Room for higher taxes on luxury homes and non-residential properties

Jan 17, 2023

Leslie Yee

LAST year, Singapore’s Budget contained some bad news for homeowners, with many hit by the levying of higher property taxes. Should homeowners view the coming Budget announcement on Feb 14 with trepidation? Could other property owners be hit with higher taxes?

Higher non-owner-occupier tax rates for all homes, as well as higher owner-occupier tax rates for homes with an Annual Value (AV) exceeding S$30,000 became effective this year. The rates will rise further in 2024. The AV of a building is the estimated gross annual rent of the property if it were to be rented out, excluding furniture, furnishings and maintenance fees.

The announcement of higher property taxes for homes came shortly after the rolling out of property cooling measures in mid-December 2021. Those measures included higher Additional Buyer’s Stamp Duty (ABSD) for all home buyers, except Singapore citizens and permanent residents buying their first home. In late September 2022, the government rolled out further cooling measures, which included tighter limits on home loans.

Still, private home prices have been resilient. Based on the Urban Redevelopment Authority’s flash estimate, prices in the fourth quarter of 2022 rose 8.4 per cent from a year ago and 22.5 per cent from the corresponding period in 2019, before the Covid-19 pandemic.

With a fast ageing population, the government may need to raise more revenue for healthcare and social needs. Levying higher property-related taxes can help raise much-needed revenue and combat wealth inequality. Also, taxing homes more can potentially slow the pace of price gains, and keep alive the private homeownership aspirations of some young adults.

I explore areas where property-linked taxes could potentially rise, possibly in years to come.

Transaction taxes

Buyer’s Stamp Duty (BSD) applies when buying or acquiring property in Singapore. It is computed based on the higher of the purchase price or market value of the property.

Different BSD rates apply between homes and other properties. For non-residential properties, the BSD is 1 per cent for the first S$180,000, 2 per cent for the next S$180,000 and 3 per cent for the remaining amount. The BSD for homes is 1 per cent for the first S$180,000, 2 per cent for the next S$180,000, 3 per cent for the next S$640,000 and 4 per cent for the remaining amount.

As it is, the BSD on homes is 4 per cent for amounts over S$1 million. Perhaps, the rate can be 5 per cent for amounts over S$2 million, which may apply to many private homes. The rate could be say 6 per cent for amounts over S$5 million, which may apply to a 2,000 square foot resale condominium unit in a prime district, or a semi-detached house in the suburbs, and 7 per cent for amounts over S$10 million, which may apply to super-luxury apartments in the Orchard Road area or detached landed homes.

There may be room to increase BSD for other properties. Currently, an investor, whether local or foreign, pays BSD of about S$295,000 when buying a commercial shophouse or strata commercial space that costs S$10 million. A Singapore citizen buying a second home that costs S$10 million incurs BSD and ABSD totalling over S$2 million.

Moreover, while foreigners who buy a private home here pay hefty ABSD, they do not pay any ABSD when buying commercial property. Maybe, there is room to levy additional transaction taxes on foreigners buying some non-residential properties here.

Seller’s Stamp Duty (SSD) is payable on residential property acquired on or after Feb 20, 2010 and disposed of within a certain timeframe. Currently, the rate of SSD is 12 per cent for holding periods of up to one year, 8 per cent for holding period of more than one year and up to two years, and 4 per cent for holding period of more than two years and up to three years. No SSD is payable for a holding period of more than three years.

Perhaps SSD can apply to the aggregate value of any home that is sold regardless of the holding period. The tax can kick in say for homes worth over S$1.5 million, which should generally exclude HDB resale flats. Also, the rate of tax can be progressive, with higher rates applying to higher capital values.

Property taxes

Besides transaction taxes, there are recurring property taxes. Non-residential properties such as commercial and industrial buildings are taxed at 10 per cent of the AV. For homes, the non-owner-occupier tax rate has risen to 11-27 per cent from Jan 1, 2023 and will reach 12-36 per cent from Jan 1, 2024, up from 10-20 per cent in 2022.

The property tax payable for an investment home with AV of S$100,000 is S$19,650 in 2023 and will be S$25,200 in 2024, versus S$10,000 for a commercial shophouse with the same AV. Perhaps, owners of investment properties with the same AV, whether residential or non-residential, should pay similar amounts in property taxes.

In sum, there is room to levy higher transaction and recurring taxes on non-residential properties and higher transaction taxes on pricier homes.

Should taxes on non-residential properties rise, maybe exemptions from the higher taxes can be carved out, say for some owner-occupiers who are buying and using premises for certain business activities. Also, exemptions can perhaps be extended to listed entities, including real estate investment trusts. Such an exemption would show support for the growth of capital markets and the democratisation of real estate ownership, as listed entities may be widely held, including by retail investors.

A politically stable and socially cohesive Singapore that welcomes business and talent, and has good infrastructure and security, will support the growth of property values here. Some foreigners pay high taxes to buy homes here because they value what Singapore has to offer.

Sharing the fruits of rising property values and rental income between property owners and the government is fair. Expect further refinements to the share of gains from property that accrue to the government over time.

Existing and potential property owners should pay heed to the risks of paying ever-higher property-related transaction and recurring taxes.