IRAS, Inland Revenue Authority of Singapore, NewtonThe recently announced and unveiled Budget 2013 included a segment on a new residential property tax structure that would take effect by 1 January 2014. This tax structure features progressive tax rates for all property, based on their Annual Value. A further increase of 1% for the upper tiers is slated for 1 January 2015. In addition to increasing tax for higher-value properties, a different, higher-tax structure will also be put in place for non-owner-occupied residences.

Non-owner-occupied residential property is the category for all residences in which the owner does not reside in. The most common example of this is a landlord who rents out an entire residential property to another  party. Even vacant properties will now fall under this category, with effect from 1 January 2014. Yes, that means vacant properties will incur the same taxes as if it were rented out.

The full details and exact rates for the new tax structure can be found here at http://www.iras.gov.sg/irasHome/page.aspx?id=14568

Obviously, these new tax rates will have an impact on both owner-occupied and non-owner-occupied residences, but to different degrees. There will be several households that will see no change, or even a reduction, in their property tax. The greatest impact will be seen by landlords, especially those with multiple, high-value properties. Owner-occupiers who reside in extremely large, exclusive or luxurious properties will also see a significant increase in their property tax. The higher the annual value of the property, the greater the increase in tax will be over the current quantum.

We may see a knee-jerk reaction as landlords try to pass the increased tax cost on to their tenants. However, the market can only absorb a finite amount of increase. Once these landlords realise that their properties are lying vacant due to overpriced rent, their asking price will tend to come back down. Moreover, these landlords will feel a greater urgency to rent out, as they have to pay the property tax whether the property is vacant or not. As such, holding the property to wait for a higher rent is no longer as attractive a proposition, especially for the higher value properties. The result might even be lower rents in the long run, as landlords with fallow properties attempt to make up for the additional taxes they have to pay due to this new tax structure. Eventually, this could exert downward pressure on property prices in general.

As a whole, we feel that this new tax structure should be a positive influence on the Singapore property market. With landlords seeing less profit, it may dampen investor enthusiasm, discouraging some of them from buying units purely to seek rent. It may even cause some existing ones to pull out. This will have a dampening effect on property prices. Moreover, just like income tax, it places the greater burden upon those who can afford it more. As it is, we feel that landlords whose only method of making more profit is the “innovative” move of increasing rent, do not contribute much to the betterment of society. Quite the opposite, in fact, as we put forth in our article.

It is our hope that this new tax structure will function as an equaliser by shifting some economic advantage away from landlords who don’t produce anything and merely just collect rent from actual, productive businesses. By combatting  the impression that hoarding and renting out property is the only way to be successful in Singapore, we should see more innovation and creativity in the market place.

In fact, we believe that this new structure might be even more effective than the cooling measures at taming the runaway market, as they directly target the profit of landlords on a regular basis. Instead of more cooling measures if prices continue climbing, non-owner-occupier property tax should be raised further. Perhaps even extend such a tax structure to commercial properties, especially retail space landlords, as this is precisely where rents need to come down for innovation to occur.

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