INCOME TAX (AMENDMENT) BILL

Order for Second Reading read. 3.15 pm

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Income tax and stamp duty measures to discourage speculation in the residential property market were announced on 14th May 1996. The Income Tax (Amendment) Bill 1996 seeks to tax, as income, any gains arising from the sale of any real estate within three years of its purchase, as follows:

(a) The tax shall be on the whole gain if the sale is within the first year of the purchase, 2/3 of the gain if within the second year, and 1/3 if within the third year; and

(b) For sellers who are not tax residents, a lawyer shall be required to withhold tax (which is not a final tax) at 15%, 10% or 5% of the value of the property if sold within the first, second or third year of purchase respectively.

Gains from sales of properties within 3 years to be taxed as income

Gains made by property developers and traders from the sale of properties are already taxable as income. However, similar gains made by individuals and other companies are not subject to tax. To discourage speculation, clause 2 of the Bill inserts a new section 10F to deem gains from the sale of property within three years of purchase as income, to be taxed at individual and company rates respectively.

However, even with the above tax treatment to discourage property speculation, Members of Parliament may be aware that taxpayers could circumvent this measure by transacting in shares in property holding companies instead. As such, it is necessary to amend the Income Tax Act to subject to tax the gains derived from the disposal of shares in a private company if the company holds at least 75% of its assets in the form of real property or shares in another property investment company. The tax payable by the seller of such shares will vary according to the period over which he holds his shares, his percentage shareholding in the company as well as the period over which a property is held by the company. Clause 2 thus also inserts a new section 10G for this purpose.

In recognition that such share owner could be compelled to dispose of his property or shares within three years of its acquisition, clause 2 of the Bill also specifically excludes disposal under circumstances such as upon the death of the owner of the property or shares or as a result of bankruptcy from the proposed tax treatment.

Withholding tax on non-resident sellers of property

At present, the Income Tax Act provides that a person who makes payments which are income chargeable to tax in Singapore to a non-resident, the payer must withhold tax on such payments. Clause 3 inserts a new section 45D to provide that tax must be withheld at the rates of 15%, 10% or 5% of the value of the property if the sale of the property or shares is made by a non-resident person. The percentage of withholding tax will depend on the holding period of the properties or shares. The party responsible for the withholding tax will be the advocate and solicitor acting on behalf of the buyer of the real property or shares, or in the absence of a solicitor and advocate, the buyer himself.

Sir, I beg to move.

Question proposed.

Dr Ow Chin Hock: Sir, I support the Income Tax (Amendment) Bill. The main objective of this Bill is to empower IRAS to tax as income any gains derived from short-term transactions in real properties. Speculation in the property market would be discouraged or deterred if part or whole of its gains is siphoned off by tax.

I would like to seek a few clarifications from the Minister with regard to the amendment Bill. First, clause 2 inserts new section 10F. The proposed subsection (1) states that "the relevant amount of any gain arising from the disposal of property shall be deemed to be income of the person chargeable to tax under section 10(1)(g)". In other words, the tax on the gain will be determined according to the property owner's chargeable income tax bracket. My question is: would this not create a tax loophole for a person who may purchase a property under the name of his family member or a relative who is in the lower income tax bracket, and hence pay lower tax on the gain of the property when he disposes of it within three years from the date of its purchase? This will reduce the effectiveness of the anti-speculation measure.

[Mr Deputy Speaker in the Chair]

3.20 pm

Dr Ow Chin Hock: Second, clause 2 also inserts new section 10G which sets out how such gain is to be taxed and the relevant definitions relating to the tax. In particular, the proposed section 10G, subsection 7(b) (in page 9 of the Bill), spells out the formula which determines the relevant amount of the gain to be taxed. The formula includes four variables and coefficients, namely, Ms, Cs, Xs and an A. The "Ms" define the market values at the date of disposal of the property within the first, second and third year of purchase. The "Cs" define the costs of such a property acquired within the first, second and third year. The "Xs" define the tax rates of the respective time periods. May I ask a few specific questions about this formula:

(1) Why are the tax rates defined in terms of Xs as coefficients of the differences between Ms and Cs (in other words, Ms minus Cs) rather than the specific numerical percentages, namely, 100%, 66.6% and 33.3% respectively? Does it mean that the tax rates will be varied in future?

(2) Is it correct to say that only one of the three Xs is applicable at any one time? For example, if X3 is applied or operational, then X1 and X2 should be zero?

(3) Does the cost of real property acquired in this formula include stamp duty, legal cost, interest cost, insurance cost, renovation cost, etc.?

My third question is related to the definition of "company". The parameter `A' is the percentage of the shareholding in a relevant company disposed of on the date of disposal. A "relevant company" or a "relevant investment company" is defined in the Bill as any private company which has at least 75% of the market value of its total tangible assets in the form of property. May I ask why is the benchmark set at 75%? Is this based on empirical evidence?

Sir, clause 3 of the Bill inserts a new section 45D to provide for the withholding of tax for a non-resident who disposes of his property within the 3-year period at the rate of 15%, 10% and 5% respectively. My question is: for a property which is co-owned by a non-resident and a Singapore resident, how will the tax on the gain from the short-term property transaction be determined, particularly if the share between the two owners is not stipulated?

