The tax on the sale of property has been a thorn in the side of finance ministers for nearly a decade. The original tax was met with howls of protest and had to be tweaked. But even then, there were parts of it that irritated parts of the sector.
And therein lies the problem... There did not seem to be any formula which could meet all the needs of all the stakeholders, while at the same time anticipating all the one-off cases that might fall through the cracks and create unfair exceptions – which would generate howls of protest.
What was the context? The property sector was going through a boom after EU accession, with development trebling in just a few years. Also the decision to allow an extra floor (and a receded one) in two-storey zones saw entire towns and villages becoming unrecognisable.
It was only obvious that the government would want its share of revenue on the profits made on property sales, while the Inland Revenue Department wanted to curb tax evasion, particularly since so much previously undeclared money was being poured into property – partly because of the repatriation schemes and partly because of the eventual changeover to the euro, which forced people to find some way to ‘park’ their money legitimately.
Prices were rising as high demand was anticipated, especially from EU citizens, but the reality is that it did not materialise to the extent dreamed of. It took years to admit that there was an oversupply, as to do so would have sent a ripple of panic across the entire sector.
The sector eventually self-regulated as development slowed down.
But just as the hordes of EU citizens coming here to buy property did not materialise as hoped for, new phenomena rose up: foreigners coming to work here for the i-gaming sector who wanted to rent; foreigners coming here to buy passports; and so on.
The property tax was working well in some ways but not in others. The option to pay capital gains meant vendors had an incentive to collect receipts to offset against the sale price. But the provisional capital gains system was a nightmare for the Inland Revenue department to administer.
Some stakeholders started whispering in Finance Minister Edward Scicluna’s ear, arguing for yet another change to the system.
The capital gains option was removed in the last Budget, sweetened by the lowering of the final withholding tax (FWT) rates. Veteran real estate Frank Salt criticised the decision almost immediately. And now both the Federation of Estate Agents and the Malta Chamber of Commerce, Enterprise and Industry have come out with howls of protest.
They argue that removing capital gains removed the incentive to get receipts for purchases related to the property, that it means FWT would have to be paid even if the property were sold at a loss, that foreigners would have to pay the tax here and in their country of origin as it is considered to be a transaction tax which does not fall under the umbrella of double taxation agreements.
The bottom line is clear: the changes have created more problems than they solved. The sector cannot afford yet again to take two steps forward and three steps back.
We must get it right first time and the only way to do that is to listen to all the stakeholders. No solution will appease all of them. But finance ministers have to juggle conflicting needs all the time.
Let us get this right before more damage is done.