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ToDAY THuRSDAY APRIL 5, 2012

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No gain in capital gains tax

Letter from Ju Xiao Yong
I REFER to Mr Ee Teck Siews letter Adopt capital gains tax (April 3). He was concerned about the effectiveness of the latest property cooling measures. His view was that stamp duties could be sidestepped by using an offshore special purpose vehicle (SPV). He suggested the introduction of a capital gains tax, to protect genuine, long-term investors seeking wealth protection as opposed to those pursuing short-term trading profits at the expense of a healthy property industry in Singapore. I find it difficult to understand why a capital gains tax should be a solution to tax avoidance conduct and a protection for long-term investors. The current income tax regime is armed with both general and specific anti-avoidance measures to prevent abuse in corporate structuring that would render the income tax regime nugatory. Further, the holding structure suggested by Mr Ee is unlikely to be a feasible way

A better way forward might be to enhance current tax avoidance measures and perhaps introduce a more targeted measure to cool the property market and protect long-term investors.
to save tax in light of the current taxation climate in the international arena. It is legally possible for the court to ignore the SPV and look to the beneficial owner of the property. This way, the gains are taxable as if the SPV had not existed. Moreover, it should be noted that a capital gains tax is levied in respect of gains from the disposal of capital assets. So how does such a tax protect long-term investors, since the gains from the disposal of a long-

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term investment is now taxable? In my view, there are two ways to safeguard long-term investors against speculators. First, greater certainty should be provided in deciding whether the disposal of real property constitutes trading, in which case the gains are taxable as trading income. Second, introduce a real property gains tax, which targets specifically the gains from the disposal of real property. The applicable rates of this tax would be tied directly to the duration of holding the property. Malaysias Budget 2012 serves as a good illustration: Where the property is sold after a holding of less than two years, the gains are taxable at 10 per cent; if the property is sold after a holding of more than five years, the gains are tax-free. In sum, a capital gains tax tends to create more issues than it solves. Instead of introducing a regime unfamiliar to the domestic setting, a better way forward might be to enhance current tax avoidance measures and perhaps introduce a more targeted measure to cool the property market and protect long-term investors.