Source : The Business Times, July 10, 2009

More clarity needed on proposed refinement and about the tax itself

THE Ministry of Finance (MOF) has sought public feedback on certain proposed amendments to the Income Tax Act. One of these, which has received much publicity over the last few days, relates to a proposed 'refinement' to the policy on taxation of gains and losses from property sales.

Under the current tax regime, gains from property sales 'may' be taxed, either as trading gains or as 'gains or profits of an income nature'.

The proposed amendment seeks to add some clarity to this. Under the current regime, it is not clear who will be taxable or when. But under the amendment, anyone who sells only one property within any four-year period will not be taxable. However, if the person sells another property within four years of the first sale, the gains from the second sale 'may' be taxable. If passed, the amendment will take effect from next year.

News of the proposed amendment has set off jitters among people in the property business and the investment community.

A common (mis)interpretation is that a form of capital gains tax on property transactions is about to be introduced, and rigorously enforced.

Thus, after the news of the proposed amendment was publicised, one broking house put out a report which said: 'We find this news adversely affecting sentiment, especially in the upper-mid to high-end . . . We see developers with large unsold inventory in the high-end as potential losers from this news.'

The MOF subsequently clarified that the proposed amendment 'involves no tightening of the current income tax policy for individuals who sell their properties'. It is only aimed at 'giving certainty of non-taxation to individuals who do not sell properties frequently'.

But the heart of the matter is that even under the amendment, the provision for a property gains tax remains on the books.

The fact that it was already there is news to some people, especially as it has apparently been very sparingly enforced: over the years, hundreds of speculators have flipped properties for a profit, and then done it again within days of the first flip, without being hit by the taxman. Investors everywhere have come to presume that Singapore has no property gains tax.

But it is there, on the books. And now, there is a proposal for it to be 'refined'. What should one make of this?

What's the rationale?

The first question is, what is the rationale for having such a tax? One possible rationale is to curb speculation, which is fair enough.

But the government maintains that the proposed change is not an anti-speculation measure. Another rationale is to prevent people from passing off income gains as property gains. This could well be the reason why the provision to tax property gains exists. But if so, it needs to be clarified that the tax would only be enforced when this happens and at no other time.

But then, why the proposed four-year interval before property transactions are deemed to be free of tax? What happens to those who dress up income as property gains every five years?

The rationale apart, another problem with the tax is its apparent lack of fairness. It might be levied on some people, but not on others who do the same thing, and nobody except the taxman knows why.

A third problem is unpredictability - despite the greater element of certainty that the proposed amendment seeks to introduce. You definitely won't be taxed if you sell two properties more than four years apart. But if you do so within four years, you might be taxed. Or you might not.

At a minimum, we need a lot more clarity, not just about the proposed amendment to the property gains tax, but also about the tax itself.

The fact that some other countries have it too is not an adequate reason for keeping it, or for assuming that it is flawless. And if it isn't, then the government should consider another option: sometimes, the best way to refine a flawed policy is to abolish it.

Govt Clears Air Over Tax On Property Gains

Source : The Business Times, July 10, 2009

Ministry says proposed change aimed at giving certainty and is not a move against property speculation

Has the market worked up a storm in a teacup over a suggested change to income tax laws on gains from property sales? Keen to quell rumours about an anti-speculation drive, the Ministry of Finance (MOF) clarified yesterday that the proposal is unlikely to lead to more individuals being taxed.

Still, some industry watchers believe that the potential change is enough to worry property investors - many of whom have returned to the market only recently.

Currently, property sellers do not pay tax on gains unless the Inland Revenue Authority of Singapore (IRAS) sees them as traders and treats the gains as income. The IRAS makes its decision on a case-by-case basis, considering factors such as why the properties were sold, how long the sellers owned them and how frequently the sellers transacted properties in the past.

These factors are derived from case law and are not clear-cut. According to MOF's statement, just 'a small number of individuals' have been taxed on gains from property sales in the past.

