By NEIL HARTNELL
Tribune Business Editor
The Government is moving to reinstate the $50,000 property tax "cap" after The Bahamas' wealthiest community slammed "punitive taxation" that threatens "500 percent or greater" tax hikes.
KP Turnquest, deputy prime minister, yesterday told Tribune Business that the Government was "actively reviewing" recent Real Property Tax Act reforms that could have a "devastating effect" on Lyford Cay and its annual $215m economic impact.
While the Government is still determining the details, Mr Turnquest indicated it was seeking to distinguish between second home properties that are used exclusively by their owners and those that are rented out to other visitors.
He revealed that one approach under consideration is to reinstate the $50,000 "cap" for all properties but introduce a new "tourism tax" for those that are rented, with the Minnis administration aiming to agree "a final position" by Wednesday next week.
The deputy prime minister spoke out after the Lyford Cay Property Owners Association, in a July 30 letter sent to himself, warned that the "insensitive and irrational changes" to the Real Property Tax Act's "owner-occupied" definition were starting to undermine confidence among the very high-end North American investors this nation wants to attract.
Henry Cabot Lodge III, the Association's chairman, said tax rates that were "too high and unpredictable" would lead to consequences impacting "every sector of the economy that services Lyford Cay", as existing homeowners sought to exit and new buyers were deterred.
Should the Government not alter course, he warned that the "viability and sustainability" of Lyford Cay was at risk from reforms that both eliminate the $50,000 tax "cap" and double the tax rate faced by second homeowners that are not resident in The Bahamas for six months per year.
The Minnis administration has previously held firm to reforms that accompanied the 2018-2019 budget, but such a forceful and hard-hitting warning from the western New Providence community that is home to the Bahamas' wealthiest investors and homeowners appears to have proven impossible to ignore.
Signalling the Government's changed approach, Mr Turnquest told Tribune Business: "The matter is under active review at the moment. However, it is our intention to restore the real property tax cap for properties that are used as a second home residence. With respect to properties that are rented, we are considering the approach."
Probed further, the Deputy Prime Minister indicated that the Government's current thinking is to segment the market between properties that are used solely by their owners and those that are rented out to earn income.
With some second homeowners effectively using their properties for business purposes, Mr Turnquest said: "That latter point is the consideration. We may end up with a flat cap on all but a tourism tax on rentals.
"Again, that detail is being discussed now and we hope to have a final position by Wednesday next week." Asked whether this meant the Government was looking at reinstating the $50,000 "cap" for all properties, but placing an additional tax on rentals only, Mr Turnquest clarified: "That is my thought at the moment, but we will have to finalise on Tuesday and determine the mechanism."
Tracking these properties, and determining whether they are being used for rental purposes, will likely prove a tough task for the Government. Yet Mr Turnquest's confirmation that the Government is seeking to reverse course, and climb down from its earlier position, will likely be greeted with relief by Bahamian realtors and all sectors that relied on the second home market - especially on Family Islands such as Abaco and Exuma.
In truth, the Government has time to make the changes given that the Real Property Tax Act reforms were only due to take effect from January 1, 2019. Yet many observers will wonder why the Bahamas had to cause such angst among its target investor/homeowner market, and whether potential buyers will now be deterred by perceptions of an unpredictable tax policy.
Mr Cabot Lodge, in the letter seen by Tribune Business, wrote: "The 2018 amendments to the Act - real property tax rates and lack of clarification concerning the implications of the definition of 'owner occupied property' - has generated substantial dismay, confusion and much expression of concern within our community."
Acknowledging the Government's right to raise revenue from real property tax and other sources, he added that "many" Lyford Cay residents would now fall out of the 'owner occupied' category because they were winter residents in the Bahamas for less than six months annually.
Yet Mr Cabot Lodge said: "These owners retain their residences for their exclusive use as winter homes and employ their Bahamian staff and their Bahamian support service personnel on a year-round basis.
"If we understand this change in the law correctly, their real property tax rate is being doubled from 1 percent to 2 percent, and further they will no longer be eligible for the $50,000 annual cap on their real property tax.
