Making sense of the property gains tax amendment

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.

Source: Business Times, 10 July 2009