There are individuals who want greater clarity on whether their gains will be taxed, MOF said. Responding to feedback, it proposed last month a condition that would guarantee no tax: An individual who sells a property on or after Jan 1, 2010 will not be taxed on the gains if he has not sold any other property in the previous four years.

This is actually 'a relaxation of income tax treatment aimed at giving certainty of non-taxation to individuals who do not sell properties frequently', MOF explained.

The proposal does not mean that those who sold more than one property within a four-year period will definitely be taxed on the gains. In line with existing arrangements, IRAS will still assess these cases individually. 'There is no change to the current and long-standing income tax treatment in this regard,' MOF pointed out.

MOF did not reveal the exact number of individuals who have been taxed on gains from property sales. But it said in an email to BT: 'If the proposed change is implemented, MOF does not expect the number of cases to increase. This is because the change does not involve a tightening of the rules.'

In fact, 'the number of cases may fall if all things remain constant' after the change, it says.

Rumours that the government was trying to curb speculation in the property market gained ground after news of the potential change got round. Property sales have been buoyant since February this year, and selling prices in some projects are said to have risen by a few per cent. Some market watchers attributed the improvement in part to the return of speculators.

In its statement, MOF emphasised that the proposed change is not an anti-speculation measure. It also reiterated that Singapore does not have a capital gains tax.

MOF's clarification has soothed the market somewhat. On Wednesday, fear that investors could exit the property market and perhaps confusion over the proposal had pushed prices of several property counters down. The selling pressure eased notably yesterday. City Developments, for instance, gained 43 cents to close at $8.31, while CapitaLand rose 12 cents to $3.50.

Despite the official reassurance, there are still nagging worries that the potential change to income tax laws could hurt investor sentiment, particularly in the prime property sectors.

'Demand for mass-market homes should hold, backed by HDB upgraders, while mid to high-end segments may experience slower take-ups from reduced speculative interest,' said AmFraser Securities analyst Lau Wei Chong in a note yesterday.

There are also industry watchers who stand by the anti-speculation theory. 'We remain believers of the idea that the government may be sending out a signal through this proposal to cool property transactions, especially in the high-end,' said CIMB analyst Donald Chua in a note.

To curb speculation in the property market in 1996, the government had imposed income tax on gains which individuals made from selling properties within three years of purchase. It lifted the rule in 2001.

Not To Penalise Investors

Source : The Straits Times, July 10, 2009

TAX PROPOSAL ON GAINS FROM PROPERTY SALES

Aim is to ensure sellers are not taxed on gains if they don't sell frequently

THE proposal to clarify the law on taxing profits from property sales is not a backdoor attempt to impose a capital gains tax or a pre-emptive strike against speculators.

ST PHOTO: ALPHONSUS CHERN

The clarification from the Ministry of Finance (MOF) on Thursday came after two days of confusion and disquiet over proposals to amend the Income Tax Act.

Concerns among property investors and analysts helped to send real estate shares plunging on Wednesday, but Thursday's statement from the ministry sparked a stock rebound.

The MOF said the proposed change is aimed at ensuring that investors are not taxed on any gains made if they do not sell property frequently. It proposes that anyone who sells only one property in any four-year period will not be taxed on any profit. If it becomes law next January, it will provide certainty for owners. At present, they cannot be sure if they will be taxed on any gains, even if they have held the property for four years or more.

The proposal was made in response to public feedback over the years demanding more certainty over the tax treatment property-owning individuals might face, said the MOF.

It is believed to have arrived at the four-year timeframe, after studying the legal precedents on taxing property sale gains over the years.

The proposed tax change does not mean tougher rules in income tax policy for individuals who sell their properties.

Instead, the only proposed change involves assuring individuals who do not sell properties frequently that they will not be taxed on a real estate gain.

The ministry said the proposed change is also not an anti-speculation measure. It does not mean that individuals who have sold more than one property within a four-year period will automatically be taxed.

