On December 5, the Inland Revenue Authority of Singapore (IRAS) announced the reduction of property tax for HDB flats in 2015. Three days later, there was an article “Property Tax cut for one in four private home owners” in The Straits Times. A week after their announcement, a representative from IRAS further elaborated how annual values are calculated in The Straits Times Forum (“Annual values of homes reflect market rents“; Dec 15).
Below are my two cents contribution after being a private home property tax payer for twelve years, with an attempt to demystify the five common myths of property tax.
1. Lower annual value does not necessarily mean lower property tax.
According to IRAS, effective Jan 1 next year, the annual value of 25.7 percent private homes has been reduced while only 1.4 percent has been adjusted upwards.
However, IRAS has implemented progressive tax rates for owner-occupied private residential properties since 1 Jan 2011. A property tax rate of 4 percent of annual value applies unless the annual value is over $65,000 (6 percent tax rate applies). For non-owner occupied properties, new progressive tax rates are implemented since 1 Jan 2014.
By end of November, owners should have received a letter from IRAS, informing them the revised progressive property tax structure for both owner-occupied and non-owner occupied private residential properties.
For rental properties, the brackets of annual values are narrower, with upward adjustment on the percentages of tax rates that ranges from 10 to 20 percent. Even if you are one of the lucky ones with a lower annual value for your property, you may still end up paying more property tax next year.
2. Annual values are not only reviewed annually.
The December 8 article in The Straits Times mentions that “some feel that the volatility in the property market cannot be captured by annual reviews”. Together with the statement from IRAS about the property tax relief of property owners, it gives the wrong impression that annual values of properties are reviewed once a year. If there are changes, they will be made effective at the beginning of every year.
However, besides end of every year, in the past I have received notices from IRAS in March, August and October about changes in annual value. And it is not unusual to have two adjustments in one year’s time.
3. Owners may not be notified of changes in advance.
Unlike any hike in bank interest rates for your housing loans, you won’t receive a notification telling you in advance that the new rates will be effective from next month and changes in repayments will be reflected in the following month.
IRAS usually gives owners one month’s notice. However, on two other separate occasions, the new annual value was being made effective immediately. One letter I received in mid-December had the new annual value backdated to November. Another one sent in early March backdated the change from February.
4. Annual value does not reflect the performance of the rental market.
Property tax is calculated by the annual value of the property. And annual value is estimated based on the rental transactions of similar properties nearby.
In other words, the annual value of your property is determined by the rentals of comparable homes, not the performance of the prevailing rental market.
There are currently 285,000 private residential properties in Singapore. From 1 Jan 2015, only 25.7 percent will have their annual value lowered. Do you think that only one in four private property owners are affected by the slowdown of the rental market?
Below is a chart that shows the annual values of four of my private residential properties as compared to the URA Rental Index from 2002 to 2014. You can see that three properties have their annual values reduced slightly only once throughout the years. For most of the time, they climb up in big steps.
5. Not all private residential properties are created equal.
Property tax is a wealth tax based on property ownership. The pricier the property you buy, the higher the rental it can generate, and the more property tax you need to pay. Depending on the annual value, the new property tax rate for non-owner occupied properties ranges from 10 to 20 percent.
If your property is in an affluent neighborhood, there are chances that your neighbors have newly renovated their flat or built a swimming pool. The good rent they fetch can inevitably result in a higher annual value for your property.
In a bad economy, it is difficult to find tenants with good budget. High-end properties are therefore most susceptible to high vacancy rate in a slow rental market. However, annual value is the same whether a property is self-occupied, tenanted or vacant. Despite the fact that you don’t have a tenant to help you pay for your mortgage and maintenance fee, you still have to settle with a high property tax.
From 1 Jan 2014, landlords of non-owner occupied properties can no longer claim any refund of property tax for an unoccupied property. The same apply for properties unable to rent out or undergoing repairs.
Lastly, if you find the annual value of your property unreasonably high, you can appeal to IRAS to raise your objection. However, you have to be prepared that the subsequent adjustment can be lower, the same, or even higher.
As what our previous speaker Mr Leung Yew Kwong, Principal Tax Consultant at KPMG Services, told the The Straits Times,
“It’s not that the process is not transparent … it’s impossible for IRAS to go into every home to access the condition it is in.”
Remember the famous saying from Benjamin Franklin?
“In this world nothing can be said to be certain, except death and taxes.”
This article was first published at propertysoul.com