Sir, I see in the Order Paper Supplement that there will be some amendments to this Bill and, earlier, the Minister has also moved amendments to the Stamp Duties (Amendment) Bill. My final question is: why are there so many amendments for these two Bills? Are the draftsmen of these two Bills in a great hurry?

Dr Kanwaljit Soin: Sir, I would like to question the Minister on the principle behind the Income Tax (Amendment) Bill.

Singapore has not, so far, subscribed to a capital gains tax. But this new amendment is introducing a selective capital gains tax. How do we reconcile this from a policy point of view?

Sir, for most middle income families, the only property they own is the family home. If misfortune or other unforeseen circumstances should arise and force the family to sell their family home before the three-year period is up, then any gain derived from the sale of this property would be subject to income tax. This does not seem to be in line with the Bill's main objective of curbing property speculation. Does the Minister have power to grant waivers for deserving or hardship cases and also in forced mortgagee sales? Also, would the Minister consider exempting from tax disposals of real property held for a period of three years or less when the property comprises an individual's principal place of residence?

Sir, a related issue to consider is the holding period of three years. Is this too long if the measures are meant solely to weed out speculators? The period could be shortened.

Other issues, Sir, in cases of options granted after 15th May 1996 and where the property is held on trust, who is liable for income tax? For a developer's project and in cases with more than one purchaser, how will their respective shares be determined? At this stage, the documents will not state how the parties are holding the property, ie, the proportion of shares. The nature of shared holdings will be specified at the transfer stage. Therefore, in relation to withholding tax, how will the purchaser's solicitor know how much tax to withhold? As the main reason for the Income Tax and Stamp Duty amendments is to curb speculation and spiralling property prices, would the Government consider non-fiscal measures, as have been tried in Hong Kong? I will just give two examples: (1) private sales of uncompleted flats subject to a quota of 10%; (2) prohibit sales of uncompleted flats before assignment to make buyers hold on to their properties. I would like the Minister's response to this, please.

Dr Richard Hu Tsu Tau: Dr Ow has asked whether there might not be a tax loophole if a person transfers his sale of a property to his relative who has a low income. I think there are two restraints for such a move. In the first place, if the taxable component is substantial, it automatically increases the tax rate for the individual even at the lower end. Let us say, you make half a million dollars in the sale of a property. You transfer to somebody who is paying $10,000 tax. His tax for that year is over $500,000. So the tax liability rises immediately to a very much higher level. That is one constraint. If the profits are substantial, it will automatically raise the level of tax which applies. Secondly, whoever does this is carrying a considerable risk. In transferring the title, he may not get it back, even between relatives and this has happened.

Dr Ow Chin Hock: Between father and son.

Dr Richard Hu Tsu Tau: Even between fathers and sons, there have been cases of transfers which have been disputed afterwards. So I think there is an in-built deterrence to any such device. Besides, I think repeated offences of this type would be watched very closely by IRAS, although it may be difficult to catch them. However, I do not think such a situation is likely to develop.

Dr Ow has also asked for an interpretation of the formula used to compute the taxable gain of a person owning shares in a property company. The use of coefficients, rather than absolute figures, in the equation is because a company can buy and dispose of shares and make profits during the 3-year period in a variety of ways. In the first year, for example, it could be selling properties A, B and C; in the second year, it could be selling C, D and E; and in the third year, it could be selling F, G and H. Each of these sales will have a separate tax liability. So we need a complete formula for calculations. I think we will be happy to show you an example of this, because you are buying shares in a company which owns a large number of properties. So the tax liability is not as straightforward as the sale of one property.

The Member has asked for the reason why 75% is considered a benchmark figure. It is a figure which we have considered reasonable. 100% would be unreasonable. 50% would be too low. 75% is half way in between. I think this is a reasonable compromise.

He has also asked about withholding tax where there is a co-ownership which is not specified. In the absence of any specified shareholding, it will be assumed that the joint partners share equally, unless they can prove otherwise. If there is no specified share ownership, we will assume that they own equal shares, half-half. If there is a dispute between the parties, it is up to them to settle their differences.

Finally, he has asked why there are so many amendments. These amendments have arisen because of appeals which were received subsequent to the announcement of the two Bills. We have been very careful to ensure that where the appeals are justified, appropriate amendments have been made to the Acts. That is the reason why we have to go through this exercise today.

Dr Ow Chin Hock: What about the definition of "cost"?

Dr Richard Hu Tsu Tau: The cost of a property will include the cost of the purchase, the cost of any duties paid, stamp duties, legal fees and any other costs which contributed to the transaction in a normal way.

Dr Soin has asked why we have introduced a capital gains tax. I would like to tell her that it is not a capital gains tax. We do not have a capital gains tax. Property gains have always been taxable in Singapore for companies trading in properties. It has never been easy, however, to tax individuals who do not transact on a regular basis, and the present Bill corrects this anomaly.

She says that for a forced sale, it is not fair. This is true. We have said that for cases where sales are involuntary and for cases of hardship, exemptions could be made.

