The Notarial Council is hoping that the government will reconsider its decision to remove the option for property sellers to pay capital gains tax, at least in certain transactions.

It has proposed concrete alternatives to the Ministry of Finance and the Inland Revenue Department. At this point, however, such changes should only be done after a thorough consultation is held with all the relevant stakeholders.

The Notarial Council had been in regular contact with the Finance Ministry and the Inland Revenue Department (IRD) about an overhaul of the tax scheme on property, which has been tweaked a number of times since 2006.

However, it was not informed that decisions had been taken and had been taken completely by surprise by the Budget announcement that would limit tax options to a final property transfer tax on the whole selling price as from January 1, 2015.

The details given in the Budget speech were minimal and the council scrambled to get more information so that notaries could publish contracts of sale safe in the knowledge that the correct tax rate and regime were being applied. A number of meetings were held after the Budget with the Inland Revenue Department in an effort to understand the variants, exceptions and exemptions, among other things.

Council president Clinton Bellizzi held up a detailed two-sided flow chart that the council drew up together with the director general of Inland Revenue to help its members decide what tax rate is applicable. A ‘frequently asked questions’ section was also put on to the IRD’s website (www.ird.gov.mt) and its own (www.notariesofmalta.org) covering all the reasonably foreseeable scenarios that could materialise following the coming into force of the new tax regime with all the possible variants and exceptions.

Notaries are at the front line and ultimately take decisions every day about what tax rate to apply

Dr Bellizzi described the notaries as being “an extension of the State” and made it clear that even though it was not consulted about the system announced, their duty was to accept the changes, understand the new system, assimilate the posible permutations and move on. “We had to make sure that we fully understood the system as we need to advise the vendors accordingly. If we get the tax wrong, then the IRD might go back to the vendor to collect the shortfall – and we could also ultimately be liable,” he said.

The changes made in the Budget reduced the final withholding tax rate – but removed the capital gains option. All the statutory exemptions that were in place prior to 2015 were retained.

“But the new system does not afford the possiblity for vendors to apply for an exemption from tax if selling at a loss or breaking even and they still have to pay the applicable rate of final withholding tax, that is, either five, eight or 10 per cent” he said.

The new scheme has come under fire as the capital gains option worked by allowing the vendor to offset expenses for sale of property taking place within 12 years from acquisition. This system taxed the actual profit made on the sale and provided a solid incentive to get Vat receipts and deter tax evasion.

However, Dr Bellizzi said that at this point, it would be unwise to simply suggest reverting to the old scheme without considering an alternative method of taxation in agreement with all the stakeholders.

“Notaries are at the front line and ultimately take decisions every day about what tax rate to apply. We need certainty,” he said. “We have all voiced our concerns about the new scheme but suggesting a change in the system at this point would be unsettling for everyone involved.”

He proposes that the government should sit down with all the stakeholders – not just real estate agents and developers, but also accountants, notaries, the Kamra tal-Periti and financial advisers.

“It is very important that all the stakeholders’ views are considered. We can’t have one influential sector which imposes the situation that suits it best.”

The old scheme had its share of problems and burdens. The capital gains system was based on the presentation of fiscal receipts to justify the expenses claimed, which posed an administrative burden on the IRD.

Another administrative burden is the refunds that had to be paid on provisional tax collected on contract.

“The system is set up in such a way that provisional capital gains tax collected on contract is worked out on the property sale alone, but when the vendor – whether an individual or a company – comes to submit the income tax return for the year, the capital gain is calculated on the actual profit made. Therefore, the taxpayer may be entitled to a refund.”

“However, this administrative burden could be lightened by resorting to independent third parties – like an accountant or auditor – to draw up the profit and loss on the sale of the property under their responsibility,” he said.

Proposals along these lines had already been made by real estate veteran Frank Salt prior to the Budget, but they had not been taken up by the government.