This series of articles on the proposed property tax revisons were previously published in the Business Guardian as part of the Property Matters series. Click Title links to retrieve article.
|#1 – An overview||The recent proposals for a revision of property taxes have met with a heavy round of criticism. Apart from the government, there have been few supporters for this new tax.|
|#2 – The Challenge for the TTRA||The challenge for the newly-founded Trinidad & Tobago Revenue Authority (TTRA) is considerable, given the depth of criticism against the proposed review of property taxes.|
|#3 – The proposed 2010 Review||This week the actual proposals of the Ministry of Finance are examined. The proposed review is formally set out in the Property Tax Bill 2009, which is to be tabled for debate.|
|#4 – The Central role of Local Government reform||This week I am drawing some conclusions on the property tax proposals, together with a presentation of the corrected data.|
The recent proposals for a revision of property taxes have met with a heavy round of criticism. Apart from the government, there have been few supporters for this new tax. That is not surprising, since our country is entering an economic slowdown.
In terms of timing, the move was poorly judged, in my opinion anyway. That said, I believe that a revision of our property taxes is long overdue.
This series is intended to provide some basic information on this important series of questions. Most objections have been based on obvious dis-satisfaction with some government service or other. Only some of the objections have been on the question of timing. It seems to me that the greater part of the protest is flowing from the level of dis-satisfaction with the standard of government.
That is beyond the scope of this particular series. I have already spent most of the previous articles in Property Matters highlighting the many strategic shortfalls which have a bearing on the property arena. This series is to provide information on property tax only.
The role of property as an Engine of Wealth
In this society property is both a place to live or base ones business and a means of making money. Every successful person in the society has made a significant part of their wealth from dealings in property – buying and selling, ‘fixing-up’, ‘renting-out’, buying lands and cutting out lots for sale, and so on. The taxation measures for the sector are generally very light, which is why dealing in property is such a popular way to make and hide great sums of money.
Amidst all the recent discussion on the pros and cons of the property tax review, we have had no real perspectives on its place in the country’s tax revenue. According to the Estimates of Revenue published by the Ministry of Finance, in 1995 property tax was 2% of tax revenue and in 2009 it was expected to be a mere .18%. Proportionally speaking, property tax is now less than one-tenth the size it contributed 15 years ago. Even when one takes into account the predicted increase in property taxes to $325M in 2010, the proportion contributed by this source is expected to be 1.06% of the whole tax revenue.
Now, while this dramatic decline in its proportions is also due to the immense increase in the size of other types of tax revenues, there are other aspects which are revealed on a closer examination.
When one considers the immense stores of wealth which are held in property, beyond the basic family home, it is sobering to realize how little the sector contributes to tax revenues.
Modes of Property Tax
There are four modes in which property is taxed in a modern system –
- Stamp Duty or Transfer Tax – This the tax paid by the purchaser when acquiring a property. This is the only one of the four types of property tax which is working to some extent. Most lucrative property investments are nowadays held in company names so that they can be split and sold by transfers of shares, which attracts a fraction of the stamp duty payable on a sale of property. More on that later.
- Occupation Tax – This is the tax paid for the length of time one owns or occupies the property and this is the one being revised now. It is called either Land & Building Taxes or House Rates under our laws. This is not working at all in our country and more figures will be presented in support of that point.
- Income Tax on Rental Income – This is taxes payable on the income received from property rentals. This is poorly monitored at present.
- Capital Gains Tax – This is a tax paid on the profits made when property is sold. CGT is only payable here in the cases of property disposals taking place within 12 months of acquisition. Few vendors dispose of property within that time-limit.
The TTRA was launched in June 2009, and is intended to be a unified body to collect taxes and customs duties. The Board of Inland Revenue and the Customs and Excise Division are to be merged.
Some of the cited benefits of the Revenue Authority model are improved revenue generation and compliance with the country’s revenue laws; better services to taxpayers and traders; a more professional staff complement; an improved retention of qualified personnel; and, an improved capacity to deal with corruption. Those are objectives with which we fully agree and the property tax review under discussion must be understood as a part of the transition to the TTRA.
There are substantial challenges for the TTRA in this area and we will be pointing these out in this series.
As a conclusion to this readers should consider the actual amounts earned by Land & Building Taxes according to the official figures.
Land & Building Taxes Receipts
*Please note that 2009 and 2010 are estimates.
