About the ‘right’ property behaviour tax

Source : Straits Times – 25 Aug 2009

THE odd feature of the Finance Ministry’s decision to not change the law on taxing gains made in individuals’ property deals was that the public was asked its comment. This was being truly consultative, but was the outcome ever in doubt? There would not be a living person on earth who would say, without a trace of irony: ‘Yes, tax me some more.’ Without prejudice to the merits or demerits of the case, opposition was a foregone conclusion. The ministry received 64 responses to its proposal to make unambiguous the definition of which transactions over how long a period of time are not subject to income tax. This had the effect of making more property deals taxable as additional personal income. All but four of those who made submissions were opposed. The surprise was that it was not 64-0. Straight off, professional speculators and dabblers alike would be delighted, as the taxability stand is up to the taxman’s interpretation of how ‘regular’ transactions had been. Tax law is better clear-cut than open to interpretation and court challenge.

The announcement last week came smack in the middle of a real estate revival, where prospective price volatility caused partly by speculative behaviour is certain to cause the Government fresh problems. The proposal, the ministry explained, had nothing to do with influencing property cycles but was meant to stabilise the income tax structure. But there is no running away from the fact that disruptive and extreme price swings and the social consequences arising, evident at least since the early 1990s, are better moderated by law if necessary than be left completely to market forces. If it is the Government’s judgment that speculation – of both the local and foreign moneybags varieties – will have an ever more pernicious effect on real estate in a land-scarce country, it will want to have in its armoury a law to discourage conduct that benefits a few but causes undue anxiety and uncertainty among genuine buyers.

It could consider at some stage a standalone law to corral speculators by levying a tax on a sliding scale over maybe a five-year period. A property sold within the first year will attract the most tax. Thereafter the tax will be on a reducing scale until after the fifth year, when disposals attract no tax. Such tax treatment is biased intentionally against quick resale, but would not punish an investor who may sell only after values have accumulated over a number of years. The Government may well determine that flipping is a minority activity, and it is true not all speculators clear untold riches at the expense of a boring but stable market. In which case, keep a hawk’s eye on mounting buyer anxieties.