Key stakeholders close to the real estate industry are calling on the government to announce an ‘amnesty’ to encourage owners of properties being rented out illegally to come forward.
In the last Budget, the government introduced a flat rate of 15 per cent tax on rental income, but the stakeholders, who spoke on condition of anonymity, said owners were afraid to come forward and regularise their position as they might then be subjected to scrutiny over possible illegal activity in the past.
“The ideal situation would be for the government to propose a one-time fine or penalty. For example, it could allow people to pay two years of rental arrears, no questions asked,” one source said.
There are still other issues relating to the new tax rate that have not yet been sorted out completely. For example, the government has not yet decided what expenses can be deducted by owners renting out properties, according to the sources.
“It is always preferable to have everything laid down in black and white, as if there is any subjectivity, it leaves the situation open to tax planning, which will ultimately affect the government’s revenue,” the sources said.
Owners of rented properties face a multitude of scenarios that complicate the calculation of actual earned revenue, including the need to replace furniture and white goods and to redecorate between tenants, unpaid rental and utility bills, and more frequent marketing expenses and commissions than for vendors.
After the 15 per cent rate was announced in the Budget, talks were held to iron out all the details and the real estate industry is now satisfied with the way it will work in practice. Owners can declare and pay the 15 per cent tax on a separate form, and do not need to list it in their normal tax revenue.
It is up to property owners to work out whether it is more beneficial to them to pay the flat 15 per cent rate on rental income, or to deduct expenses – including interest paid on the mortgage – and then take the 20 per cent maintenance allowance from the total, paying their normal tax rate on the remainder.
Another complication is that the 15 per cent tax rate only applies to residential properties, whether the owner renting the premises is an individual or a company. But if the property is being rented for commercial use, the rate does not apply.
If the owner does not opt for the 15 per cent rate, there are still some question marks over whether the rental income is passive income or not.
The income is considered to be passive when the owner already has a full-time job and the rental income is ‘jam’ on top of his or her ‘bread and butter’ income. In that case, the owner can deduct interest on the mortgage, any ground rent, and then 20 per cent to cover maintenance.
If the owner rents out the flat(s) as their main business, then all expenses can be deducted as they would be for any normal business.
“But there are hybrid cases, where people have a full-time job and still rent out a number of flats through a management company. What is that? Passive or business income?” the sources queried.