Westhill Consulting British Colombia, Hong Kong, Jakarta, USA: Jakarta weighs new land and property tax formula

Indonesian president Joko Widodo’s administration is sending mixed signals to the public about new tax regulations on property, as it aims to fill state coffers and introduce populist policies at the same time.

In a bid to meet a revenue target of 1.5 quadrillion rupiah (UScopy14 billion) this year, the government plans to introduce various measures, including revised property tax regulations.

The finance ministry says that starting from April it will adopt a new formula to collect luxury goods tax on landed houses or apartment.

“The formula will be based on [property] value, not on its size. Surely, the value will be more than one billion rupiah,” Finance Minister Bambang Brodjonegoro said last Monday.

The current luxury tax on property transactions is imposed on purchases of landed houses bigger than 350 square metres and apartments of more than 150 square metres.

Bambang said that determining “luxury” based on property size was not always accurate. For example, he said, a 150-square-metre apartment might be seen as luxurious in one location but not in another.

The government also plans to lower the property price limit when imposing 5% income tax on property transactions, to 2 billion rupiah (about 5 million baht) from the previous limit of 10 billion for houses of more than 500 square metres and apartments of more than 400 square metres.

But Anton Sitorus, head of research at the real estate services firm Jones Lang LaSalle Indonesia disagrees with the new proposed formula.

“This new regulation is aimed at boosting revenue from property tax. But a luxury tax on property should be regulated by size first, not based on its value,” Sitorus said.

“Luxury tax and income tax are two very different things, but they’ve been mixed up in this proposed formula.”

While Indonesia does not exempt a first house from tax, a central bank regulation makes it easier for people to acquire a first home by allowing a 20% down payment, compared with the normal requirement atleast of 30%.

But even as the finance ministry is preparing the public for new taxes, there is confusion about how united the government is behind the idea. Ferry Mursyidan Baldan, the minister of agrarian and land reform, in January called for a populist policy to scrap the taxable value of property, property transfer fees and the annual land and building tax in a bid to ease taxpayer’s burdens. He said he would propose the idea to the finance ministry.

The taxable value of property, also known as NJOP, is normally used to determine the value of land but it doesn’t always reflect in a property transaction since the actual transaction value could be lower or higher depending on whether the land is strategically plotted or not, despite being situated in a prime location.

To replace the NJOP as a determining factor for valuing land, Ferry said his ministry proposed a new system called land value zoning. He said it would be based on more concrete variables and spatial planning concepts and would set the land value higher if it was situated with good access to public facilities and infrastructure.

Ferry said he expected the initial phase of the new property tax regulation would be imposed by 2016 and would first exempt houses below 200 square metres, places of worship and other buildings used for social purposes. It would still collect property transfer fees and annual land and building tax on land and buildings used for commercial purposes and houses larger than 200 square metres.

Ferry’s proposal has met with opposition from regional governments. The central government in 2011 gave them the authority to collect land and building tax, and they fear that his plan would reduce their revenues.

Westhill Consulting British Colombia, Hong Kong, Jakarta, USA: Tax-saving tips for buying and selling a property

A joint loan while buying is beneficial; make full use of deductions available while selling.

Irrespective of class or income, Indians are fond of buying gold and real estate. Purchasing and selling the metal is a straightforward game but a property, through its lifecycle (buying, owning and selling), can be taxing. If played right, you can reduce the tax outgo.

While buying

A house is the biggest purchase most people make in their lifetime and the government realises this. To give buyers relief, the government has allowed income tax (I-T) deductions if the property is bought on a loan. Under Section 80C, the borrower can claim deduction of up to Rs 1.5 lakh. For a self-occupied property, a Rs 2 lakh benefit is available under Section 24 (b) of the Income Tax Act for interest on the home loan. If the property is not self-occupied, the entire interest paid to the lender can be deducted from income. “This applies even if a person borrows money from a friend, his family or a private lender provided appropriate loan document between the borrower and private lender is done and there is either a letter or a confirmation of interest charged by lender,” said Hemal Mehta, senior director, Deloitte in India.

