The final withholding tax on property introduced by the government in the last Budget was “intrinsically wrong” and is having a negative impact on the market, according to the Federation of Real Estate Agents.
“The feel-good factor was building up and we were seeing more and more people investing in property, including foreigners, who we all know are key to driving this industry,” FEA president Ian Casolani said.
Under the new regime introduced by the Budget, the option of paying capital gains at 35 per cent was removed but the rate of the final withholding tax was reduced. For property acquired before 2002, a 10 per cent tax on the value has to be paid, instead of the previous 12 per cent. In case of property acquired after 2002, the tax is now 6.5 per cent for individuals and eight per cent for property traders.
Tax consultant John Huber, who advised the FEA, explained that the final withholding tax overlooked several crucial points.
“The final withholding tax seems to have been drawn up with developers in mind. They are now able to price in a set amount of tax, which gives them much more clarity. Of course, that is passed on to the buyer.
“But by doing so the government has ditched the 35 per cent capital gains tax, which imposed tax discipline, as the seller would have an incentive to collect and present receipts to set off against his profits.
The capital gains tax was succeeding in cutting down on tax evasion. It has now been removed,” Mr Huber said.
The final withholding tax has another shortcoming: it has to be paid even when the property is being sold at a loss.
Federation president Ian Casolani believes that this is grossly unfair.
“The authorities tend to scoff at the idea that property might ever be sold at a loss. But the truth is that people do sometimes find that they need to sell in situations which are less than favourable, say because they need the money for an emergency, or because they separate.
“For these people, the final withholding tax adds insult to injury. Not only are they forced to drop the price to sell quickly, but they also have to pay tax on their losses,” Mr Casolani said.
Mr Huber went a step further, saying that the tax simply does not make sense.
“The property withholding tax is part of the income tax regime. Which law ever taxes you on a loss? It is simply contradictory! Which country in the world taxes a loss?
“Can you imagine if the government were to impose a flat rate final withholding tax on a share transfer? Or on a company’s turnover, without taking into account expenditure. It does not make sense!” he said.
“It should be either a transaction tax or a capital gains tax. It is contradictory!”
Mr Casolani explained that the contradictory nature of the tax also meant it ran foul of double taxation agreements.
“Take the UK, for example. This is considered by the tax authorities in other jurisdictions to be a sales or transaction tax and as such it does not fall under double taxation agreement for credit or relief. So a UK seller would pay the tax here and then pay again in the UK,” Mr Casolani said.
Is there an equitable solution? One option would be to have some form of exemption for those who sell at a loss, or perhaps the Commissioner for Inland Revenue could be given discretion to waive the property tax in certain cases. But the FEA is frustrated by the idea of yet again trying to patch up the tax.
This is not the first time that the tax of property has had ‘unintended consequences’. It was first introduced in 2006 but has since had to be revised several times. This latest change was an attempt to streamline the refund system, as when the vendor opted for capital gains, he or she would pay an up-front provisional amount to Inland Revenue, which very often found itself in a position where it had to pay refunds, creating an administrative burden.
The FEA made three recommendations to the government: clear guidelines on the definitions of people who trade in property and those who hold property as an investment; to reintroduce the capital gains option, but with better computation systems; and the introduction of an authorised registered mandatory who would be qualified to submit the capital gains computation.
The warning in the FEA’s position paper is clear: “Ad hoc decisions that come as a total surprise not only to the operators in the industry but also to the local and foreign market harm this particular market, and recovery normally takes longer than just with the revocation of a law or announcement. This is why the FEA insists that all measures to be taken that affect its industry should be reached after a true and proper consultation period.”
Mr Casolani stressed that the federation had the interest of the property market and the country’s success as a whole at heart.
“We are not concerned with how much tax the vendor has to pay. That is not the issue. We are only concerned with the impact the system has on the market.
“We were seeing considerable investment but now investors start reconsidering, especially those who get into the market impulsively as the feel good factor rubs off on them ,” Mr Casolani said.