Proposed income tax changes – just a blip
By DMG Research
Property stocks have fallen 3.1% in reaction to a proposed change in income tax law, stipulating that profit from a property sale (on or after 1 Jan 10) would be exempted from tax if the seller has sold only one property within a four-year period. In the event that more properties are sold, their ensuing profits could be taxed if the Inland Revenue Authority of Singapore (IRAS) decides that they are of a trading nature.
IRAS's decision is based on the incumbent tax regime, which taxes the income of a trader – one who buys and sells properties within a short time span. Simply, the change narrows the scope, but leaves the 'case-by-case' judgment of 'trading income' unchanged, suggesting that not all subsequent property sales will be liable to taxation.
While we think the amendment mainly makes clearer the current tax structure, it also implies the government's cognizance of the buoyant property market now. More importantly, it does not encourage unhealthy speculation, which has gathered pace for mid and select prime projects.
Anecdotally, the 3 – 5% discounts during soft launches have provided an impetus to speculation, as buyers aim to make quick profits after the official launch.
As the economy and job market have not shown concrete and broad recovery signs, and foreigners have not entered in droves, we believe this represents the best time for it to douse some of the speculative flames.
We expect the tax change to have minimal impact on prices and take-up of owner-occupied mass projects. Given their higher speculation, mid and prime projects are more vulnerable to a short-term correction. However, as capital values there only rose 7% and 4.9% qtr-on-qtr respectively in 2Q09 and remain 21.7% to 31.3% off their 4Q07 peaks, the upside potential remains superior to downside risks for buyers.
Even if a maximum 20% personal income tax rate is levied on profits, the seller should still reap healthy income. Counters with reasonable domestic residential exposure could face temporary sell-offs, with deeper declines for those with higher mid-high end exposure such as Ho Bee, SC Global, Wheelock and Wing Tai.
Nonetheless, with the opening of the Marina Bay Integrated Resort (IR) targeted in early 2010, stocks and physical prices should resume their upward trend following this short-term blip, which represents a good entry point, from our view. We reiterate our Overweight call on the property sector, with CityDev as our top pick at a target price of S$12.00.
Disclaimer
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