Rates change may turn out to be bitter pill

PUBLISHED : Thursday, 26 November, 1998, 12:00am
UPDATED : Thursday, 26 November, 1998, 12:00am

While the Government's decision not to collect rates for the first quarter of this financial year was a genuine boon to occupiers suffering the pains of economic downturn, the decisions to bring forward the revaluation date from July 1, 1999 to October 1, 1998 and to introduce an annual revaluation are not so clearly a bonus for two important reasons.

Firstly, there is no guarantee that values in October 1998 will prove to have been lower than those prevailing in July next year. Many commentators and valuers are predicting static values and possibly even falls. If values do fall, ratepayers will lose out next year.

Secondly, the drastic change to an annual revaluation from a three-year valuation cycle (itself a reduction in the 1980s from seven years), unprecedented in Hong Kong and other common law countries that share our rating law and system, will remove the three years' stability all ratepayers have long enjoyed (except those whose tenements have physically grown or altered during the life of the valuation).

If in any year the market moves up at all, the taxman in the form of the Commissioner for Rating and Valuation will help himself to more from occupiers who previously would have continued to pay rates based on the value at the last valuation date.

Under the present system the taxman can only catch up after three years have passed, in the year after each revaluation, unless he changes the percentage payable.

In both rising and falling markets, this long-established system enabled ratepayers to know what their rates would be until the year after the next revaluation (subject to percentage).

It enabled the Government to have a reliable year-on-year indicator of the level of revenue it could expect from this substantial source. To make this change will remove this certainty.

It should also be remembered that rates are a tax on the occupation of property. They are essentially a notional rent which may also be expressed as a percentage or 'yield' on the capital value. Whilst owners may suffer a loss or enjoy a rise in capital values, in a volatile property market, rents do not go down or up at the same speed or by the same amount at the same time.

The Government's own figures to June show that while property prices had then dropped by 25 per cent, rents had only fallen by 10 per cent.

Generally speaking movements in rents lag well behind those of capital values, a factor mirrored to some extent by the long-established rates revaluation cycle and the narrow band within which the percentage is always set.

It may be that this proposal may also reduce the number of appeals by reducing the value of each appeal but an annual revaluation will also require a great deal of extra work for the Commissioner and his valuers, no doubt at an extra cost to taxpayers.

The Government must believe that the annual revaluation will bring in the extra revenue needed to pay for this extra work and that can only be predicated on annual increases in rates. While our property taxes continue to be by rates, a tax in the form of rent rather than in another form, changes such as those now proposed should first be thought through very carefully to ensure they accord with principle and logic as well as expediency.

Further, in all such matters, both advantages and disadvantages in the long and short term must be explained to the ratepaying public before they are decided upon.

In principle, taxation is properly a matter for a representative legislature; a government in an 'executive-led' territory like Hong Kong should be even more careful to explain matters in full and not to present as sweet what may possibly turn out to be a bitter pill for millions of Hong Kong people.