The Property Tax Act, 2009 was assented to by the President on December 31, 2009, and was expected to come into operation on January 1, 2010. Taxpayers have, however, benefited from a moratorium on the payment of the tax since inception. We note as well that the Property Tax Act, 2009 also repealed the Lands and Buildings Taxes Act and Part V of the Municipal Corporations Act effective January 1, 2010.
In his budget statement delivered on September 30, 2016, however, the Minister of Finance signalled that the property tax would be fully implemented in fiscal year 2017 with the population of the valuations roll and minor amendments to the Valuation of Land Act. Recently, the Minister of Finance has indicated that the Government is moving forward to implement the property tax by hiring 248 people to work in the Valuations Division of the Ministry of Finance.
Further, in a statement issued on April 19, 2017, the ministry advised that Valuation Return Forms (Returns) will be issued to property owners within the next week with a deadline for submission of May 22, 2017.
In its Final Estimates of Revenue for 2017, the Government expects to collect $503,000,000 in property taxes in the current year. This compares to the sum of $71,413,824 collected in the year 2009, which was the last year the repealed system of Lands and Buildings Taxes were collected.
While the anticipated property tax revenues in 2017 are materially higher than under the regime it replaced, it still amounts to just 1.68 per cent of total tax revenues. Such revenues must, however, be viewed in the context of an environment where the country’s fiscal resources have dwindled significantly due to the fall in commodity prices and lower oil and gas production.
In light of the imminent implementation of the property tax, we seek to provide this update on the said tax.
Please note these definitions:
Annual Rental Value (ARV) = Annual rent which particular land is likely to attract having regard to the purpose for which the land is actually used, occupied or tenanted, or where it is not actually used, occupied or tenanted, having regard to the purpose for which it is reasonably suitable
Annual Taxable Value (ATV) = ARV less deductions and allowances
Capital value means the sum which the fee simple (ie, freehold interest) might be expected to realise if offered for sale on such reasonable terms and conditions as a bona fide seller would require.
n The table above summarises the applicable rates for the respective Property Classes to compute Property Tax
Rates
Property tax will be assessed as a percentage of the Annual Taxable Value (ATV) of the property as set out below:
Property Tax = ATV x Prescribed Rate for the Property Class
n INDUSTRIAL
ATV: 6% of the installed cost of plant and machinery whether or not housed in a building.
Rate of Tax: 6% of ATV in the case of plant and machinery housed in a building and 3% of ATV for plant and machinery not housed in a building.
Under the prior Lands and Buildings Taxes system, plant and machinery not housed in a building were not liable to be assessed.
Under the Property Tax regime, however, plant and machinery would be included in the ATV even if they are not housed in a building.
The definition of “land” was expanded for the purposes of the Property Tax to include “land covered with water” and “all structures, machinery, plant, pipelines, cables and fixtures erected or placed upon, in, over, under or affixed to land.”
The onshore and offshore installations of the energy sector would appear to have to be included in the determination of the ATV.
Based on current guidance from the Ministry of Finance, the ATV with respect to plant and machinery is based on the installed cost of such plant and machinery. The worked example provided by the ministry, however, refers to the current market value of such assets.
In order to determine the current market value, the current replacement cost of the plant and machinery is adjusted to reflect wear and tear as evidenced by maintenance cost levels, production deficits and other influencing factors.
We understand that the adjustment for wear and tear would not be based upon accounting convention but is rather expected to take into consideration real declines in the productivity and efficiency of the plant and machinery over time.
Notwithstanding such guidance, there is still a great deal of uncertainty as to how the installed cost of the plant and machinery is to be determined and, in particular, how the wear and tear adjustment is to be computed.
We would further note that the terminology utilised by the Ministry of Finance in its guidance (ie, installed cost, current market value, current replacement cost) is confusing and somewhat contradictory.
In the case of vacant industrial land, the ARV is computed as 5% of its capital value.
The relevant legislation does not prescribe a rate of tax specific to vacant industrial land, however, we would expect that the rate applicable to land with plant and machinery not housed in a building ie, 3% would be applicable to vacant industrial land.
n COMMERCIAL
ATV: ARV less 10%
Rate: 5% of ATV
In the case of commercial property, the ARV is the annual rental income expected to be earned from such property as determined by the Commissioner of Valuations under the provisions of the Valuation of Land Act.
The ATV is the ARV less 10% (for the average time that the property may not be rented). We note that no guidance has been provided by the relevant authorities regarding the valuation methodology to be adopted to determine the expected annual rent of the property and many issues remain unclear. So, for instance, there is some uncertainty as to whether common area charges are to be taken into account in determining the annual rent of the property.
With respect to vacant commercial land, the ARV is determined to be 5% of its capital value. The ATV is determined by deducting any applicable deductions and allowances from the ARV and the property tax is computed by applying a 5% rate to the ATV.
n RESIDENTIAL
ATV: ARV less 10%
Rate: 3% of ATV
As is the case with commercial property, the ARV in respect of residential property is the annual rental income expected to be earned from such property as determined by the Commissioner of Valuations under the provisions of the Valuation of Land Act.
On the other hand, the ATV is the ARV less 10%(for the average time that the property may not be rented). Whether a property is owner occupied or presently tenanted would not change the ATV valuation methodology which would be based upon expected annual rental income in all instances.
Several factors will be taken into account in determining a
property’s rental value, including:
• The location of the property
• The classification of the property
Residential properties will
be classified as follows:
• Standard Home One: one bathroom
• Standard Home Two: one-two bathrooms
• Modern Home: At least one en suite bathroom with a speciality room
• Executive Home: May have at least as many bathrooms as there are bedrooms and specialized areas eg, a separate room for dining, office, library etc.
The classification would also take into account factors such as quality of construction and condition of the property.
ERNST & YOUNG SERVICES LIMITED
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