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Arawak Chair 'Prays' For Late Reversal On Real Estate Taxation

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Arawak Homes’ chairman yesterday said he is “praying” that the Government will reverse course at the last minute on a “material dampener” for real estate and all related industries.

Sir Franklyn Wilson told Tribune Business that the move to treat real estate purchases as VAT ‘exempt’ from July 1, coupled with the effective removal of the $50,000 real property tax ‘cap’ for high-end properties owned by foreigners, represented a ‘double whammy’ for a sector that is vital to the Bahamian economy.

Calling for “common sense to prevail”, Sir Franklyn expressed hope that advocacy efforts by the newly-formed Bahamas Developers Association, and major developers individually, would make the Government aware that the VAT treatment change was “counter productive”.

In particular, he warned that the VAT ‘exempt’ status for real estate purchases was “highly inconsistent” with the Prime Minister’s goal of making home ownership more affordable and accessible for Bahamians as it would increase new-build housing costs.

Sir Franklyn spoke out after the VAT ‘transition notes’, released by the Government at the weekend, revealed that it is making no concessions to developers over the reformed real estate ‘transaction tax’ structure.

“We are aware of that information,” he told Tribune Business, “but we are also aware of the fact that several significant developers in the country and, in fact, the Bahamas Developers Association, have been seeking to encourage the Government to revisit this particular thing.

“It remains my prayer that, as late as it might be at this stage, that common sense will prevail and someone would see that what is being announced is counter productive.”

The VAT ‘transition notes’ confirm that all property sales/purchases will now be treated as VAT ‘exempt’, meaning that developers can no longer recover the tax paid on their ‘input’ costs.

“If you are a developer you may have, or be in the process of, acquiring real property. Transactions involving the sale or purchase of real property are now exempt as of July 1, 2018. Stamp tax is now, however, charged on all such transactions,” the transition notes state.

“All of the VAT you incur in the process of your development is not recoverable, as VAT on any taxable supplies in relation to an exempt supply is not available as an input tax credit deduction.”

Developers had previously warned such tax treatment would mean “millions of dollars are on the line” as it would be “impossible” for them to claim back the now-increased 12 per cent VAT on their input costs.

The former Christie administration changed the ten percent Stamp Duty levied on real estate sales to accommodate the current VAT rate, splitting this 7.5 percent/2.5 percent between VAT and Stamp Duty. But the 2018-2019 budget goes back to the 10 percent stamp duty on all real estate purchases over $100,000.

This prompted warnings of increased real estate costs for both Bahamian and international buyers. Developers currently ‘net off’ the VAT they pay on construction materials, and the likes of contractor, engineer and architect bills, against the ‘output’ tax whenever a property is sold.

But the Budget’s altered tax structure, by eliminating VAT, robs developers of the ability to claim back already-paid input tax, thus saddling them with a multi-million dollar increase in development costs that will likely be passed on to purchasers of new housing units.

This, in turn, could depress real estate development activity and have negative consequences for all industries that rely on the housing market - especially realtors, contractors and attorneys.

Besides the potential hit to the domestic Bahamian housing market, Sir Franklyn yesterday reiterated warnings that changes to the definition of ‘owner-occupied’ property in the Real Property Tax Act threatened to have a similarly negative impact on the foreign second home market.

As previously revealed by Tribune Business, the Real Property Tax Amendment Bill that accompanied the 2018-2019 budget requires “owner-occupiers” to reside in their homes for six months or more per year. This is a marked change from the current Act, which defines “owner-occupiers” as persons who reside in their homes “on a permanent or seasonal basis”.

This allows the Bahamas’ second homeowner community, many of whom are in this nation for just a few months per year, to be taxed at the “owner-occupier rate” that was reduced in 2016. They currently pay a rate of five-eighths of one percent on their home’s value between $250,000 and $500,000, with the portion above $500,000 taxed at one percent. The total sum they pay is also capped at $50,000 per annum.

But, with the elimination of “seasonal basis”, homeowners will now have to reside in their Bahamas properties for a minimum of six months per year to retain “owner-occupied” status.

Should they fail to meet this benchmark, their properties 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 are much steeper.

Real estate classified as ‘other property’ is taxed at a rate of three-quarter of 1 per cent on its first $500,000, with a 2 per cent rate applied to its value above this threshold. And the 50 per cent ‘cap’ does not apply, meaning the tax rate is effectively doubling.

Explaining the implications, Sir Franklyn told Tribune Business: “For all practical purposes, the cap that has existed on real property tax for high-end homes has essentially also been lifted.

“At my stage I really don’t like to preach doom and gloom, but I just pray that someone will see this combination of policies are likely to be detrimental to one sector of the economy that remains reasonably robust.

“When you add all these things together, I continue to pray that, as late as it might be, that someone might see there’s got to be a better way to solve whatever the problems are. When you add these two things together it’s a dampener, let’s put it that way.”

Sir Franklyn recalled how his son, Franon, Arawak Homes’ president, had previously revealed that the company’s most popular ‘home and lot’ package - that for a three-bed, two bath home - would increase in price by $23,000 - going from $192,000 to $215,000 - as a result of the Budget’s tax changes.

Franon Wilson had previously warned that a “huge” number of Bahamians will thus be priced out of home ownership, with the VAT rate hike and changed real estate taxation structure having “a bigger impact than VAT’s introduction” back in 2015.

Endorsing that analysis yesterday, Sir Franklyn said: “One needs to recognise that any time you do anything to cause the cost of a home to go up $1,000, you guarantee you are moving hundreds of people across the line from being able to qualify to not being able to qualify [for a mortgage], even for the most inexpensive home.”

He told Tribune Business that the Budget was incompatible with the Access to Affordable Homes Bill 2018, which was recently passed by Parliament. This aims to provide serviced lots for less than $30,000 to Bahamian home purchasers, with incentives - such as Customs duty and excise tax exemptions - provided for a two-year period to persons who construct their own homes on the property.

“They say they wish to encourage home ownership, and the Prime Minister himself has been vocal in stating that,” Sir Franklyn said. “He’s to be commended for that, but this Budget is highly incompatible with that. That’s the bottom line.

“It’s material enough that I’ve got to hope and pray it’s not too late for someone to think after all that this is not likely to have a positive impact, and that it’s worth another look.”

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