As we come to the end of the year, many would have received a statement on the property tax. What is property tax and why do you need to pay?
Property Tax as a wealth tax
Property Tax is known as wealth tax. A wealth tax is based on a percentage of the entire asset base. An example of wealth tax is the Additional Buyer’s Stamp duty. A Singaporean purchasing a second property will be subjected to additional stamp duty of 7% of the value of the entire purchased property or valuation whichever is higher.
Another example of wealth tax is inheritance tax or estate duty which countries like Japan, United States and United Kingdom still practice. United States’ estate duty is 40% of the entire estate in excess of just US$60,000 for non-US tax residents. This means a Singaporean who has a portfolio of US$1,000,000 in US stocks will only be worth 1,000,000 – (1000000-60000)*0.40 = $624,000 upon his demise. This is equivalent to 37.6% in immediate losses upon his death!
Unlike the one-time levy for Additional Buyer Stamp Duty and inheritance taxes, property tax in Singapore is levied annually.
Property Tax is one of the ways which the government collects its revenue. Goods and Services Tax (GST) and Income Tax are other ways which the government obtain its revenue.
How is Property Tax calculated in Singapore?
The amount payable for property tax is a two-step process.
First, the Annual Value of the property has to be determined. The Annual Value is the estimated annual rent of your property if it were to be rented out, excluding the furniture, furnishings and maintenance fees. It is estimated based on market rentals of similar or comparable properties.
From my empirical observation, the Annual Value used by IRAS appears to be always below market rate. For example, one of my client’s Annual Value for 2015 is $11,340. On the other hand, the market value if it was rented out is $30,600.
The second step is to apply a progressive tax rate. For 2015 and using $11,340 as the Annual Value, an owner occupied property tax is (11340-8000) * 4% = $133.60. If the property is not occupied, the property tax payable is 11340 * 10% = $1134.
As the market value of the same property is $537,000, the effective tax rate is 133.60/537000 = 0.0249% and 1134/537000 = 0.211% for owner occupied and non-occupied respectively.
Personally I find it weird that the calculation has to be based on the Annual Value rather than the market value of the property given that property tax is a wealth tax.
By the way, do not forget that if the property is actually rented out, income tax is payable on the rent collected.
Why bother about property tax?
First, property tax is compulsory. Not paying property tax is illegal.
Second, if the property is actually rented out, property tax reduces the income yield of the property. For example, if the property rental yield is 5.7%, the rental yield drops to 5.489% after taking into account of property tax. If you take into account of income tax, the yield further deceases.
Why property tax is declining?
It was reported recently ("Reduction in property tax for those in bigger HDB flats" on 8th December 2014) that property tax will decline for HDB households. This is due to the lower Annual Value as rents are declining.
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