Some early thoughts….
We received a number of questions following our initial report and decided to follow up with a few thoughts.
As reported in our bulletin last Thursday the Minister of Finance and the Public Service, Dr. the Hon. Nigel Clarke opened the 2019/20 budget debate and sent a positive shock wave to members of the investing and general public locally and abroad with the proposed new tax package. Overall, the package is welcomed for a number of reasons.
- By far the biggest and most significant change is the abolition of ad valorem stamp duty and its replacement with a standard fixed fee of $5,000.00. You may recall that the Real Estate Reform Consortium (RERC) formed in or around 2009 to aid in the reform of the real estate sector (of which I was co-founder and chair) had as one of its issues, the incongruity of the application of stamp duty. Sometimes it is determined on an ad valorem basis i.e., the value of the transaction based on the consideration (in the case of a sale and purchase, the price), and in other cases, it is charged as a flat rate i.e., a duty on the document itself. There seemed to be no rationale for why this was so, other than as a revenue earner on high value transactions, such as property sales and would have been the subject of considerable government lobbying from members of the industry. However, with the economy in such a delicate state for as long as I can remember, I guess the time never seemed appropriate to reform it, until now! Given that the real property sector (through developers and lenders) is so heavily impacted by the ad valorem tax type, transactions involving agreements for sale, mortgages, credit documents and the like will benefit significantly.
2. This reform will also be of great benefit to developers and generally anyone engaged in construction as it removes the construction agreement stamp duty. Currently, any agreement for construction of a house exceeding $500,000.00 is subject to a 5.5% stamp duty. Although this duty is normally shared between buyer and seller, the reduction may encourage price reductions on the part of the developer, who before now would have sought to recover his portion of the tax in the house sale price which in turn could result in an increase in the demand for build-on-own land purchases, and perhaps be of special benefit to young people.
- The reduction in Transfer Tax to just 2% is next most significant change. A long overdue measure which the RERC and others have steadfastly been in support of. Most vendors found this tax type particularly egregious, and we are sure it created anomalies in transactions. One imagines the anomalies would range from the seller hiking the price in an attempt to net a greater sum; or trying to pass the tax on to the purchaser notwithstanding the legal burden properly being the seller’s; to incorporations of overseas entities in low tax jurisdictions and attempting to do part cash deals ‘under the table’. It remains to be seen whether and to what extent the anomalies will be addressed by the reduction, but there’s no doubt that developers and other major dealers in real property transactions will be very happy with this move.
3. One further benefit is immediately visible. With some lenders willing to lend up to 95% of the purchase money, it is now possible for sellers to facilitate such buyers by accepting much lower deposits. With transfer tax at the rate of 5% and stamp duty at 4%, it meant that sellers had to take 9% up front from the buyer, in order to address these tax obligations. Thus the traditional request for 10% had to be maintained, with buyers and lenders having to engage in gymnastics to enable buyers to benefit. We should see transactions benefiting from much lower deposits, maybe as low as 3% (especially for cash purchases) which together with the more favourable lending rates offered by lenders, will make house purchase much more accessible to buyers, to the delight of developers, lenders, REITs, pensions schemes and of course buyers.
4. There is to be an increase in the transfer tax (death duty) threshold for estates of deceased persons from $100,000.00 to $10 million. The increased threshold certainly provides a cushion for inheritors of family property for properties valued below the threshold, but it remains to be seen how useful it will be for those valued above. At present many family members find themselves having to sell properties in order to pay the transfer taxes. For properties worth in excess of $10 million, the family will still have to find 1.5% of the value in excess of the threshold either from their own resources or that of the estate, unless the home can benefit from a principal home exemption.
5. Asset tax for non-financial institutions is to be abolished. Again, another welcome abolition. Businesses were required to pay between $5,000.00 and as much as $100,000.00 each year based on its declaration of assets. Small business especially will be able to use these funds for further investment in stock or assets.
6. The Minimum Business Tax is finally abolished! A fixed sum payable by all registered entitles annually, no matter its size or revenues (or losses for that matter), this tax type is one of the most unpopular tax types we encounter. Implemented during the austerity period of Jamaica’s recent return to the IMF, it is seen by many as an aberration, its only purpose deemed the extracting of revenues from legitimate business. The market will be happy to see it go.
7. An increase in the threshold for registration for General Consumption Tax (GCT) from $3 million to $10 million is being implemented. This represents a great boost for over several thousand small and micro businesses who will no longer have to charge and collect the sales tax and file GCT returns until their revenues reach the new threshold. Money spent by these businesses in purchasing materials is therefore recoverable from their sales for their sole benefit.
All in all the changes set to be implemented with effect from 1 April have brought a thrill to the market. The boost will no doubt provide a fillip to the transactional marketplace, since it is hard to see how the major players in real estate, construction, lending, business generally but especially the small and micro business aren’t going to see a virtually immediate benefit. The tax office should expect to see minimal transactions taking place until 1 April, and might even see some cancellations! After that, well let’s see what happens. We are hopeful that the market will indeed respond in the way that the stimulus is designed to encourage.
