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David Sandison examines the influence of real estate on the economy and explores ways to bring in additional tax revenues and provide price stability.
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This article was first published by The Business Times on 6 May 2021.

 

Real estate in Singapore in many ways is a common denominator underpinning many of the country's issues. When property prices rise, it is only to the benefit of those who enjoy the luxury of being investors. High prices make it more difficult for the younger generation to aspire to home ownership and puts them under pressure to demand higher wages. It makes the absolute jump between an existing home and the dream home just that - a dream.

High prices also lead to increased cost of doing business while market volatility leads to developers over-shooting demand. But fundamentally, real estate does not generate wealth for the economy, unless it is being used productively for industry. Investment in residential real estate also diverts funds from finding their way into much needed business investments. A stable and reliable real-estate market, on the other hand, benefits the whole economy.

Particularly in the residential sector, it is common for foreign wealth to be parked in the relative safety of the Singapore real-estate market. This has continued to put upward pressure on prices, despite the significant stamp duty imposed on the acquisitions and disposals of such property. In our view, the influence of real estate on the economy and how it may be used to provide additional tax revenues as well as provide price stability needs to be examined more closely. Some of our thoughts on the topic:

Extracting taxes from owners of unoccupied residential property

There is a marginally higher property tax payable for non-owner occupiers than owner-occupiers. However, this does not distinguish between local owners and foreign owners, with foreign owners being neither citizens of, nor residents in, Singapore. As noted above, Singapore real estate provides a safe-haven parking lot for foreign wealth. Property can be left empty without fear of the owner coming back and finding it burned to the ground or full of squatters. Therefore, foreign owners who want to use Singapore real estate as a proxy safety deposit box for their funds should be expected to contribute to the economy that is providing that security. This reputation and security is Singapore's intangible property and it is of great value.

There are two ways that additional tax revenues could be raised from this under-exploited asset. The first would be to impose an additional tier of property tax, with unoccupied property owned by foreigners taking the highest hit; the alternative would be to impose income tax at the top marginal rate for foreign individual owners (22 per cent) on "deemed rental income" if the property remains empty. Or it could involve a mixture of the two. Where the property is let out, property tax would be lower, and income tax imposed on actual income. The beauty of real estate is that it is not going anywhere, and so in the event of default by the owner, the government has the keys, legally speaking.

The concept of deemed rental income could also be imposed on unoccupied second properties owned by Singapore residents, at their marginal rate of tax.

Some may remember not so many years ago that this was actually the case under Section 10 (11) of the Income Tax Act. But back then, it even sought to tax you on the excess of annual value over a specified amount (last seen as S$150,000) of the place you were residing in. So, the concept is not without precedent.

It could be argued that the punitive stamp duties imposed on residential properties have already had a dampening effect on prices, while raising taxes. That is indeed true. But stamp duty only applies on transactions; and once the transactions dry up (under the weight of the duty), tax revenues fall off a cliff. The above proposals allow value to be extracted during the currency of ownership.

These measures, combined, could be some ways that more money is invested more productively into the economy - either by diverting the cash to more productive investments in the first place, or allowing the government to redistribute it from the Exchequer. But there are more ways to squeeze juice from this lemon.

Capital-gains tax on investment properties

As most people will try to tell you, Singapore does not impose a tax on capital. However, the line between a capital gain and taxable income is blurred. Many a battle with the tax office has been fought over the years over that line. A graduated capital-gains tax on real estate was attempted several years ago, but that failed. We believe that it is time now to reconsider such a tax on investment properties. Identification of an investment property would quite simply follow the non-owner-occupier status used for property tax purposes. The house you live in, your principal private residence, a question of fact, would be exempt from the tax.

The rate of tax need not be at marginal rates but could be a flat rate (say 10 per cent). This would add to tax revenues, as well as remove the perennial resource-wasting arguments about trading or investing.

These ideas tackle several different, yet interconnected, issues - stabilising property prices, encouraging investment into more economically productive areas, and taxing wealth effectively. It is time to end this unproductive love affair with property.