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Relevance Of Frequency Of Sales And Duration Of Ownership In Taxation Of Property Gains
September 2009 | Real Estate | Property Notes
Charmaine SEAH
Introduction
The Singapore Government sent a shock wave through the property market early last month when they released a paper to the public suggesting, among other things, a proposed change to the Income Tax Act ("the Act") allowing a tax concession for a person who sells only one property within a four-year period. This proposed change was interpreted initially by the public as an indirect move by the Government to tax speculators of private real estate properties. After strong negative feedback from the public, the Government, in a surprising move, decided not to proceed with this proposed change. Despite the abandonment of the proposed change, the episode showed that the Government is likely to view the frequency of sales and duration of ownership as the two most important factors of trade.
The proposed change
Under the current provisions of the Act, gains from the disposal of real estate properties may be taxed either under section 10(1)(a) as trading gains or under section 10(1)(g) as "gains or profits of an income nature". An individual does not pay tax on gains made from selling a property unless the Inland Revenue Authority of Singapore ("IRAS") assesses or has assessed him as a property trader. However, there is no clear definition of a "property trader" and no clear guidelines as to when a seller might be deemed by IRAS to be a property trader.
The proposed section 10G under the draft Income Tax (Amendment) Bill had sought to provide more certainty and clarity to the existing framework. Essentially, under that section anyone who sells only one property within any four-year period will not be taxed on his profit. However, if a seller sells another property within four years of the first sale, the profit from the second sale may be taxable. The key word "may" was interpreted by many as a sign that the IRAS will scrutinize closely a subsequent sale made within the four-year period to discern whether the seller concerned should be deemed a property trader.
Clarifications from the Ministry of Finance ("MOF")
The proposed change sent jitters through the property market and sparked off market concerns that the Government was setting the stage to introduce a policy to actively tax gains on property transactions and to curb speculation in the property market. This proposed change, it was thought, would have a strong negative impact on property prices.
In order to assuage these fears, the MOF released a media statement clarifying that the proposed change involved no tightening or stricter enforcement of the current income tax policy for potential sellers of properties. It was meant to provide certainty of non-taxation for individuals concerned with whether they might be deemed to be property traders under the Act. It maintained that the proposed change was not an anti-speculative move and that there was "no change to the current and long-standing income tax treatment in this regard".
Negative public feedback
While the MOF clarifications calmed concerns substantially, public feedback was negative and unsupportive of the proposed change. 60 of the 64 responses to the public consultation process opposed the proposed change. Some reasons given were as follows:-
| (1) | despite the proposed amendment, the same problems of lack of transparency and unpredictability would still plague sellers who disposed more than one property within a four-year period; |
| (2) | there was no indication of how the "four-year period" was arrived at, and left room for criticisms that it was arbitrarily chosen; |
| (3) | the proposed change could bias purchase decisions towards investing in one bigger property rather than numerous small properties; and |
| (4) | other relevant factors besides frequency of sales should be considered in exempting sellers from tax on gain from property sales. The circumstances that led to the sale are also relevant and important. |
Concluding observations
Although the Government has backed away from the proposed change, the public was offered a glimpse into the decision making process of IRAS in the assessment of whether an individual is a property trader. Indeed, it showed that factors of multiplicity of sales and duration of ownership weigh heavily in the assessment. This is in line with earlier judicial pronouncement.
In NP and Another v Comptroller of Income Tax [2007] 4 SLR 599, a couple bought eight properties and sold seven properties in a span of eight years. They were eventually taxed the profits of two of those properties after appealing and bringing their case to the High Court. The Court held that the key question was whether the seller possessed an intention to trade. In determining such an intention, the Court will examine various characteristics including: the motive of the seller, the nature of the subject matter, the method of financing, whether there has been a multiplicity of similar transactions (i.e. multiple sales), duration of ownership, the application of special skill or supplementary work and reasons for realisation. In particular, the Court clarified that in relation to the factor of duration of ownership, the period of two years was not unduly short in the context of a residential property. Further, in considering the method of financing, the reinvestment of sale proceeds would generally negate a finding of trading notwithstanding a short duration of ownership. The Court will also look at genuine circumstantial reasons that would negate the inference of a trade.
A property owner holding several properties should therefore carefully think through any decision to dispose multiple properties within a short time span if he wants to avoid the taxation on any gains from the sale of such properties.