The challenge for the newly-founded Trinidad & Tobago Revenue Authority (TTRA) is considerable, given the depth of criticism against the proposed review of property taxes. It is my belief that no review or reform, however well-intended, can succeed without a solid grasp of what has gone before. Those who forget the lessons of the past are doomed to repeat them. That old saying also extends to those who do not bother to seek out those historical lessons. This article will outline the nature and extent of that challenge.
Last week’s Property Matters ended with details of the total amounts collected in Land & Building taxes between 1993 and 2009. To recap, those figures showed total receipts of those property taxes ranging from $72.0M in 1993 to an estimated $72.77M in 2009.
I made the point that as a major engine of wealth, property taxes amounted to less than one-fifth of 1% of the country’s total tax revenue. That figure came from the Ministry of Finance and was only for Land & Building taxes. I have been as yet unable to get the figures for Stamp Duty on property transfers, or Income/Corporation taxes paid on rental income.
Based on the official figures, it is plain to me that even if we limit the discussion to Land & Building taxes, there is a major problem. At the very least, there is gross inefficiency in the monitoring and collection of these taxes. The bleaker view would seem to suggest improper behavior by the officials responsible.
It is impossible that the Land & Building taxes collected in this country could justifiably remain at the same level in the period 1993-2009. There are five elements of change which would each have significantly increased the collections of that tax.
Those elements are –
- Inflation – Over the period there was a tremendous increase in property values. I hear you say that properties were not revalued for decades, but that is just not so, since revaluations were carried out in San Fernando (2004) and Point Fortin (2008). But more on that one later, in the sidebar.
- New buildings – There has been a large number of new buildings added to the national stock in the period. The Minister of Finance has made the surprising statement that about 200,000 of those properties have never paid any taxes and that they are effectively ‘missing’ from the official records.
- Improved buildings – In addition to those 2 elements, it is also the case that significant improvements which add value would increase the tax liability of the owner.
- Extended buildings – If a property is extended so as to increase its value, that would increase the taxes payable.
- Changes of use – Finally, changes of use which increase value would also increase the taxes payable.
Each of these five elements occurred, to a huge extent, in the period under review and yet the amount of taxes collected is virtually the same. Something has gone seriously wrong here and we need to consider that situation before arrangements are set in concrete for the proposed review.
To return to the first of the five elements set out above, the revenues in those areas which were revalued should have increased significantly. That is not the case, as shown by both the national figures and the sidebar dedicated to County Victoria.
The point of the recent revaluations was to increase the revenue base and we need to enquire how that has changed. In these circumstances, it is just not good enough for the Ministry of Finance to publish Estimates of Revenue showing this poor performance at the same time as announcing a review of the system.
We need to understand the problems if we are to have any chance of fixing them. If we press on without asking the right questions, we will just continue ‘spinning top in mud’.
We need to find out how come these government revenues went missing in San Fernando. Did people complain about unfair assessments of their properties and have successful appeals? Even if that took place, it could never lead to the scandalous situation set out in the sidebar. Never.
It seems to me that a significant number of people in San Fernando are either having their assessments unduly reduced or just not paying the tax. Either way, it is simple work to identify the mischief-makers. We have already located them. It would only be necessary to examine the records for the largest 100 properties in San Fernando or select a few along certain major roads. A clear pattern would soon emerge.
The real question, if the government were serious about reviewing these taxes and doing so under the new TTRA, is how to proceed. It is vital that those who undermined San Fernando’s property tax revenues must form no part of the new, revised system.
In the period under examination, the highest total receipts for this tax was $109.4M in 1994, which has now declined to $72.77 this year. If the Ministry of Finance cannot collect $109M, how are they going to collect the $325M anticipated in 2010? Some serious house-cleaning is in order.
Next week, I will examine the property tax review itself.
SIDEBAR: County Victoria – The Revenue Riddle
The properties in San Fernando were revalued for Land & Building taxes in 2004 and it is reasonable to expect that the receipts from that source would have risen to reflect that increase in values. The Ministry of Finance compiles those receipts by County and San Fernando is part of County Victoria.
The records for County Victoria are instructive –
|Year||Land & Building taxes receipts|
|2009 (revised estimate)||$5.90M|
This is showing the depth of the problem in that in 2001 the total L&B taxes collected in County Victoria was $5.64M and after the 2004 revaluation, that figure rose to $10.01M. A few short years later, the Ministry’s own Estimates of Revenue are telling us that only $5.90M is expected from County Victoria in 2009.
