Taxation Of Real Property In Singapore
Real property encompasses land, buildings and fixtures and the bundle of rights that comes with the real estate. The bundle of rights are rights such as ownership, land zoning, etc. While in a real estate there are also personal properties which are tangible and intangible. Tangible items are movable items such as chairs and tables, these fall under the subcategory of chattels. The intangible aspect is goodwill, brand recognition, etc. The personal properties are not included in the taxation. While only real property is being taxed.
Type Of Taxes
Non-Recurrent Tax : This is a tax that is not recurring. It happens only once if an activity takes place. Example, Stamp Duty, GST, Betterment Levy / Development charge, Estate Duty.
Recurrent Tax : This is a tax that is recurring periodically. Example, Property tax, Income Tax (on rental income).
When Will You Be Taxed?
When there is a sale/purchase/transfer/death where a change of ownership happens, when you let out or rent a place, when you own a property, for use/enjoyment and upon land value enhancement/redevelopment. Tax can be in the form of stamp duties such as buyer stamp duties, seller stamp duties, property tax and income tax.
How Did Property Tax Come About?
In the 19th century, economists singled out land as a subject for taxation. Property tax is a tax on immovable property. It is a good base of taxation as it is not easily hidden. The collection cost is also low. The government also has a more predictable revenue as land is fixed. The thing about property tax is that it is a wealth tax. It is a tax because someone owns a real estate.
Singapore’s property tax system was derived from the British Rating System. Prior to 1961, rates were collected by two different local authorities. City Council for urban area and District Councils for the rural area. The tax collected was used for the provision of local services and utilities. However, from 1 Jan 1961, property tax became a pure fiscal tax going into the consolidated fund. With Property Tax Act Cap 254 coming into effect.
Why Does Property Tax Matter To A Country?
Property tax contributes significantly to tax revenues. On the average, property tax accounts for 1% of the GDP in each country worldwide. For Organisation for Economic Cooperation and Development (OECD) countries, it collects more than 2% of GDP. While the value of real property is increasing over the years, property tax is gaining more importance.
Tax Base Options For Property Tax
- Site Value/Land Value
- Captial Value
- Rental Value/Annual Value
Individual countries may choose either one or a combination of both. The base value is constantly revised and can be charged based on prevailing value or fixed date value. For Singapore scenario, it adopts an Annual Value tax base.
Site Value/Land Value
This method allows only the land to be taxed without including any buildings.
PROS: This method allows for full development potential and does not dis-incentivise building improvements.
CONS: Valuation of land by disregarding existing buildings may be difficult and controversial due to the lack of market data. If many owners own the land such as strata titled property, it would be hard to apportion tax equally to every party.
Captial Value Base
This method taxes based on the property capital value which includes both the land and buildings.
PROS: It is much fairer as value is based on the entire property assets that individual owner possess. It is also easier to explain and accept that property tax is a wealth tax from this method. If there are more sales transactions it would be easier to value as most considerations would have already been priced in the transaction price.
CONS: Sales price can be very different at different locations, due to footfall, etc. Thus there is more variability than rental value base. It is also more volatile than the rental value base. This method also dis-incentivise building improvements as any improvements will incurr a higher valuation and higher tax.
Rental Value/Annual Value Base
This method taxes based on a property’s rental value.
PROS: Rental values do not differ greatly and thus less variability as compared to capital value base. The rental values are also less volatile as compare to the capital value base. If there are more rental than sales transactions it would be easier and more accurate to value. This applies to office/retail units where most transactions are rental transactions.
CONS: It is difficult to explain to owners who do not rent out their property as to why they have to pay property tax as they assume that it is based on rental value but they did not get any rental income. It is often confused with income tax. Owners have difficulty accepting it as a wealth tax. Building improvements may lead to higher rental and annual value may increase and result in higher tax, this would dis-incentivise building improvements as well.
Challenges Faced By The Government
- Most homeowners do not understand the reason to pay a tax on the homes they own.
- Owners find it unfair and onerous as it is not related to income earned.
- Assessment values are subject to constant revision and increase in tax could be unavoidable.
- Annual value computation is not transparent in owner’s view.
- There could be inconsistency and assessment errors as it is subjective.
- Subjective valuation can be challenged.
Mitigation Measures Taken By Government
- Tax rebates.
- Progressive increase in tax payable.
- Freezing review/adjustment to valuation for a period.
- A limit cap on the increase in valuation or tax payable.
- Tax reliefs
- Tax remission
Have you seen any measures that are relevant to the Singapore’s context?
Property Tax System In Singapore
The property tax system in Singapore is based on Annual Value(AV) Base. AV is assessed by the chief assessor by looking at the market conditions. While the tax rate is prescribed by the government. This is a simple calculation, for an in-depth explanation of annual value look at my annual value post.
- Property Tax = AV x Tax rate (%) a year
- Example: Building AV $48,000 at tax rate of 10% pa
- Property Tax payable on building = $4,800
Singapore Property Tax Administration
Inland Revenue Authority of Singapore (IRAS) administers Property Tax. It undertakes both assessment and collection functions. Property tax collection in FY16/17 : $4.4 billion (about 1.06% of GDP). These revenue collected will be used to fund government expenditures in support of social objectives, maintain strong security and external relations and promote economic growth.