|Taxing thoughts on property – Part 4
Closing points on Stamp Duty
Thursday 15th April, 2004
This week we will end the series on property taxation by summarising
some of the main points to emerge from the past 3 weeks' columns.
Only a fortnight ago we heard the pointed criticism of one of our
leading businessmen, Mr Arthur Lok Jack, on the fact that most of our
national budget is spent on recurrent expenditure with only a small part
devoted to capital creation.
We really do need to spend more on capital creation if we are to
develop our country's resources.
The question is whether this can be afforded with the current
taxation regime of breaks and, in the case of property taxes, outdated
and under-enforced taxes on a sector brimming with benefits for
Of course, we all have objections to wasteful State spending and
those issues must be tackled by the development of realistic performance
A fortnight ago we had the beginnings of a fruitful debate on the
disappointing performance of TTPost during a Senate debate sparked by
the Government’s attempt to continue the benefits enjoyed by that
It is a legitimate concern that increased taxes could end up being
wasted, but we have to call for these performance measures to be put in
Some of the key points to be made here are:
Purposive Taxation: It is clear from the series that there is
little attempt to use property taxes to achieve objectives beyond
financing the expenditure of government.
Progressive taxation: The Stamp Duty regime does contain
elements of progressive taxation in that more expensive properties are
more heavily taxed upon transfer.
Dynamic BIR/C&E: The new Revenue Division‚ would have access
to the vast web of services into which just about everybody is tied —
TSTT, TTEC, WASA, TTPost, Registrar General‚s Department and so on — all
keep records which could be used to improve levels of collections.
It is interesting to note that in the last week or so there have been
advertisements in the press which would indicate that there are moves to
revise the State’s stance on Tax Evasion and the Land & Building Taxes.
Stamp Duty is the tax paid by purchasers of property.
The rate of Stamp Duty increases with the value of the property with
higher taxation applying to non-residential property. In the case of
non-residential property, this can be as much as seven per cent for most
of the price. The rule is that the BIR will charge the higher of the
stated purchase price or the open market value; they also have the power
to seek a valuation if the purchase price seems too low.
Some of the key points arising in the Stamp Duty discussion are:
Good job: The graph shows the State income from Stamp Duty on
property in the period 1994-2004 and the rises in this income are truly
From just over $20M in 1994 to estimated receipts exceeding $145M in
2003 and 2004. It would seem that the Stamp Duty section of the BIR is
equal to the challenge of dealing with our rising property market and
its increasingly sophisticated players.
We would also add that an examination of the figures published in the
Ministry of Finance’s Estimates of Revenue show a good degree of
correspondence between the estimated income and actual receipts from
Differential rates: Stamp Duty is also charged on the sales of
shares, but at a rate which is a tiny fraction of the rate applicable to
property sales. Of course, this seems to be discriminating against the
property investor but one could also ask whether the rate for equity
investors is too low.
Evasion: The high rates of Stamp Duty have spawned a series of
avoidance devices manufactured by purchasers and their advisers.
These range from inclusion of fixtures and fittings to artificially
reduce the sale price of the property to simple miss-statement of the
sale price. The most obvious effect of this is a loss of taxation
revenue, but a serious secondary effect can be felt in the distortion of
the nation’s records of property sales.
These records are maintained by the Registrar General’s Department
and they would be the natural starting point for any research to revise
tax rates on property or the construction of a house prices index.
If the records are wrong, it is impossible to rely on these and there
are hard choices to be made. Either we tighten-up on the accuracy of the
deeds entering this database: and hence increase the tax income from
Stamp Duty: or we revise the basis of taxation.
Cecil Quesnel’s letter published here a fortnight ago mentions the
effect of these high taxes in terms of cheating and suggests a lower
rate to reduce this level of cheating.
It is my view that a reduction in the rate will not curb the appetite
for cutting corners and only proper monitoring of this web of
investments will yield a true picture, but it is essential that the
database be restored to its prime position as a true record of
Next, we will be talking about the so-called property bubble‚ and
moving on to discuss the future of Caroni’s lands.
Limiting land taxes
Let me take a little space in this week’s column to tackle the
interesting points raised in Cecil Quesnel’s letter published in the
Business Guardian a fortnight ago.
Mr Quesnel mentioned an earlier discussion on the issue of limiting
land taxes to the land element of a property.
This is a very logical measure which should have the effect of
penalising landowners who do not develop their properties, since they
will pay the same tax as adjoining owners who have built on their land.
The intention is to reward development of land by not increasing the
taxes due upon development.
Mr Quesnel’s central point is that Stamp Duty rates could be reduced
to limit the cheating‚ and that Land & Building taxes could then make up
the shortfall if they are correspondingly increased to take account of
only land values. In order to assess these ideas we would need to
understand the operation of the property market and those taxes.
If we take the two extremes of the market the point can be
illustrated since the normal family buys a single home and lives there
for several decades.
The property trader/investor buys and sells many properties in the
course of a year and occupies only one or two.
The point here is that the average family would only have a single
encounter with Stamp Duty: i.e. when buying their home: while Land &
Building taxes are a constant if they want to claim the BIR relief on
The property trader/investor has many encounters with Stamp Duty and
limited exposure to Land & Building taxes: even that encounter is
balanced by the income they receive from the properties they hold in
To alter the existing system as Mr Quesnel suggests would relieve the
trader/investor of substantial tax burdens and shift these onto the