'There is no change to the current and longstanding income tax treatment in this regard. Whether an individual who sells properties more frequently is subject to income tax depends on the facts and circumstances of each case,' the ministry said.

It is believed that there are fewer than 100 instances each year where a property seller is deemed to be a trader and needs to pay tax on gains.

And unlike many countries, Singapore does not have a capital gains tax, but profits from selling a property can be taxed at the appropriate income tax rates if the Inland Revenue Authority of Singapore (Iras) deems the seller to be a trader.

Iras uses various yardsticks to determine if a seller is a trader. These include the circumstances leading to the sale, how long the individual has held the property and how frequently he has sold properties in the past.

The Finance Ministry also clarified that individuals will still not be required to report to Iras every time they sell a property.

'Iras has always conducted its own audits of property transactions for possible cases of assessable income,' it said.

Market experts welcomed the Government's move to clear the air on the proposed tax change.

'Individuals can take comfort that if they sell more than one property within a four-year period, this would not automatically subject them to income tax,' said Mr Owi Kek Hean, KPMG's head of tax services.

'The statement removed any lingering misgivings investors might have over the proposed tax changes. They can go back to business as usual,' said Mr Tan Tiong Cheng, chairman of property consultant Knight Frank.

The stock market also heaved a sigh of relief, as the statement quelled earlier fears raised by analysts that the proposed tax change might be a disguised move to impose a capital gains tax.

Property giant City Developments rose 5.5 per cent, while CapitaLand gained 3.5 per cent, following Wednesday's sell-off when investors had reacted badly as news on the proposal broke.

# NO CHANGE to current and longstanding income tax treatment for individuals who sell properties frequently

# NO NEED for individuals to report to Iras every time they sell a property

# NO MOVE to impose a capital gains tax. Only those sellers deemed by Iras to be traders will be taxed

No Sign Of Excessive Speculation In Private Property: Mah

Source : The Straits Times, July 10, 2009

THE recent spike in private property sales is being monitored by the Government but there has been no sign of excessive speculation, said National Development Minister Mah Bow Tan on Thursday.

Mr Mah (left) said 'speculation is always part and parcel of any market. Whether there's excessive speculation or not, that is something we have to look at and watch out for.' -- ST PHOTO: LUIS ENRIQUE ASCUI

Mr Mah said 'speculation is always part and parcel of any market. Whether there's excessive speculation or not, that is something we have to look at and watch out for.'

'So far, anecdotally, we don't see any. But if there is, we will take the appropriate action,' added the minister, who was speaking on the sidelines of an HDB event.

The private property market kicked back into life in February after a sluggish 2008 that saw home prices and sales volume plunge on the back of the global economic recession.

The surge in activity, primarily supported by the healthy sales of private suburban homes, has helped stem the slide in private property prices.

Recent flash figures from the Urban Redevelopment Authority show prices fell 5.9 per cent from April to last month, following a record 14.1 per cent slide in the first quarter.

Mr Mah yesterday acknowledged the spike in activity, but added that prices have come down some 25 per cent over the last two to three quarters.

'I guess some of this increase in take-up rate is due to the property prices coming down. So whether this will be sustainable, I think it's really hard to tell.'

Sustainability will depend on two factors - sentiment and fundamentals, he added.

How the public perceive the health of the local and global economy will be crucial as will various factors, such as the supply, take-up rate and transacted prices in the private market over the coming months.

As far as the Government is concerned, 'our main interest is to make sure that the property market is an efficient one', said Mr Mah.

'By that, I mean that it functions well, and prices are more or less in line with economic fundamentals.'

The Government has released information on how much supply is coming onto the market, the transacted prices and how many units have been sold on the deferred payment scheme.

This gives buyers complete information, rather than to have reports of high prices alone, he said.

'For example, there are about over 40,000 units coming onto the market in the next three or four years - I think people must know that.'

The Government is also monitoring the market and will adjust the supply through its land sales programme.

'The objective is to keep the market efficient and (to do so), you need to give timely, accurate and comprehensive information to the public,' said Mr Mah.