Published Thursday 15th April, 2004

This week we will end the series on property taxation by summarising some of the main points to emerge from the past 3 weeks' columns.

Only a fortnight ago we heard the pointed criticism of one of our leading businessmen, Mr Arthur Lok Jack, on the fact that most of our national budget is spent on recurrent expenditure with only a small part devoted to capital creation.

We really do need to spend more on capital creation if we are to develop our country's resources.

The question is whether this can be afforded with the current taxation regime of breaks and, in the case of property taxes, outdated and under-enforced taxes on a sector brimming with benefits for investors.

Of course, we all have objections to wasteful State spending and those issues must be tackled by the development of realistic performance measures.

A fortnight ago we had the beginnings of a fruitful debate on the disappointing performance of TTPost during a Senate debate sparked by the Government’s attempt to continue the benefits enjoyed by that utility.

It is a legitimate concern that increased taxes could end up being wasted, but we have to call for these performance measures to be put in place.

Some of the key points to be made here are:

Purposive Taxation: It is clear from the series that there is little attempt to use property taxes to achieve objectives beyond financing the expenditure of government.

Progressive taxation: The Stamp Duty regime does contain elements of progressive taxation in that more expensive properties are more heavily taxed upon transfer.

Dynamic BIR/C&E: The new Revenue Division‚ would have access to the vast web of services into which just about everybody is tied — TSTT, TTEC, WASA, TTPost, Registrar General‚s Department and so on — all keep records which could be used to improve levels of collections.

It is interesting to note that in the last week or so there have been advertisements in the press which would indicate that there are moves to revise the State’s stance on Tax Evasion and the Land & Building Taxes.

Stamp Duty

Stamp Duty is the tax paid by purchasers of property.

The rate of Stamp Duty increases with the value of the property with higher taxation applying to non-residential property. In the case of non-residential property, this can be as much as seven per cent for most of the price. The rule is that the BIR will charge the higher of the stated purchase price or the open market value; they also have the power to seek a valuation if the purchase price seems too low.

Some of the key points arising in the Stamp Duty discussion are:

Good job: The graph shows the State income from Stamp Duty on property in the period 1994-2004 and the rises in this income are truly impressive.

From just over $20M in 1994 to estimated receipts exceeding $145M in 2003 and 2004. It would seem that the Stamp Duty section of the BIR is equal to the challenge of dealing with our rising property market and its increasingly sophisticated players.

We would also add that an examination of the figures published in the Ministry of Finance’s Estimates of Revenue show a good degree of correspondence between the estimated income and actual receipts from this tax.

Differential rates: Stamp Duty is also charged on the sales of shares, but at a rate which is a tiny fraction of the rate applicable to property sales. Of course, this seems to be discriminating against the property investor but one could also ask whether the rate for equity investors is too low.

Evasion: The high rates of Stamp Duty have spawned a series of avoidance devices manufactured by purchasers and their advisers.

These range from inclusion of fixtures and fittings to artificially reduce the sale price of the property to simple miss-statement of the sale price. The most obvious effect of this is a loss of taxation revenue, but a serious secondary effect can be felt in the distortion of the nation’s records of property sales.

These records are maintained by the Registrar General’s Department and they would be the natural starting point for any research to revise tax rates on property or the construction of a house prices index.

If the records are wrong, it is impossible to rely on these and there are hard choices to be made. Either we tighten-up on the accuracy of the deeds entering this database: and hence increase the tax income from Stamp Duty: or we revise the basis of taxation.

Cecil Quesnel’s letter published here a fortnight ago mentions the effect of these high taxes in terms of cheating and suggests a lower rate to reduce this level of cheating.

It is my view that a reduction in the rate will not curb the appetite for cutting corners and only proper monitoring of this web of investments will yield a true picture, but it is essential that the database be restored to its prime position as a true record of transactions.

Next, we will be talking about the so-called property bubble‚ and moving on to discuss the future of Caroni’s lands.

Limiting land taxes

Let me take a little space in this week’s column to tackle the interesting points raised in Cecil Quesnel’s letter published in the Business Guardian a fortnight ago.

Mr Quesnel mentioned an earlier discussion on the issue of limiting land taxes to the land element of a property.

This is a very logical measure which should have the effect of penalising landowners who do not develop their properties, since they will pay the same tax as adjoining owners who have built on their land. The intention is to reward development of land by not increasing the taxes due upon development.

Mr Quesnel’s central point is that Stamp Duty rates could be reduced to limit the cheating‚ and that Land & Building taxes could then make up the shortfall if they are correspondingly increased to take account of only land values. In order to assess these ideas we would need to understand the operation of the property market and those taxes.

If we take the two extremes of the market the point can be illustrated since the normal family buys a single home and lives there for several decades.

The property trader/investor buys and sells many properties in the course of a year and occupies only one or two.

The point here is that the average family would only have a single encounter with Stamp Duty: i.e. when buying their home: while Land & Building taxes are a constant if they want to claim the BIR relief on mortgage interest.

The property trader/investor has many encounters with Stamp Duty and limited exposure to Land & Building taxes: even that encounter is balanced by the income they receive from the properties they hold in their portfolios.

To alter the existing system as Mr Quesnel suggests would relieve the trader/investor of substantial tax burdens and shift these onto the ordinary household.