Estate agent, accountant say new tax is unjust

A Federation of Estate Agents is in the process of being set up, following the dissolution of the previous association, and one of its first battles is bound to be against the 12 per cent withholding tax on the sale of property, announced in the budget speech last week.

However, estate agents are not waiting for the federation to be created to express their views on the matter and individual companies are not holding back from voicing their opinions.

Cassar & Cooper (Real Estate) Ltd general manager Michael De Maria categorically described the tax as "unjust as whoever sells at a small profit, or none at all, still has to pay 12 per cent of the selling price".

Mr De Maria gave as an example the fact that his estate agency was currently actively trying to sell a property that was purchased last year by an English woman, who had every intention of making Malta her permanent home.

"She spent a considerable amount of money renovating the property but, unfortunately, due to ill heath, will have to move back to the UK as soon as possible."

Mr De Maria said the woman was willing to sell her property without making a profit - selling it at cost, plus the five per cent stamp duty paid on purchase and the renovation costs.

With the "old" capital gains tax, she would not have had to pay any tax, he explained. But today, she would have to pay 12 per cent of the selling price.

The withholding tax would also be detrimental to young, engaged couples who, eventually, never get married and have the chance to live in their property for three years, after which they would be exempt from tax. They too would be charged the 12 per cent tax on the total selling price and would, therefore, be considerably disadvantaged, estate agents envisaged.

"It seems that the government thinks that every property in Malta is sold by a developer/speculator, which is certainly not the case," Mr De Maria stated.

As regards inherited property, "one also has to remember that when Capital Gains Tax was introduced in 1992, inherited properties were totally exempt from this, and for properties purchased prior to 1992 and sold after that date, the tax payable was apportioned. This meant that property purchased, for example, in 1972 and sold in 2002 only paid 33 per cent of tax on the profit.

"If properties were hoarded, then I cannot see how the new withholding tax would help," Mr De Maria said.

"Only a just revision of our archaic rent law would put more properties on the market," he maintained.

On the subject of under-declaration, "the government claims that the old tax regime encouraged some to under-declare the value of the sale in order to reduce the tax paid," Mr De Maria quoted.

"But on the contrary, to date, purchasers had every interest in declaring the true sale price and this because they would be paying five per cent stamp duty on the purchase, whereas if they under-declared they would be paying 35 per cent of a larger profit on an eventual sale.

"They would also have insisted on paying the 18 per cent VAT on any improvements made to the property. Simple arithmetic! One would rather pay 18 per cent VAT and have it deducted from the profit, than show a larger profit, which would have been taxed at up to 35 per cent." Now, with the withholding tax paid on the sale price, it could be beneficial to both purchaser and vendor if they under-declare, Mr De Maria maintained.

He also referred to the article by the parliamentary secretary in the Finance Ministry, Tonio Fenech, in The Times on Saturday, where the latter provided a table, showing that a property purchased in July 2003 for Lm155,000 and sold in January 2004 for Lm235,000 would pay nearly exactly the same amount of tax with the "old" Capital Gains Tax as with the "new" withholding tax.

But this would only be the case if there were no expenses like stamp duty, notarial and agents' fees, improvements, bank interest etc... on the Lm155,000, Mr De Maria said.

Moreover, to sell a property at 51 per cent profit after a mere six months is a fallacy, he added.

Mr Fenech also compared this tax to the 15 per cent withholding tax on bank interest, Mr De Maria quoted, pointing out that "the keyword here is interest. The 15 per cent withholding tax is on the interest (profit) and not on the capital (selling price). In actual fact, this withholding tax is optional as one may prefer to declare the interest in his annual tax return".

According to Mr De Maria, "the fairest would be a withholding tax of something much lower that 12 per cent for who chooses, and the "old" regime for the vendors who are making a small profit, or none at all".

The views of estate agents are being echoed in the accountancy world.

Noel Muscat, an accountant, said that what he finds totally unfair about the new tax system is that it completely ignores the expenses that would have been incurred and, consequently, any losses that may be incurred.

Mr Muscat details a practical example of how the new system would affect anyone who ventures to carry out a transaction, which, up to a week ago, made good economic sense:

Peter buys a flat and its overlying airspace for the price of Lm90,000 and sells the said property, say nine months later, for the price of Lm120,000.

The table below shows that taxation has actually increased by 136.45 per cent, and the net profit after tax is of a mere Lm3,000, whereas, under the old system, Peter would have made a profit of Lm11,310, Mr Muscat explains.

Moreover, since the new system ignores all the expenditure that was incurred, Peter could risk incurring a loss, he continues.

Thus, for example, if it takes him 21 months to sell the property, he would incur a further Lm3,780 in bank interest, and that means that he would have made a net loss of Lm780.

Meanwhile, the government would have earned Lm18,900 in stamp duty and income tax, besides other income from VAT on the commissions and fees paid.

"Does anyone consider this fair?", Mr Muscat questioned, hoping there would be "serious rethinking" on the subject, and that anyone caught in the middle of a similar transaction would be given time and space to apply the "old" tax system.