Taxing our love of property

I KNOW I am in good company when I say we Singaporeans love owning property. But, December 2023 was a time for reflection for many when property tax bills were issued. For those who have the good fortune of owning property, did you take a look at your latest property tax bill? Did you take a close look? And relooked? Yes, it did go up. For some, it increased by a bit. For some others, it nearly doubled.

Let’s break down the causes of the hike in the fateful tax bill. First, this is due to the increase in the property’s annual value (AV), which reflects the increased (hypothetical) market rental value. This should be a good thing for owners. Second, the rise in the tax bill is also due to the increase in the property tax rates and the change in the banding of the annual value. The combined forces of both effectively increased overall property tax rates.

For example, from 2015 to 2022, the first S$55,000 of AV attracted a property tax of S$1,880 or an effective rate of 3.4 per cent. In 2023, it rose to S$2,430 or 4.4 per cent, and it rose again to S$2,980 or 5.4 per cent this year. Looking at this uptrend, should those who're paying more property tax count themselves privileged or the opposite?

If you are paying a lot more as property tax, it should mean that you are fortunate enough to own a high-value residential property. It should also mean that the potential rental income and rental yield, and subsequently its capital value, have increased, which translates to a boost in the owner's wealth.

This may sound paradoxical, but tax collections play a part. It allows our country to build infrastructure, maintain the rule of law, protect the borders, and provide education and health services, among other things. The reserves provide stability, especially in times of tribulation. Investors are in Singapore for many, if not all, of these reasons. There's no question that taxes on income, consumption (through GST) and assets help fund the infrastructure that drives economic growth. In such a circularity, tax collections will grow as businesses, employment, salaries, and the value of key assets, such as property, grow.

For someone fortunate enough to own and live in a landed property that's worth, say, a whopping S$10 million at the start of 2023, he or she would have scored a capital appreciation in the year of an average of 8 per cent (based on Urban Redevelopment Authority data). This is equivalent to a gain of S$800,000. Not bad for just holding it. It is likely that the AV of such a property would be in the S$120,000 range, and the property tax bill for 2023 would be S$13,330. This seems a lot smaller when compared with the unrealised capital gain. Assuming 2024 sees a further S$700,000 increase in capital value with a modest increase in AV to S$130,000, the property tax of 2024 would be S$21,580-significantly higher than in 2023. But, if you juxtapose this jump in property tax over the two years at S$8,250 against the unrealised increase of S$700,000, it is only 1.2 per cent of such gains.

If we take property tax as a proxy for a wealth tax, we are looking at a wealth tax rate of 0.2 per cent on the asset value of S$11.5 million (S$10 million plus the unrealised gain of S$1.5 million over two years). In such a case, we should reflect on whether such a tax does seem reasonable. But what about the plight of the retired asset-rich-cash-poor aunty or uncle who owns a property that you might've heard of? The rising property tax bill sounds unkind when they're looking forward to sailing into the sunset and are suddenly faced with a large property tax bill. Depending on who you ask, that aunty or uncle may receive sympathy (or not), but what can they do about it? In cash-strapped situations, although considered unconventional especially in traditional Asian cultures, a reverse mortgage that allows for an encashment of the capital appreciation to meet the costs of owning such a property can be considered. For those with children who stand to inherit the property tax-free along with a windfall gain, perhaps the duty associated with inheritance. There is, of course, the option to realise the gain through a sale, and placing such properties in the market can help stabilise prices for more to enjoy, contributing to greater circularity.

If we were to replace the revenue generated through property taxes with higher corporate and individual tax rates, this could have a negative impact on Singapore's attractiveness-and, perhaps ultimately, the capital appreciation of our properties. If we think of property taxes as a toll to increase the capital value of our much-loved asset, perhaps the increased taxes would become more palatable. Owners of properties who made that wise investment years ago need to recognise that the capital appreciation is a result of Singapore's success over the decades, and the gains in value have not been taxed. If the owners decide to realise the gain through a sale, such gains are generally tax-free unless they are trading in properties; think of this as your personal tax-free reserves which you can unlock.

While the increase in property taxes seems fair when looking at the big picture, certainty around the tax rates remains key to a competitive business environment. Our ask for Budget 2024 or to decision-makers is for greater stability in the system such that no further significant increases are imposed until the dust settles. At the same time, property owners should be assured that when there's a dip in the property market (in terms of both the capital and rental value), the AV would be reduced accordingly to reflect a fair system underlined by the health of our economy.

The writer is Asia-Pacific and Singapore tax leader at PwC Singapore.