"In many cases, this arbitrary change will result in a 500 percent or greater increase in their real property tax burden. For many residents in our community, this will impose annual real property tax bills of many hundreds of thousands of dollars."
One attorney, speaking on condition of anonymity, previously told Tribune Business that a $2 million vacation home would see its tax bill jump from around $18,000 to $33,000 - a $15,000 or 83.3 per cent increase.
But they suggested the impact was even more startling for a $10 million home, which currently pays $50,000 based on the real property tax 'cap'. With this removed, the attorney calculated that the tax bill will rise to around $193,000 - a $143,000 or 286 per cent increase.
Outlining the consequences of such steep tax hikes, Mr Cabot Lodge wrote: "If the tax burden becomes too high and unpredictable, a group of homeowners have already indicated to me that they will sell and leave the Bahamas.
"This would lead to unintentional circumstances that would adversely impact property values and every sector of the economy that services Lyford Cay as well as similar communities. It would heavily reduce household and general employment; construction; landscape maintenance services; pool services; electrical and plumbing services; food services; automobiles purchased; utilities payments; legal fees and real estate commissions; property tax revenue; and VAT revenue."
Mr Cabot Lodge continued: "Further negative impacts would include: The reduction of property values, the collection of revenues for community maintenance, and bring to a halt a number of construction projects that are presently being placed on hold because of this tax uncertainty.
"Such adverse impacts would not be unique to Lyford Cay, but they would also be felt throughout the many thriving second home communities throughout the Commonwealth. We do not understand the reasoning behind what appears to be the punitive treatment of expat winter residents whose properties are used in a manner identical with those of full-year expat and local residents.
"Whatever the reason, we are greatly concerned that if this interpretation of the law stands, we will have wholesale liquidation of what - in many cases - are multi-generational residents' properties here. The impact on our community will be devastating."
Pointing out that second homeowners provided "a consistently stable source of economic activity", Mr Cabot Lodge said: "In the case of Lyford Cay that has been over 60 years of consistent and solid community development and growth contributing approximately $215m per annum to the GDP of the Bahamian economy.
"We are concerned that absent our many 'winter' residents, the viability of and sustainability of our community is at risk. The rumours of these unwelcoming tax policies now swirling around New York, Florida, Toronto and other North American and Latin communities will have unintended long-term consequences for the Bahamas as investor confidence is undermined by insensitive and irrational changes in tax laws and policy.
"As I am sure your government fully understands, there is a large 'snowbird' population who own homes here, as in all Caribbean warmer climes, and this change in the law, we hope unintentionally, suggests that such residents, eagerly sought elsewhere, are now unwelcome in the Bahamas.
"We appeal to the Government to quickly clarify the intent of the Real Property Tax amendments, and to recognise that the winter resident market is an economic asset to the Bahamas that should be incentivised and not discouraged by punitive taxation."
Sir Franklyn Wilson, the Arawak Homes chairman, and who had himself previously warned of the amendments' consequences, yesterday suggested that the calibre of homeowners resident at Lyford Cay made the Association's letter impossible to ignore.
"I just do not see how it can be ignored; how any government can ignore it," he told Tribune Business. "Their position is similar to what the Bahamas Developers Association have said, and I'm convinced sound heads will cause that to be fixed. It's too important to the country."
Robert Myers, the Organisation for Responsible Governance's (ORG) principal, yesterday backed the Government's approach in distinguishing between second homes that are rented out and those used solely by their owners.
He explained that he saw "no reason" why second home renters should pay more in tax than "owner occupiers", given that they were effectively running a business. Mr Myers, though, emphasised that any taxation needed to be reasonable, so that the vacation rental business was not discouraged.
"I'm not saying we need to tax them exorbitantly and put massive rates on them," he told Tribune Business, "but they need to pay their fair share in tax.
"We have to be careful we don't put everybody in a one-size-fits all. There are people that don't live in the Bahamas that have very expensive homes and don't rent them out for commercial reasons. They're very private people and important members of our community from an economic standpoint. We don't want to discourage those people.
"But commercial people should want to contribute taxes to this country. They benefit from its success and should contribute to its operating costs."