Capital pains

Let us make things clear from the start. The new capital gains tax on property sales is not a reduction of tax, down from 35 per cent to 12 per cent.

The exact wording in the budget is: "We will introduce a final withholding tax of 12 per cent on the value of the property sold. This will replace the current system of up to 35 per cent taxation on the profit made upon the sale of the property".

This new capital gains tax is paid on the contract of sale and with no right to appeal.

What does this mean? I'll tell you what it means. It means that if a property is sold for Lm100,000 then the new tax would be 12 per cent of the sales value, that is Lm12,000.

Now this tax is wonderful if you have purchased a property a long time ago. For example, if you purchased a property for Lm10,000 20 years ago and today you sell it for Lm100,000 you would have made a gain of Lm90,000.

Normally you would have to pay 35 per cent capital gains tax on the gain, which would be Lm31,500. After Monday's budget you would only pay 12 per cent of the sales price, which is Lm12,000. You would save Lm19,500!

That really is a tax saving. However, this new budget only favours the people who have owned a property for a long time and have made very substantial profits.

Let us take the case of a person who purchases a property today for Lm100,000, plus stamp duty of Lm5,000 for a total cost of Lm105,000. However this person decides to sell and buy another. Having owned the property for only one year, he decides to put the property on the market for Lm110,000, just to get his money back. What will happen is this.

He sells his property for Lm110,000 and makes a profit of Lm5,000. But he then has to pay 12 per cent withholding tax on the sale price of the property on the contract of sale. This means he pays Lm13,200 withholding tax. Indeed, he only made a profit of Lm5,000 but has to pay Lm13,200 in tax! Quite a disincentive.

Now let us assume he keeps the property for two years and sells for Lm120,000. He will then make a profit of Lm15,000 but will still have to pay a withholding tax of 12 per cent on the sale price. That will be Lm14,400. So after two years he makes a profit of Lm15,000 but has to pay a withholding tax of Lm14,400. That is a tax of 96 per cent. That's not only another great disincentive to buy a property but it also shows very clearly that the authorities are not aware of the sensitivity of the local property market. Why should anybody be made to pay more than the maximum 35 per cent tax on any income or profit? This new tax system will create that ridiculous situation.

The 12 per cent final settlement tax is not a fair tax because it only favours those who have owned property for a very long time and have made substantial profits.

Under this new taxation system, in order to attain a break-even level when paying 35 per cent capital gains tax on the sale of the property one would have to secure a profit of 54 per cent. The new scheme will work against anybody making a profit of under 54 per cent. And 54 per cent is a lot of gain to make in a short period of time, especially in today's more cautious property market.

The new tax is most unfair on those purchasing a property now and who, when selling, only make a small or reasonable profit. In fact, it is not just an unfair tax, it is a very unfair tax and a tax that doesn't treat all property owners equally.

Under the previous system, a 7 per cent provisional capital gains tax was paid on the sale price of the property paid on contract but if this amount proved to be too high after all expenses were declared, and proven, then the vendor could apply for a tax refund. This resulted in many people receiving refunds from the tax department. So if seven per cent proved to be too high in some cases, just imagine what 12 per cent, with no right of appeal at all, is likely to be!

If the authorities think the new system will stop abuses, then I respectively beg to differ. The door will now be wide open and the honest little guy in the middle will be the one to get hurt.

What is the solution? Very simple. Make property taxes fair to all property owners and never let anybody pay a property sales tax that is higher than 35 per cent of the real profit.

Mr Salt is a real estate agent.