Property tax provisions using Victorian-era language need to catch up urgently with the digital age.

See Wei Hwa, Partner, Tax, KPMG in Singapore

Connect with us

Property tax, which originated as a municipal levy, hardly receives much attention from fiscal strategists, especially in these days of the re-design of the global tax system under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS 2.0).

With the current fiscal agenda in Singapore focused on the international equity of taxation, domestic inequality, climate change and ageing demographics, property tax has in recent months received some attention as an example of a progressive wealth tax.

There is however little discussion of a 19th century vestige of our property tax system, which incentivises investment in machinery for the making of items like socks and soaps of the old industrial economy, but not those of the modern economy pivoting towards Industry 4.0 and the future economy.

Why the colonial era property tax provisions needs to catch up with the digital age

A brief discussion of the fiscal history may be apt at this juncture. The property tax system in Singapore may be traced back to the early 19th century when it was introduced as a municipal levy to defray the expenses needed for the provision of various services such as the cleaning and lighting of public streets, fire and police service, etc.

The convenient and obvious tax base was the rental value of real or immovable properties that directly benefit from services provided by the municipal government. Machinery that are affixed to land or buildings would thus fall within the tax base and be subjected to municipal rates, as such machinery will be treated as part of the immovable property under the law of fixtures.

The tax base of real or immovable property was however a crude fiscal instrument, which catches within its dragnet, productive machinery which needed to be fixed to the premises, for functional efficiency.

Hence, the colonial authorities devised a carve-out to exclude machinery used for the making, altering and adapting of articles for sale, from the levy of rates. In essence, the carve-out served as a fiscal tool to promote investment in machinery in the early days of industrialisation.

Those carve-out provisions still remain in our law as section 2(2) of our Property Tax Act. Unsurprisingly, the statutory language of the carve-out reflected the nature of industries prevailing in the 19th century, which were chiefly that for the making, altering and adapting of articles for sale.

Applying property tax to modern industries

Our economy however, has evolved significantly over time, notably with the rise of new industries, particularly those that use "state of the art" technologies.

Unfortunately, the Victorian-era carve-out in section 2(2) uses workhorse language that is not elastic enough to be stretched to meet the circumstances of the 21st century. For example, the current property tax legislation disadvantages investments in certain types of machinery. This includes cold chain technologies needed for the storage of vaccines and perishables, as well as sterile and specialised environment technologies that provide contamination-free environments to facilitate the manufacturing of vaccines and drugs for the global supply chain, and simulated environments such as those used by our burgeoning aerospace industries with the use of wind tunnels.

The archaic language used also disadvantages investment in machinery which uses photovoltaic technologies that provide sustainable clean energy, and those used by Singapore's agritech and aquatech industries that could bolster food security in the face of supply chain disruptions and climate change.

A higher property tax burden also falls on businesses that use leading-edge machinery to drive productivity. In particular, within the logistics sector, property tax is currently imposed on a wide range of machinery, including those using robotic sensor-based technologies for the e-commerce supply chain, as well as those using automatic storage and retrieval technologies that minimise the use of physical space and manpower.

Such machinery does not necessarily make, alter or adapt articles for sale, to qualify for exclusion from property tax assessment under the requirements of section 2(2).

Yet much of the leading-edge technologies provide the environment and physical conditions essential for propelling deep tech in our future economy and enhancing productivity through automation.

Updating the property tax system

Are we unique in this situation? What have other jurisdictions with similar property tax systems done to cater to the advent of new technologies?

In a number of foreign jurisdictions that share similar property tax systems with colonial-era antecedents, it is noted that machinery used for "manufacturing operations and trade processes" have been excluded from the levy of property tax. Most investments in leading-edge machinery, such as those discussed above, qualify as machinery used for "trade processes", and hence are excluded from property tax assessment in these foreign jurisdictions.

While Singapore's property tax system has been used to address the "inequality curve" as highlighted by Minister for Finance, Lawrence Wong, at the 35th Singapore Economic Roundtable on Oct 15, 2021, much more can be achieved through tweaking archaic property tax rules in redefining the trajectory of our fiscal strategy. This is particularly so given that the "demographic curve" pointed out by the minister will increasingly drive us towards the use of machinery as our labour pool diminishes.

Therefore, there is a good policy case for updating the scope of the carve-out in section 2(2) of the Property Tax Act, in order to encourage the investments in deep technologies so as to be future-ready in support of the transition and re-structuring of our economy.

At the same time, new rules should be introduced to equip our property tax system to tackle the "emission curve" mentioned by Minister Wong, by encouraging investment in sustainable or green properties that are aligned with environment, social and governance (ESG) principles. The Maritime and Port Authority has taken the first move in this regard, by announcing that "green" ships will qualify for tax rebates and other benefits to be introduced from next year.

Hopefully, our property tax system will similarly be ready for the future economy.