Problem area: Under the current market conditions, project delays are a common thing. This can cause financial trouble to the borrower. A person can’t claim deduction for the interest if his or her house is still under construction. A buyer can, however, get benefit for the principal amount. On possession, the borrower can claim deduction for the interest paid during the pre-construction period. This needs to be done in five equal instalments, starting the financial year you are handed the property.

Tip: To take advantage of current laws, a couple should take a joint loan in equal proportion. This will allow each to claim full tax deductions available for the principal and interest. This also applies to a child and a parent.

While you own it

If it’s the borrower’s only house and self-occupied, there’s no taxation. For those who have two or more houses and these are neither let out nor occupied, the taxation can get tricky.

According to I-T laws, in such cases the owner should take a notional rent value and pay tax on it. There’s a prescribed method to calculate the notional value, which takes into consideration the municipal value of the property and the rent control legislation (either of the two) or the prevailing rent in the area for a similar house. “In a case of a notional rent, there is no rule to submit a certificate from a third party. However, it’s better that a person submits a letter from a broker stating the prevalent rent in the area,” said Mayur Shah, executive director – tax & regulatory services, EY India.

Problem area: If you are claiming housing loan deductions and housing rent allowance (HRA) at the same time, it can cause trouble. Many people claim HRA by showing rent paid to parents or wife (if there’s a house in their names). A taxpayer is allowed HRA and loan deductions both under certain conditions. For example if your house is in a different city than that of residence. The department also allows you to claim HRA if you have a house in the same city as your residence, but you need to have a genuine reason. For example, many people in metros such as Delhi and Mumbai own house in far-off suburbs and can find it difficult to commute, owing to the distance. In such case, the person can claim both.

Tip: While calculating the notional value of a second home, you are allowed to claim few deductions such as municipal taxes. Also, an owner can claim deduction of a sum equal to 30 per cent of the value of the house property towards repair and maintenance charges.

More Tips: 5 Tips From Real Estate Experts Across The Country

While selling

When a person sells a property, he or she needs to pay tax on the profits made. If sold within three years of acquisition, the seller needs to pay short-term capital gains tax (STCG). In this case, the profits are combined with the income and taxed on the I-T slab rate.

If the property is held for more than three years, it attracts long-term capital gains tax (LTCG). The tax is levied at 20 per cent (plus surcharge and cess) after adjusting the gains for inflation using the cost inflation index the government issues.

A seller can save entire tax outgo if he or she uses proceeds equivalent to long-term capital gains for buying a new house located within India within one year prior to the sale date or two years from the sale date. If the property is under construction the time period permitted is three years.

The amount used for buying a new property is exempted from tax and if there’s any balance, it will be taxed at a flat 20 per cent (plus cess and surcharge). If you are not immediately buying a house, this money needs to be kept in the Capital Gains Account Scheme (CGAS), and withdrawn within the stipulated timeframe.

If you don’t want to go for a residential property, you can still save LTCG tax by investing in specified bonds issued by the National Highways Authority of India or Rural Electrification Corp (under section 54/54EC) within six months from the date of sale. These bonds have a lock-in period of three years. Also, the seller can only invest a maximum of Rs 50 lakh in these bonds, while you have to pay tax on the remaining amount.

Problem area: If the seller had inherited the property or it was gifted to him, the capital gain will be computed on the basis of the cost to the previous owner. If the house was purchased before April 1, 1981, the I-T department will consider the acquisition cost by the original owner or the fair market value of the property as on April 1, 1981, whichever is higher.

If a person sells an under-construction property after holding it for over three years, the taxation rules completely change. This is because the I-T department considers the person as a property owner only when he or she has received possession.

Tip: While calculating STCG and LTCG tax on sale of property, one can deduct the money spent on improvement and also cost for acquiring the asset such as stamp duty, legal fees, and payment of brokerage.

For more tips, just go to Westhill Consulting British Colombia website. Westhills offers a wide variety of innovative housing styles and options. You can also visit our Linkedin group and read some discussion for more info.