By NEIL HARTNELL
Tribune Business Editor
The government reformed the real estate "transfer tax" structure because it was "inherently unfair" to give companies preferential tax treatment over individuals on property purchases.
KP Turnquest, deputy prime minister, pictured, told Tribune Business that including value-added tax (VAT) in the levy on real estate transactions had effectively allowed businesses to pay a tax rate equivalent to just 2.5 percent of the purchase price.
By contrast, parties to residential real estate deals had to pay the full ten percent rate, split between 2.5 percent stamp duty and VAT at 7.5 percent under the tax structure introduced by the former Christie administration.
Mr Turnquest branded the disparity in rates as an "anomaly", which arose as a result of how VAT works. Companies were able to treat the 7.5 percent levy on real estate purchases as a business expense, and "net it off" or offset it against the "output VAT" they collected from consumers. As a result, they effectively recovered three-quarters of the tax payable.
"The reality is it was never the intent, in our view, for businesses to be able to transfer property at 2.5 percent," the deputy prime minister told Tribune Business. "This was effectively what was happening with VAT charged on property.
"It is inherently unfair that businesses were effectively able to have a 2.5 percent stamp duty rate while individuals were paying ten percent. We sought to fix that anomaly."
In doing so, and reverting to the old ten percent stamp duty levy, the government is now treating real estate purchases as VAT 'exempt'. This has created a new set of concerns, especially for real estate developers, as they are no longer able to reclaim the VAT paid on their 'inputs' such as construction materials, contractor, architect and engineer services (see other article on Page 1B).
Numerous developers, including Jason Kinsale, Aristo Development's chief, and Arawak Homes' president, Franon Wilson, have warned that this will result in increased construction/development costs that will inevitably be passed on to consumers - pushing real estate and home affordability beyond the reach of many more Bahamians.
Mr Turnquest, meanwhile, explained that changes to the Real Property Tax Act's definition of 'owner-occupied' property were designed to eliminate "loopholes" that had allowed mainly foreign homeowners to escape with a lower tax rate.
"One of the issues is that these homes were claiming owner-occupied status, and some are not being used in any significant way," the Deputy Prime Minister told Tribune Business.
"The benefit is intended for Bahamians owning their own homes. It's a bit of a loophole we sought to close. It's also a reality that some of those homes were being used as vacation rentals rather than owner-occupied, so we're seeking to close the loophole."
When asked whether the change was also designed to prod wealthy foreign investors and second homeowners to choose the Bahamas as their primary domicile, Mr Turnquest replied: "That would be an added benefit.
"It's just a matter of tightening up the holes. In any tax administration, there's always areas that are grey that need to be tightened up as you go along, and this is one of those."
A briefing note to clients from the Higgs & Johnson law firm said the 'owner-occupied' change, which realtors and developers have both warned the Government against, will take effect from January 1, 2019.
"The definition of the term 'owner-occupied property' has been amended to remove the phrase 'or seasonal basis', and to insert a requirement that an owner must reside in their property for at least six months annually," Higgs & Johnson said.
"As a result of this change, beginning January 1, 2019, an owner that resides in their property for less than six months in any given year will be required to pay real property taxes annually at the rate of 0.75 per cent on that part of the market value which does not exceed $500,000, and 2 per cent on that part of the market value which exceeds $500,000.
"This change will affect Bahamian citizens, permanent residents and second homeowners who do not reside in their property for a minimum of six months. Accordingly, the statutory maximum annual tax of $50,000, which applies to owner-occupied property, will not apply in such instances."
As previously revealed by Tribune Business, second homeowners who fail to meet this benchmark face being reclassified as "residential property" or "other property". Since non-Bahamians cannot qualify for the former, foreign second homeowners will fall into the 'other property' category where the tax rates - as outlined by Higgs & Johnson - will effectively double with no protection from a $50,000 'cap'.
Adrian White, head of the Bahamas Bar Association's real estate committee, previously said the likely effect of the Real Property Tax Act changes was "a real concern" given the "quite severe increase" in tax bills it will produce.
"It looks like the open opportunity for owner-occupied status is being limited to residents in occupancy for six months," Mr White told Tribune Business. "The overall amounts payable are going to increase quite severely depending on the overall value of the property in question. It's going to be a big increase if that Bill is passed; it certainly would be."
Mike Lightbourn, Coldwell Banker Lightbourn Realty's president, told Tribune Business that the Government's planned reforms will likely impact 90 per cent of the Bahamas' second home market.
He branded the 'owner-occupied' change's implications as "ridiculous", given that the dramatic taxation increase risked undermining the Bahamas' price competitiveness and driving foreign buyers to rival Caribbean destinations that did not impose such cost burdens.
"That will affect at least 90 per cent of the foreign homeowners, and they're the ones that pay the taxes by and large," Mr Lightbourn said. "Oh God, I'm thinking of some sales we have now that it could kill."