Sunday, July 12, 2009

Property investors still jittery about tax policy

Iras does not have cut-and-dried definition of 'trader'

In the recent property boom that ended last year, MrLee (not his real name), a vice-president in a company here, sold three properties within a year.

One was a home he had lived in for many years, while the other two were investment properties whose prices were too good to pass up.

Just before he sold the third property, Mr Lee's lawyer warned him that all this buying and selling might get him into trouble with the Inland Revenue Authority of Singapore (Iras).

Specifically, Iras could deem him a property 'trader', which means that he relies on property transactions for income. If this happened, the profits he had earned on the three properties would have been added to his income that year, significantly increasing his tax burden.

With the property market in hyperdrive, however, Mr Lee, who is in his 30s, decided to take the risk and sell the third property. 'If you're going to get whacked, you're going to get whacked,' he said.

Fortunately for him, Iras left him alone. But the period of indecision he suffered over whether he would be taxed on the sale is not uncommon for property investors and genuine owners, even if they space out their property sales over a number of years.

To this end, the Ministry of Finance (MOF) is proposing to clarify the law on taxing profits from property sales. If it succeeds, property sellers will not have to worry about being taxed on their profits - as long as they let at least four years pass between each sale.

Even if they sell more than one property within a four-year period, it does not mean they will automatically be taxed.

Iras has no cut-and-dried definition for what makes someone a 'trader', but looks at factors including the reasons for the sale, how long the individual has held the property, and how frequently he has sold properties in the past.

In effect, Iras has not changed its rules on this matter - the danger of a property seller being categorised as a trader has always been there. Iras has also not tightened its standards, nor will it enforce them more strictly.

But last week's clarification of the four-year period - which the MOF says is meant to provide reassurance to property owners - has sent a wave of jitters through the property market just as it is starting to pick up.

Property stocks dived after news broke of the clarification, which is among the changes listed in a draft amendment to the Income Tax Bill put up for public feedback last month.

If the change goes through, the relevant new section will apply to properties sold from Jan 1 next year. A property owner selling his property on Jan 1 will definitely be safe if he has not sold any other property since Jan 1, 2006.

Stocks rallied a bit after the MOF stressed that the clarification is not meant as an anti-speculation measure, is not a disguised capital gains tax, and is not aimed at penalising property investors.

But some property agents told The Sunday Times that a few of their clients who had bought new properties recently backed out of their options last week after reading about the clarification.

Given that most property owners who leave a gap of four years between selling their properties are unlikely to worry about being taken as traders, some have questioned the need for this clarification.

'It provides clarity for people who sell only one property in four years. But it has made things even more uncertain for those who sell one property and then want to sell another two years later,' said a 34-year-old property investor who wanted to be known only as Ms Lim.
For some seasoned investors such as Mr Chen, who is in his 30s, the 'clarification' makes no difference.

'I'm a bit more obvious to Iras. I've bought and sold more than 10 properties in the last several years,' he said. 'I argued to Iras that some of the properties were bought under my company. But it's up to their discretion to decide what makes a property trader, and this clarification doesn't make it any clearer.'

The four property investors who were interviewed for this article declined to give their real names in case Iras decides to keep a closer watch on them.

One of their main gripes is that the four-year period seems arbitrary.

'For new HDB flats, you can't sell until five years later. For resale, it's one year. So how did they come up with four years for this rule?' said Mr Lee.

It is believed that Iras decided on the timeframe based on legal precedents.

One court case that made headlines in 2007 was that of a couple who bought eight properties and sold seven between June 1988 and March 1996.

In 1999 and 2000 - the taxman can retroactively 'catch' you for up to eight years after you sell your property - Iras charged the couple $250,000 in tax on the $1 million profit they had made from four of those properties.

The couple appealed on three properties, but only one was allowed. They then took their case to the High Court and managed to get another property off the hook - after pleading that they had sold the apartment because of its bad fengshui.

The case was hailed not only as a landmark decision based on fengshui, but also as a timely reminder of the existence of Iras' laws on taxing property gains.

This time, however, the reminder may not be so timely. Property agents are concerned about the timing of MOF's clarification, saying it would derail the fledgling rally in the property market, which in turn could contribute to a delay in any economic recovery.

'There aren't any new measures introduced, everything remains status quo, so why create unnecessary excitement or concern in a market that's just finding its footing now?' said Mr Mohamed Ismail, chief executive officer of real estate agency PropNex.

Still, some would-be investors are not deterred.

Mr Tan, who runs his own company and is in his 50s, is on the verge of buying a new investment property. He already owns 'a few', which he rents out.

'I don't see myself as a trader,' he said. 'I don't intend to buy and speculate. I buy to hold, but even if I sell it in two years, I will put forward the case to Iras that I'm not a trader.'

If the worst happens and he gets taxed, he will just 'factor the extra tax into the cost of my investment'.

'This policy will not derail me from trying to make money from property,' he said.
Not every investor is so sanguine, however.

Mr Lee, for one, is casting his eye on overseas properties. 'I would head to London or Australia or the United States. Some of these places have capital gains tax, but at least property prices there are much lower now, so they may be more worth it.'

Tax on property gains: Up to Iras to decide

Whether or not a property seller is taxed on his profits is ultimately up to Iras.

The tax agency does not require individuals to alert it when they sell their properties. Iras has always conducted its own audits of property transactions for possible cases of assessable income.
It will use yardsticks such as the circumstances leading to the sale, how long the investor has held the disposed property and how frequently he has been selling properties in the past.

Let's assume that a certain investor is among those audited for income, and that after taking all these factors into consideration, Iras decides that he should be taxed.

If he earns an annual income of $100,000, and he has made a gain of $300,000 on selling his properties, his total assessable income for the year will now jump to $400,000.

A back-of-the-envelope calculation shows that his income tax will also soar by $51,600 - from $7,100 to $58,700.

This is largely because the surge in his income has pushed him into a higher tax bracket: his top tax bracket has gone from 14 per cent to 20 per cent.

In Singapore, individuals do not pay tax on their first $20,000 of annual income.

They will pay 3.5 per cent tax on the next $10,000 they earn and 5.5 per cent on the following $10,000.

Income above $40,000 will be taxed at 8.5 per cent, and for amounts more than $80,000, the rate goes up to 14 per cent.

The maximum rate is 20 per cent, which is applied to whatever income an individual earns over his first $320,000.

Source: Sunday Times, 12 July 2009

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