Land & Construction Tax Bill overview

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Land & Construction Tax Bill overview 
Bangkok Post: 16 Jun 2009
source: www.BangkokPost.com

TAXCORNER
LAND AND CONSTRUCTION TAX BILL UNDER SPOTLIGHT

By: LAWALLIANCE LIMITED

In light of the inheritance tax bill going nowhere, nothing is more interesting than the Land and Construction Tax Bill (LCT Bill). The finance minister recently said that the LCT is scheduled to be put on the table for consideration by the cabinet very soon and will come into force in the next two years from now. It could be bad news for some residential property owners because they will no longer enjoy their tax exemption under the current house and land tax (H&L Tax). Believe it or not, the current H&L Tax has been in force for more than 80 years.

According to the Ministry of Finance, property tax revenue constitutes less than 10% of the total budget. New Zealand and Malaysia - unlike Thailand - collect far more tax revenue from property. The more tax revenue the local tax authorities can generate, the less they need from the government budget for local spending. Therefore, property tax reform is a must to improve the efficiency of the tax system.

Under the new regime, owners of properties will enjoy a lower tax rate, down from 12.5% of annual rentable value to 0.5% of the official assessment value, without a need to fight with local tax authorities on the criteria adopted in determining the annual rentable value. Three tax rates will apply to three categories of taxpayer:

1. 0.5% of the official assessment value for land and construction used for commercial purposes;

2. 0.1% of the official assessment value for land and construction used for residential purposes;

3. 0.05% of the official assessment value for agricultural land.

The LCT Bill wisely contains a mechanism stimulating owners to utilise land. If any owner fails to do so, he will be liable to pay LCT plus a 100% penalty for every three years, but not exceeding 2% of the official assessment value.

During the transition period, the Ministry of Finance proposes to charge 50% of the LCT in the first year the law is in force and 75% in the second year. The LCT will be applicable in full from the third year onwards.

Meanwhile, the bill still creates some concerns that require clarification from the Ministry of Finance. For example,

a) The LCT focuses on the official assessment value of the land. Conceptually, the construction value is also taken into account, but what are the criteria for the valuation?

b) In the case of condominiums, should LCT be chargeable to each individual owner or to the condominium juridical body? As a number of the unit owners could be foreigners who travel in and out of the country, the LCT chargeable to the condominium juridical body may be desirable.

c) Where the utilisation is mixed, such as partly residential and partly commercial or agricultural, what are the criteria for qualifying as a residential area with a lower tax rate? There is no assurance that the local tax authorities would not assume that the entire property is in commercial use. If this remains unclear, owners will attempt to split property into pieces to avoid the tax.

d) If there is a sanction against unutilised land, the government should suggest a resolution for "blind" land - land without access to a public road.

e) The law should have a clear definition of the term "construction". The current H&L Tax is interpreted by the Tax Court to apply even to telephone booths, which is very different from the property tax policy.

Since the official assessment value is crucial under the new system, while the valuation process is complicated, the government has recently assigned the Treasury Department to do the re-valuation of all properties throughout the country. The LCT Bill is such an important tax bill, which will affect taxpayers nationwide, that perhaps the government should consider a public hearing. Hopefully, it will happen after the cabinet's approval.

Prepared by Thanasak Chanyapoon and Piphob Veraphong. They can be reached at 02 6515490 or admin@lawalliance.co.th.