Government to study the implementation of a wealth tax in the future as it’s important for maintaining the social compact
By Ajay Kumar Sanganeria, Partner, Head of Tax, KPMG in Singapore; Stephen Banfield, Partner, Real Estate & Asset Management, Tax, KPMG in Singapore
The possible introduction of a wealth tax was flagged on a number occasions in the lead up to the 2022 Budget. While a wealth tax was eventually not tabled at this year’s Budget, a recurrent theme in Finance Minister Lawrence Wong’s speech was the need to maintain the social compact, and to ensure that those with the greatest capacity to pay contribute accordingly.
This is especially in light of the projected costs associated with an ageing population and the need to ensure all Singaporeans share in the nation’s prosperity.
Minister Wong has indicated that the Government will study the implementation of a wealth tax in the future. This will draw upon the experiences of European countries, and presumably will consider in equal measure countries which have now repealed their wealth taxes as well as those like Switzerland that continue to impose such a tax.
The challenges of a tax on net wealth were discussed in detail in a 2018 study by the Organisation for Economic Co-operation and Development (OECD) and are fairly self-evident. They include difficulties with measurement, compliance and the risk of capital flight.
In the Singapore context, the imposition of a wealth tax will need to be carefully calibrated to ensure that it does not run contrary to the positioning of Singapore as a wealth management hub. It will also need to factor in the increased mobility of both capital and high net wealth individuals in this digital age. There is an important interaction with the taxation of capital gains which Singapore does not do. A wealth tax could be an alternative to a broad-based capital gains tax, and the reverse is also true.
It is not yet clear if the Government will limit their study on wealth taxes to just a tax on capital during a person’s lifetime. An approach seen commonly in other countries is the imposition of an estate or inheritance tax, and it is too early to tell if any consideration will be given to the reintroduction of an estate duty. Imposing tax on the testamentary transfer of assets is an effective tool to counter the concentration of wealth. Especially where this tax is imposed on the inheritance of assets, as opposed to an estate itself, it can serve a redistributive as well as revenue raising objective. An oft-cited issue with inheritance or estate taxes is the ability for individuals to plan ahead and to minimise their impact.
Even though a broad-based wealth tax did not materialise this year, the Minister did make a number of changes that will impact wealthy taxpayers.
The highest rate of property tax will increase to 32 per cent for owner-occupied properties and to 36 per cent for non-owner-occupied properties. These are significant jumps from the current maximum rates of 16 per cent and 20 per cent respectively. These new rates will be rolled out in phases over two years with the first increase to take place with effect from 1 January 2023.
Such changes are unsurprising within the context of this year’s Budget as property tax may be considered a wealth tax of sorts. This is because it can be targeted at the very wealthy and is relatively easy to collect.
One notable omission from the Budget is any attempt to introduce additional stamp duty tiering. For Singapore citizen buyers who are purchasing their first property, the maximum rate of normal buyer’s stamp duty is still just 4 per cent which applies on the purchase price of a residential property over $1,000,000. This is irrespective of whether the Singapore citizen is purchasing a condominium or a good class bungalow. Rates of additional buyer stamp duty have been steadily increasing but curiously not the rate of normal buyer’s stamp duty itself.
Another change announced by Mr Wong was the introduction of two new personal income tax bands. Personal income tax at the rate of 23 per cent will be imposed on those with income over $500,000, and at the rate of 24 per cent on income over $1 million with effect from YA2024.
These are moderate increases and are clearly targeted at the highest of wage earners in Singapore. It is consistent with the idea that those with the greatest capacity should contribute more, balanced with the long-standing position that the tax system should not serve as a disincentive for wage earners to strive to progress their careers.
A final change impacting the wealthy is the introduction of a new tier in the additional registration fee. This will be at 220 per cent and will apply on the open market value of cars which are in excess of S$80,000. This new maximum rate is not dramatically higher than the current maximum rate of 180 per cent. It is effective from 19 February 2022 for cars which do not need to bid for certificates of entitlement.
While Budget 2022 introduced fairly moderate changes for the wealthy, it could be the beginning of a number of incremental adjustments which are designed to enhance the social compact.
It will be interesting to see the discussion of a wealth tax develop further. This is crucial for Singapore both as a matter of fiscal policy and also within the broader global context where many jurisdictions are increasingly concerned about wealth inequality and how they can meet projected expenditure needs.
