengthened, healthier market as well as new investment opportunities.
The third benefit is the simple diversification of not only the investor’s funds but also of the market itself. The government-mandated changes to Thai LTFs are a reminder that there is absolutely no guarantee that government-endorsed investment options that exist today will be there the next year. If LTFs are subject to change, then the same thing could happen to RMFs or any other option. Cryptocurrency is global and its growth and development are not beholden to the whims of a single government body. If a single country happens to implement regulations on crypto, then that will only impact the crypto market to the proportion of that country’s participation in the market, and not the entire market itself.
The loss of tax advantages will surely be felt in the Thai marketplace. If no LTF-style tax-advantaged fund options are provided, the Thai equity market could stand to lose nearly 19 million baht in LTF contributions per year. This creates a void for investors seeking new opportunities, and that money will have to flow somewhere. Thailand is quickly becoming a blockchain hotspot as the Thai government has proven itself incredibly welcoming of the cryptocurrency space; in some ways with regulation and government recognizance, it is even ahead of the United States. The cryptocurrency space provides a brand new opportunity that is ready and open for business to fill the void in the Thai equity market.
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Darius & Saul