Another Shockwave for Real Property

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Another Shockwave for Real Property

It is
undeniable that real property has taken the biggest hit from the tax policies
of the current military government. The new gift and inheritance taxes focus on
real property, while the new property tax is designed to correct the flaws of
the House and Land Tax Act and to collect more revenue from properties used for
commercial purposes as well as unused properties. The latter tax is expected to
generate huge sums for the government.

However, not many people are aware
that we are at the edge of a third wave. In combination with the enforcement of
the property tax, it could result in panic sales and a plunge in property
prices in the short term. Of course, this will be viewed by the rich as another
opportunity to acquire assets.

For more than two decades, the
Revenue Code has adhered to a "safe harbour" rule where real property
transactions are concerned. When an individual transfers ownership, or the
right of possession, in an immovable property, the taxable income is the
"value appraised for the purpose of charging the registration fee of the
rights under the Land Code", as announced by the Land Department and valid
on the day of the transfer.

This rule has been applied,
irrespective of whether a price is charged, and the assessment value is
normally much lower than the real price at which the sale takes place.

Last week, the cabinet approved a
bill to put an end to the unrealistically low income tax on immovable property
sold by individuals by modifying Section 49 bis of the Revenue Code. Under the
draft bill, the registrant at the Land Department will be required to apply
either the "price declared by an individual, or the value appraised for
the purpose of charging the registration fee so applied on the transfer date,
whichever is greater", for tax calculation and collection purposes.

For example, where a seller sells
a plot of 50 square wah in the Silom area, if the standard assessment value of
land in the area is 800,000 baht per square wah and the sale price is 1.8
million per square wah, the seller must declare a total of 90 million baht as
taxable income — instead of 40 million under the current legislation.

The government of former prime
minister Anand Panyarachun enacted the safe harbour rule in 1991. The aim was
to tax income derived from sales of immovable property "on the same basis
as those used for the calculation of the transfer fee under the Land Code and
to create convenience and fairness for the people".

The unspoken rationale, commonly
known in the industry, is that use of the safe harbour rule helped to promote
activity in the property market and to stop widespread corrupt practices,
whereby the parties to a transaction and the authorities jointly underdeclared
the transaction price.

Although the current legislation
seems to be achieving its objectives, it raises concerns about inequity, in
that the rich have not been subject to progressive tax rates in the way that
they should have been.

Notwithstanding the cabinet
resolution, the Revenue Code will continue to allow an individual, who
originally obtained a property via inheritance, or originally acquired it with
no trade or profit-seeking purpose, to separately calculate income tax on the
sale of immovable property from other income, to deduct standard expenses (with
the lowest percentage equal to 50% of the sale price), and to divide the
remaining amount after deductions by the number of years of possession to a
maximum of 10 years. This combination still allows a lot of tax saving.

This unique tax calculation is a
key factor in determining whether to keep land within the family or in a family
holding company — as the company can only use the actual costs of land as a
deductible expense.

Even after the enforcement of the
new Section 49 bis, a family wishing to sell land in a prime area may still be
able to divide it into smaller plots, with lot-by-lot transfers registered
separately by different family members. The draft legislation does not touch on
such arrangements.

Even though the Land Department
will now be required to apply the greater amount between the declared price and
the standard value in collecting tax, anyone thinking about submitting a fake
price had better think twice. If a Revenue Department official finds out what
the real price of the sale transaction was, you could be audited. Such action
could be considered tax evasion, subject to a jail term from three months to
seven years and a fine of 2,000 to 200,000 baht.

The change to the tax base for the
sale of immovable properties will apply to individual income tax calculation
only, and has no effect on specific business tax, stamp duty, or even the
coming land and building tax.

In any case, from now until the
day the bill takes effect, you will see a number of individuals owning land in
prime areas either rushing to close mega-deals, with some discount of course,
or to reorganise their asset holding structures.

Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at

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