By NEIL HARTNELL
Tribune Business Editor
A top realtor yesterday questioned why a lower $50,000 Value-Added Tax (VAT) threshold was being applied to real estate investors, calling for a uniform $100,000 benchmark to be applied “across the board”.
David Morley, Morley Realty’s president, told Tribune Business that he saw no reason why there had to be a “distinction” between real estate and other industries when it came to the VAT mandatory registration threshold.
While still ploughing through the just-released VAT Bill and accompanying regulations, Mr Morley added that the other unresolved question relating to commercial real estate was whether Common Area Maintenance (CAM) or service charges would be subject to VAT.
“On the issue of commercial real estate, there are two things we need to get clarification on,” he told Tribune Business.
“The [registration] threshold is $100,000 for any business in the November legislation. The issue with real estate is that the turnover threshold is $50,000.
“I don’t see why there needs to be a distinction between real estate investment, and investment in a business. It should be the same across the board.”
The Ministry of Finance’s explanatory notes accompanying the draft VAT Bill and regulations confirm that the mandatory registration threshold for “operators of hotels, villas, and similar accommodations”, plus “the supply of commercial property for lease”, is proposed at a $50,000 annual turnover.
Turning to his other concern, the Morley Realty chief added: “Most commercial lease agreements are drawn as net leases. The landlord charges a net rent, and the tenant reimburses the landlord for the net operating expenses of the property.
“That’s not an income; it’s a remittance to the landlord. CAM charges, service charges - can that be taxed? Is there a VAT tax on that, because rental income is a net return to the landlord.”
Mr Morley, a specialist in commercial property sales and leases, suggested that the impact from a 15 per cent VAT on commercial leases/rentals may not be as pronounced for landlords and their tenants as some may fear.
This was because VAT is structured to ultimately be paid by the end-user, with businesses able to deduct or ‘net off’ what they pay on their so-called inputs from what they collect from their customers.
In the landlord’s case, Mr Morley said they would collect the 15 per cent VAT on the lease and pass the due funds on to the Government, once they had deducted or ‘netted off’ any tax paid on their inputs - such as electricity, services and other supplies.
With commercial tenants, they would also treat the VAT paid on their rent as an ‘input’, deducting this from what was collected from their customers and remitting the ‘net’ to the Government.
However, Mr Morley expressed concern about VAT’s impact on businesses that fell below the $100,000 mandatory registration threshold.
While they will not have to levy VAT on their customers, nor will they be able to recover the tax paid on their inputs, causing their costs to rise.
“What’s taking place with VAT is that those businesses with turnover of less than $100,000 will be most drastically affected by VAT,” Mr Morley told Tribune Business.
“Their expenses are automatically increased by 15 per cent, and they can’t offset it against anything they collect. It’s the small businesses that will be drastically affected, not those over $100,000.”
While he now had “a general understanding”, Mr Morley said he would only know his specific VAT obligations and responsibilities, in relation to commercial real estate, once the final Bill and regulations were released.
“Hopefully, there’s enough ability for people to give constructive feedback to government and put it in a position that it doesn’t apply the wrong policies in different industries,” Mr Morley told Tribune Business.
“Until such time as they finalise the legislation, we’re all sitting ducks waiting for it to happen.”
Once that happened, he suggested that the Bahamas Real Estate Association (BREA) would need to conduct due diligence on the experiences other countries had encountered with VAT and see what the difficulties for real estate were, so accurate, constructive advice could be given to the Government.
And BREA would have to educate its members on their rights and responsibilities, Mr Morley adding: “We have one bite at the apple, so let’s get it correct so that it’s a win-win, not a lose-lose, situation”.
He told Tribune Business he had already consulted realtors in Barbados on VAT’s impact since it was introduced there 10 years ago at a 12 per cent rate.
At that time, Barbados’s Stamp Tax rate on conveyancings was 10 per cent, but this was dropped to 7.5 per cent before VAT’s introduction. Now, Barbados has an 18 per cent VAT rate, and Stamp Duty has been cut further to 2.5 per cent.
“Barbados found that VAT had some type of, not crippling affect, but it drastically affected real estate sales after coming into effect,” Mr Morley said.
Yet while Barbados charged VAT on both commercial and residential property sales, the Christie administration is looking at making the latter ‘exempt’, something Mr Morley described as “a bonus”.
“We can’t look a gift horse in the mouth,” he said, “but we have to make sure wherever else we are charging for real estate doesn’t have a crippling effect. It is a very serious Bill with far-reaching implications.”
John Rolle, the Ministry of Finance’s financial secretary, meanwhile confirmed yesterday that 15 per cent VAT will not be levied on commercial property sales prices.
Tribune Business revealed on Monday how the October draft of the VAT materials had listed “sales of commercial property” as ‘exempt’, meaning no VAT would be charged, but it was omitted from those exempt services in the publicly-released November Bill.
Mr Rolle suggested this may have been an “editing” mistake, and told Tribune Business the only aspects of real estate transactions that were ‘VATable’ would be fee-based income - legal fees, appraisal fees and realtor’s commission.
He added that the Government was already earning a satisfactory tax take from real estate transactions via the typical 10 per cent Stamp Duty rate.
There had been concern that adding VAT on top of commercial real estate prices would create a 25 per cent tax burden, but Mr Rolle yesterday appeared to put that to rest.
He added, though, that future discussions may look at whether it was “desirable” to replace Stamp Duty “on certain transactions” with VAT.