'Land rich' levy eyed to plug duty loophole
Lawmaker Paul Chan Mo-po says Hong Kong should adopt measures similar to the 'land rich' duty system used by the New South Wales state government in Australia if more investors try to avoid paying increased stamp duty on property deals.
Chan, the representative for the accountancy sector in the Legislative Council, said the small increase announced by the government last week in stamp duty on property deals worth more than HK$20 million would not be a major deterrent to wealthy investors.
'But there may be some who would try to resell property by company transfers to avoid paying stamp duty,' he said.
If this practice became more widespread, the government could clamp down on those who tried to use such a loophole by introducing Australia's 'land rich' duty, Chan suggested.
An investor in New South Wales who buys 20 per cent or more of a land-rich unit trust, or 50 per cent or more of a land-rich company, attracts duty at the general rate applied to regular land transfers rather than a lower company-based rate.
In an effort to cool down the overheated demand for luxury property in Hong Kong, the government is raising the stamp duty on transactions over HK$20 million from 3.75 per cent to 4.25 per cent to increase the investment cost to speculators. The new rate will take effect from April 1.
A tax department calculation shows that under the new measure, stamp duty on a property bought for HK$21,739,120 will increase to HK$923,913, compared with an existing duty of HK$815,217.
Commentators warned after the announcement that investors could escape the increase and cut their stamp duty to just 0.1 per cent by setting up shelf companies through which to do the transactions.
In this way the duty payable on a HK$21,739,120 property could be cut to just HK$21,739.
However, Paul Chow, a partner at accounting firm Grant Thornton, pointed out that buyers channelling their property deals through companies would have to hire accountants and lawyers to do due diligence as to whether there were any hidden liabilities in the companies.
'Hiring a lawyer to handle a deal could cost at least HK$100,000. And the buyer also has to spend tens of thousands of dollars on the services of an accountant,' he said.
On top of these costs, a company might need to pay profit tax of 16.5 per cent on the sale of the property if the Inland Revenue Department determined the property was purchased for short-term trading rather than as a long-term investment.
'As the sale procedure is complicated, it is not common to see investors reselling property by company transfers, unless the property is very valuable,' Chow said.
A property agent said most investors preferred to buy property directly rather than through a company, which involved higher risk. However, he believed more investors, particularly those who bought large amounts of property, would consider doing so through company transfers after the rise in stamp duty.
Too little, too late?
Some fear the extra tax announced last week may not deter buyers
The stamp duty on property transactions above HK$20 million will rise next month from 3.75 per cent to: 4.25%