She has asked for tax exemption for a principal place of residence. Presumably, she means that tax exemption should be granted when the principal place of residence is sold. Exemption from tax cannot be granted if a gain is made within 3 years, unless the sale is involuntary. After the property is sold and a new property is acquired, it becomes a new principal place of residence. Should we exempt that too if it is later sold? It is very difficult. So I think the answer has to be no.

She has questioned whether the 3-year holding period is too long. I think it is a reasonable period if we assume that people who buy properties for genuine purposes, either for own use or for investment, would not normally sell in under three years. Shortening the period could be done, but I think it will not be as effective in curbing speculation. We could say two years. It is arbitrary. Three years is reasonable. Anybody who buys a property for genuine use or for genuine investment would not normally sell it in under three years.

On the question of multiple ownership of a property where shareholdings are not specified, I think I have already answered this in my response to Dr Ow's question. If shareholdings are not specified and there are more than two owners, for example, it will be divided equally between shareholders until proven otherwise.

I am not clear exactly what the last question was. It had something to do with non-taxable properties?

Dr Kanwaljit Soin: Where the property is held in trust after 15th May option, who is liable for income tax?

Dr Richard Hu Tsu Tau: Whoever sells it. The question is: who has effected the sale? Where do the proceeds lie? The person to whom the proceeds accrue will be liable to tax.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. -- [Dr Richard Hu Tsu Tau].

Bill considered in Committee.

[Mr Deputy Speaker in the Chair]

Clause 1 ordered to stand part of the Bill.

Clause 2 --

The Chairman: Clause 2. There are 11 amendments. Amendment No. (1), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 2, line 38, to leave out "Where" and insert "Unless regulations made under subsection (9) otherwise provide, where".

The reason for this amendment is to enable regulations to be made with regard to the determination of the date of purchase or sale of different classes of properties.

Amendment agreed to.

The Chairman: Amendment No. (2), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 4, to leave out line 3 (including marginal reference) and insert "any written law".

Sir, this is a drafting amendment.

Amendment agreed to.

The Chairman: Amendment No. (3), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 4, to leave out lines 6, 7 and 8 and insert "without any option to purchase and which is for a term not exceeding 7 years in the aggregate;".

This amendment is to exclude leases which do not have an option to purchase and which is for a term not exceeding seven years from the ambit of the tax measures.

Amendment agreed to.

The Chairman: Amendment No. (4), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 4, to leave out line 9 and insert --

"(e) as a result of repossession and termination of a lease by any statutory body under the written law establishing that statutory body;

(f) in accordance with any provision of the Residential Property Act (Cap.274) or any notice or direction issued thereunder; or".

This is to specifically provide the disposals under the following circumstances will be excluded from the ambit of the tax measures:

(i) disposal as a result of repossession and termination of a lease by a statutory body; and

(ii) disposals required under the Residential Property Act.

Amendment agreed to.

The Chairman: Amendment No. (5), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 6, after line 12, to insert --

"(d) for prescribing a different time of acquisition or disposal of any real property or class of real property, or by any person or class of persons; and".

The reason for this amendment is similar to amendment No.(1).

Amendment agreed to.

The Chairman: Amendment No. 6, Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 7, line 16, to leave out "of such" where they secondly occur.

Sir, this is a drafting amendment.

Amendment agreed to.

The Chairman: Amendment No. (7), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 8, line 13, after ""acquire"", to insert ", in relation to any shares in a relevant company,".

This is to make clear that this section is referring to acquisition of shares in a relevant company.

Amendment agreed to.

The Chairman: Amendment No. (8), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 8, to leave out line 32.

Sir, there is no need for such an exclusion provision with regard to the disposal of shares.

Amendment agreed to.

The Chairman: Amendment No. (9), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 11, line 12, to leave out "a" and insert "one or more".

Sir, this is a drafting amendment.

Amendment agreed to.

The Chairman: Amendment No. (10), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 11, line 13, to leave out "company" and insert "companies".

Sir, this is a consequential amendment.

Amendment agreed to.

The Chairman: Amendment No. (11), Dr Hu.

Dr Richard Hu Tsu Tau: Sir, I beg to move,

In page 12, after line 16, to insert --

"(f) the date of acquisition or disposal of any real property shall be determined in accordance with section 10F.".

Sir, this is to make clear that the date of acquisition or disposal of property held by a relevant company will be determined in the same manner as that under section 10F.

Amendment agreed to.

The Chairman: The followng six consequential amendments will be made:

(1) In page 4, line 10, to re-letter paragraph (f) as paragraph (g).

(2) In page 6, line 12, to leave out "and".

(3) In page 6, line 13, to re-letter paragraph (d) as paragraph (e).

(4) In page 8, line 31, after "winding-up;", to insert "or".

(5) In page 8, line 33, to re-letter paragraph (d) as paragraph (c).

(6) In page 12, line 16, to leave out the full-stop and insert a semi-colon.

Clause 2, as amended, ordered to stand part of the Bill.

Clauses 3 and 4 ordered to stand part of the Bill.

Bill reported with amendments; read a Third time and passed.