This week the actual proposals of the Ministry of Finance are examined. The proposed review is formally set out in the Property Tax Bill 2009, which is to be tabled for debate.
It is proposed that all the properties in the country will be re-valued as at 1st January 2010 and that the new assessments of Annual Taxable Value (ATV) will be set. Those ATVs will be used to establish the amounts payable under the tax rates according to the type of property.
Mass Valuations will be conducted, due to the sheer impracticality of carrying out individual inspections of each property in the country. ‘Bands’ of values (given in terms of $ per unit of area) will be set for various standards of property in different areas.
In the case of residential and commercial properties, a deduction of 10% is being proposed to allow for periods in which these might normally be vacant and that adjusted figure is the Annual Taxable Value (ATV).
How much money will this tax raise?
The Estimates of Revenue 2010 disclose an anticipated total of $325M for 2010 from Property Tax. That is a little more than twice-times this year’s estimated total of $142.52M. In my view, that anticipated increase is an under-estimate and I have already estimated new revenue in the $1.0Bn range.
My estimate is derived from considering the five elements which would have changed the government’s entitlement to property tax. We are starting from a $143M baseline figure -
- In terms of inflation alone, it is surely at least 6-times increase in the several decades since most areas were revalued. In the areas where recent revaluations did take place, it is clear from last week’s column that there was no corresponding increase in revenues. Even if we take account of the change in the rate at which the property is taxed – in some cases down from 10% of ATV to 3% – that is at least a three-times increase. Revised total – about $429M.
- In terms of new buildings, as stated by the Minister, there are about 200,000 properties stated to be ‘missing’ from today’s records, then that is about 40-45% of the buildings in the country to be added to the new database. Almost a doubling. Question is on what terms are the ‘new’ buildings to be included. You see, it is possible to just include a 10-year old block of apartments and start collecting taxes on 1st January 2010 or one could take the position that there are substantial taxes and penalties owed under the old regime, after all it is the legal responsibility of the owner to register your property with the rating authority. Even ignoring the penalizing approach involving back-taxes etc. that is a revised total of about $800M.
- Improved and extended buildings, together with other changes of use – These are three elements have added considerable value to the nation’s stock of properties, as we can all see. Even if we estimate a modest doubling in values for these factors, our revised total is about $1.6Bn.
That is the rationale for my conservative estimate of $1.0Bn in ‘new’ money.
Will landlords raise rents to compensate for this tax? In other words, will the burden be transferred to the ‘small fry’? There are already advertisements from the Ministry of Legal Affairs warning that to raise tenants’ rents is illegal. The dangers of that happening are overstated, in my view, since the market is now at such a low ebb that it would be the rare landlord who would antagonise their tenants by doing so. Paradoxically enough, the low ebb at which the economy stands is the very reason why this is a very poor time at which to try implementing the tax.
Next week, I will conclude by setting out how the tax might be administered in a more transparent and accountable fashion. Other issues would include the destination of the funds and the creation of ‘whistleblower’ processes.
HOW MUCH TAX WILL YOUR PROPERTY ATTRACT?
Residential – A figure of 3% of the ATV is being proposed.
- In the case of a home with an estimated monthly rental value of $3,500, the Annual Rental Value is $42,000.
- After adjustment, that is an Annual Taxable Value of $37,800.
- At the 3% rate, that is an annual property tax liability of $1,134.
- A monthly sum of $94.50.
Commercial – A figure of 5% of the ATV is being proposed.
- In the case of a property with an estimated monthly rental value of $10,000, the Annual Rental Value is $120,000.
- After adjustment, that is an Annual Taxable Value of $108,000.
- At the 5% rate, that is an annual property tax liability of $5,400.
- A monthly sum of $450.
Agricultural – A figure of 1% of the ATV is being proposed.
- The ATV is calculated to be 2% of the estimated market value of the property.
- In the case of an agricultural property with a market value of $600,000, the Annual Taxable Value is $12,000.
- At the 1% rate, that is an annual property tax liability of $1,200.
- A monthly sum of $100.00.
Industrial – A figure of 6% of the ATV is being proposed.
- The ATV is calculated to be 6% of the installed cost of the plant and machinery, plus the cost of the structures within which they are housed.
- In the case of an industrial property with a total installed cost of $3.0M, the Annual Taxable Value is $180,000.
