Tricky questions on whether private homes should carry a higher tax burden

This can be in the form of capital gains taxes on transactions of homes, or levying tax linked to the capital value of a home or raising property taxes

Nov 02, 2021

GOVERNMENTS across the globe have spent vast sums of money to help people and businesses deal with the economic devastation wrought by the Covid-19 pandemic.

As countries look to build back better from the pandemic, strengthening social safety nets and fighting climate change will add to the strain on government purses.

Singapore has spent huge sums in fighting the pandemic, and is confronted with an ageing population and increasing spending on healthcare.

Fortunately, Singapore has built up reserves over the years. Investment returns of the nation's reserves supplement the country's annual budget through the Net Investment Returns Contribution (NIRC). But returns from the NIRC are facing significant headwinds in a more challenging global investment environment, said Finance Minister Lawrence Wong at an event organised by the Institute of Policy Studies (IPS) last month.

Minister Wong said the sustainable and responsible way to fund Singapore's recurrent expenditures is to raise tax revenue and to do so with a fair and progressive tax system.

There is pressure to raise more taxes, with the goods and services tax (GST) rate set to increase from 7 per cent to 9 per cent by 2025.

During a dialogue session at the IPS event, Minister Wong noted that the government is studying possible options for expanding wealth taxes that are effective and not easily avoidable.

Do higher taxes loom for residential property? Private homes already shoulder a big tax burden.

For property purchases, Buyer's Stamp Duty (BSD) applies. The top rate of BSD for homes, which applies to the remaining amount of transaction value exceeding S$1 million, rose from 3 per cent to 4 per cent for properties bought on or after Feb 20, 2018.

On top of BSD, Additional Buyer's Stamp Duty (ABSD) may apply for purchases of residential properties on or after Dec 8, 2011. For example, ABSD is payable for Singapore citizens buying their second home, permanent residents buying their first home and foreigners buying any residential unit at rates of 12 per cent, 5 per cent and 20 per cent respectively.

Also, Seller's Stamp Duty (SSD) applies if a home is sold within three years of its date of acquisition.

In 2020, the amounts assessed for BSD, ABSD and SSD relating to private homes were S$1.31 billion, S$966 million and S$18 million, respectively, according to the Inland Revenue Authority of Singapore (IRAS). The amounts assessed for 24,860 and 5,770 transactions, respectively, for BSD and ABSD work out to an average of close to S$53,000 in BSD and just over S$167,000 in ABSD per transaction.

Property tax is payable on property ownership in Singapore, whether the property is owner-occupied, rented out or left vacant. Property tax is applied on the Annual Value (AV) of the property, which is the estimated gross annual rent of the property if it were to be rented out, excluding furniture, furnishings and maintenance fees.

For homes, property tax is applied on a progressive scale. Owner occupiers enjoy a lower tax rate than non-owner occupiers. For a home with an AV of S$40,000, the annual property tax payable is S$1,280 for an owner-occupier and S$4,200 for a non-owner occupier.

Tax collected by IRAS for the financial year ended Mar 31, 2021, from property taxes was S$3.1 billion, down 34 per cent year-on-year amid tax rebates.

Top tax contributors

The top contributors to tax collected by IRAS in its latest financial year were corporate income tax, personal income tax and GST which contributed S$16.1 billion, S$12.8 billion and S$10.3 billion respectively.

Progressive personal income tax will likely continue to be a key tool to combat income inequality. There could be scope to make personal income tax more progressive by raising the top rate.

What about calls for more wealth taxes applied to property and inheritance to fight wealth inequality?

Private homes already contribute substantially to tax revenue. The government also receives proceeds from land sales and stamp duties as well as corporate income taxes from developers of new homes.

While the gains from increases in private home prices accrue solely to the homeowner, they may arise due to the efforts of the government and society at large.

For example, good public infrastructure can raise the value of homes. Attracting businesses to set up shop and create high-value jobs here can boost housing demand. Having good public safety and social harmony can lure foreigners to invest in homes here.

Given the above reasoning and the need to raise monies to fund public spending, perhaps private homes can shoulder a heftier tax burden.

This can be in the form of capital gains taxes on transactions of homes. Alternatively, levying tax linked to the capital value of a home or raising property taxes can add to the recurring income of the government.

As to inheritance taxes, Singapore removed Estate Duty for deaths on and after Feb 15, 2008.

Many people, who cherish being able to share the fruit of their labour in the tangible form of a home with their loved ones or favourite charity when they pass away, may baulk at any reintroduction of Estate Duty.

If Estate Duty applies only to a high threshold of asset size, this need not scare the large number of homeowners here.

Fighting inequality through more wealth taxes can be politically acceptable and even popular if only a small number of people pay such taxes.

Also, such taxes need not stymie Singapore's growth as a wealth management hub if Singapore's attributes of transparency, stability and ease of doing business remain strong.

However, levying more taxes on homes and inheritances should be carefully thought through so as not to excessively penalise those who strive to build up wealth by working hard, saving and taking risk, and seek to provide for themselves in their later years or their loved ones.

If homes have to bear a larger tax burden, what about other property types such as conservation commercial shophouses, which are popular for investing to preserve wealth?

When it comes to the wealthy stepping up to combat wealth inequality, perhaps homes can contribute via the good class bungalow (GCB) segment.

Wealth taxes on GCBs

Rolling out additional wealth taxes only on GCBs can be justified on the grounds that planning guidelines help to ensure scarcity of product. The Urban Redevelopment Authority (URA) has carved out 39 GCB Areas (GCBAs) in Singapore, which are largely in districts 9, 10 and 11. This includes areas such as Nassim Road, Cluny Hill, Queen Astrid Park and Victoria Park.

Within GCBAs, the URA stipulates that detached homes with minimum plot sizes of 1,400 square metres and maximum site coverage of 40 per cent are to be built.

The guidelines help ensure that GCBAs are low density enclaves of exclusivity and tranquility. In land scarce Singapore, having GCBAs gives up using land more efficiently to build high-rise units that can house many households.

Debate will ensue on how Singapore aspires to fulfil diverse objectives of being open, vibrant, inclusive, compassionate and fair, among others.

Having more people hold good jobs so the base of personal income tax payers increases, having more businesses grow their presence here so more corporate tax gets generated and increasing the GST rate can help raise government revenue.

Still, private homes may find it hard to dodge being tasked to contribute more to tax revenue.

While homes may be solid long-term investments in a Covid-endemic world, buyers need to watch out for the tax collector who may be eyeing a larger piece of the pie.