Should Seller's Stamp Duty be replaced by capital gains tax?

Business Times

2 days ago

[SINGAPORE] Strong guardrails are in place to help ensure a stable housing market in Singapore. This includes levying seller's stamp duty (SSD) on transactions of homes which are sold within a specified holding period.
SSD of 1 per cent for the first S$180,000, 2 per cent on the next S$180,000 and 3 per cent on the remainder was applicable to sale of homes with a holding period of under one year when SSD was first introduced in February 2010.
Today, SSD rates are much higher and the holding period before a seller can sell a home without attracting SSD is much longer.
The latest changes to SSD saw the holding period and rates increased. Effective from Jul 4, SSD rates are 16 per cent for a holding period of up to one year, 12 per cent for a holding period of more than one year and up to two years, 8 per cent for a holding period of over two years and up to three years, and 4 per cent for a holding period of over three years and up to four years. SSD is not payable where the holding period exceeds four years.
SSD is applied based on a home's transacted price or its market value, whichever is higher.
Perhaps it's not surprising that the SSD regime got tougher. In recent years, the number of private residential property transactions with short holding periods rose sharply, in particular the sub-sale of uncompleted units.
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Certainly, many people view buying a home as a long-term investment and those buying for owner-occupation may envisage holding on to the said home for well over four years.
Also, the need to hold a private home for over four years before selling it so as not to attract SSD is hardly onerous compared with a minimum occupation period (MOP) of five years or more for Housing and Development Board (HDB) flats. The MOP is the time period that an owner must physically reside in a flat.
However, new HDB flats are sold at subsidised prices unlike private homes and some HDB flat buyers receive housing grants.
Impact on housing mobility
The tighter SSD regime will adversely impact housing mobility and possibly affect some private homebuyers who buy a unit predominantly for living and not for investing.
Firstly, there are sound reasons why homeowners may want to sell a home within four years of purchase.
For example, a breakdown in a relationship between parties who jointly bought a private home or the need to raise funds to finance a family emergency, deal with a job loss or pursue a business venture could drive owners to sell a home within a fairly short holding period.
Being 'pushed' by the SSD regime to hold onto a home for longer than is desired may add undue stress to homeowners caught in the above circumstances.
Secondly, the SSD regime can sting particularly hard should an economic recession cause home prices to fall sharply.
In the above scenario, financial pressure may drive many owners, including buyers of new uncompleted condos, to sell their private homes at losses. And the losses will be exacerbated for owners, who are financially stretched but not bankrupt, by the need to pay SSD where homes are held for four years or less.
Currently, individuals who own residential properties need not pay SSD if they have been adjudged a bankrupt and are required to dispose of their homes as a result of bankruptcy.
Capital gains tax
Maybe, applying SSD to the sale of homes should be replaced by introducing capital gains tax on the sale of property whether residential or non-residential. Afterall, why drive housing speculation to other segments of the physical property market?
Currently, gains from selling property in Singapore are generally not taxable. However, gains from sale of property may be taxable if one is assessed to be trading in property.
Taxing the gains from selling a home can be fairer than applying SSD on homes sold within a holding period of four years or less regardless of whether the transaction was profitable.
Capital gains tax on property sales could be applied using higher rates for shorter holding periods and lower rates for longer holding periods. To emphasise the long-term nature of property investment, the tax can apply to properties that are held for say eight years or less.
Also, costs incurred by owners on building improvements could be taken into account when computing capital gains for tax purposes.
Progressive payment
Ultimately, in land scarce Singapore, applying a capital gains tax to sale of various types of physical property might be effective in curbing speculation and raising revenue.
While many people buy private homes here for owner occupation, some buyers may be driven solely by the aim of making a fairly quick buck.
Buying a choice uncompleted unit at a new condo's launch using the progressive payment scheme and selling the unit before it's fully completed and paid for could still work despite the tougher SSD regime.
Take the purchase of a S$2 million new uncompleted condo home. Assume the unit is sold at 15 per cent above the purchase price after three and a half years, ahead of obtaining the temporary occupation permit or certificate of statutory completion.
In the above case, the profit on the purchase price of S$300,000 can comfortably cover Buyer's Stamp Duty and SSD of S$161,600 as well as agent's selling commission and legal fees.
Moreover, having 40 per cent of the unit's purchase price still unpaid at the time of its disposal will enhance the seller's investment returns.
The government intervenes actively in the local private housing market. Rightly, buyers have to be financially prudent and locals buying homes for owner occupation enjoy preferential treatment.
Nonetheless, there will be investors, including relatively short-term ones, eyeing potentially lucrative financial returns from buying private homes.
Whether applying SSD or capital gains tax on sale of homes is fairer or more effective in managing housing demand is debatable.
Still, while tough measures will help keep speculators at bay, some speculative activity in private homes could persist should demand stay strong.