- At the 6% rate, that is an annual property tax liability of $10,800.
- That is a monthly bill of $900.
Last week’s column set out my findings in respect of County Victoria and those findings were incorrect in so far as stating that San Fernando’s property tax revenues were included along with that County’s. The combined picture of County Victoria and San Fernando, is set out here -
County Victoria/San Fernando revenues 2000 to 2009 ($M)
|Year||County Victoria||San Fernando||Total|
Readers should also note that there was a tax amnesty in 2007/2008.
The property tax revenues of our Municipal Corporations are separately published by the Ministry of Finance in the Estimates of Revenue and Expenditure for the Statutory Boards, Similar Authorities and the THA. Those Municipal Corporations and their property tax revenues for 2009 are –
- POS – $30.0M
- San Fernando – $16.0M
- Arima – $3.75M
- Point Fortin – $15.0M
- Chaguanas – $5.00M
The national figures will be correctly compiled for presentation in the final column in this series.
This week I am drawing some conclusions on the property tax proposals, together with a presentation of the corrected data.
The first issue in my mind is the question of why this form of property tax has not been reviewed since Independence. There have been several significant attempts to review the property tax regime, but those attempts were shelved by politicians under pressure from landed interests. That is something we need to be alert for at this time.
A further point is that the legislation was revised in 1990 and we are being presented with a new set of legislation without any explanation as to what were its shortcomings. We need to separate the cogent arguments in favour of a review of values from the presentation of new legislation without a rationale. It does remind me of the Draft Constitution or Working Document.
Why run the risk of failing to persuade the public of a new scheme of laws, if all one is trying to do is re-value the properties? In the absence of a rationale for new laws, it almost seems like a planned diversion. Time alone will tell whether this crop of politicians have greater determination than those of the past.
The interesting thing for me is the manner in which the revenues are proposed to be treated and the thinking underlying that. One of the most fertile things about this moment is how certain issues have come together in that we are hearing talk of local government reform, property tax reform, calls for improved local services and better quality representation.
There is tremendous opposition to this property tax review. One can well understand the widespread concerns expressed about the poor quality services, lack of accountability, all with a general sense of decline. These objections to unprecedented increases in property tax are being expressed at the same time as proposals for the long-awaited local government reform.
Readers need to understand the serious change which this new legislation represents. Under the existing system, property taxes are payable to the relevant local authority. The local authority budgets are funded from both Rates & Taxes and Central Government subvention. At present, only a minor part of local government expenditure is locally-generated from the residents’ Rates & Taxes.
For example, in the Municipal Corporations the proportions are set out in this table. -
In 2009, 82% of Municipal Corporations’ funding came from Central Government. That is solid justification for the persistent complaints that local government is too heavily-dependent on central government money. If these property tax proposals are implemented, all Rates & Taxes which are now paid to the local authorities will be payable direct to central government. That will have the effect of making local government bodies 98% reliant on central government funding. As far as I am concerned, that would be a major step backward, since it would effectively dilute the already-limited independence of local government. Readers, this is at the very same time that various lofty ideals as to local government reform are being consulted on and discussed. Soon for debate, I am sure.
The only serious way to proceed would be to allow the local authorities to collect the ‘new’ funds due from the property tax review. That would have the effect of blowing a breath of fresh air through the local government system and maybe even improving the extent to which citizens support both reforms.
That approach of combining the reforms is one which might win broad support and open fresh possibilities for our governance.
The table showing the combined property tax income County Victoria and the City of San Fernando was omitted from last week’s column. The table is here –
|Year||County Victoria||San Fernando||Total|
The national totals for this type of property tax has been compiled from two sources –
- House Rates, which is paid in Municipal Corporations, as listed at the end of last week’s Property Matters, from the Estimates of Revenue and Expenditure for the Statutory Boards, Similar Authorities and the THA.
- Land & Building Taxes, which is paid in the rest of the country, from the Estimates of Revenue.
|Year||L & B Taxes ($M)||House Rates ($M)||TOTALS ($M)|
An explanation as to the dates – Up to the start of 1998, the country’s fiscal year-end for national accounting was 31st December. There was a transition between 1998 and 2001, with periods to be read as follows ‘1998’ is 1st January to 30th September of that year: ‘1998/1999′ is 12 months ending 30th September 1999 and 1999/2000 being 12 months ending 30th September 2000.