The Auditor’s report on the performance of the Capital Transfers Duty Department made public last week reveals an astonishing level of shabbiness and amateurishness in the way this Department functions.
It results that the Board responsible for ensuring that the value of property is not under-declared in transfer deeds has no technical expertise and relies on property prices in magazines published by estate agents as a reference. The auditor also reported that when probed, the board failed to explain why the declared values of certain properties were accepted while others were referred to architects for inspection and valuation. This haphazard way of doing things is absolutely shameful.
The background to this shambles is the fact that values of properties are often under-declared in deeds of transfer so that stamp duty and capital gains tax – if applicable – is avoided. This is not a recent phenomenon but has been with us for decades. After all, dodging tax by whatever means seems to be our national hobby.
Incredibly, there was a time when official policy unwittingly encouraged people to under-declare the real sale price of property in a deed of transfer. This was in the Mintoff days when the socialist government, in a fit of its ‘control freak’ credentials, decided to take steps to ensure that the property market does not overheat by controlling prices at which property could be sold. Before a property was sold, the government used to send an architect to value the property. Even though a sale price was indicated in the preliminary ‘promise of sale’ agreement, the price on the deed could not exceed the official valuation. The way many got round this hurdle was to declare the officially assessed value on the deed while the difference was paid surreptitiously, ‘under the table’! Mintoff’s efforts to appease the perpetually groaning masses only led to an almost officially sanctioned tax-cheating habit.
Eventually, the Mintoff government scrapped this piece of nonsensical governmental interference and took steps in the other direction – that of punishing those who under-declare the real price of a property transaction. Again it did this by enacting an unwieldy draconian law that gave government the right to pre-empt the purchase of property and acquire it at the declared contract price within two years of the contract, whenever this was considered to be below current market price. This created a lot of uncertainty because for two years purchased property did not really belong to the purchaser in an absolute manner. It would have completely ruined the property market if it was ever applied, but the threat of pre-emption as contemplated by the law remained more of a threat than a possibility. As far as I know, no property was taken over by government by virtue of the powers emanating from this law.
After 1987, this law was also scrapped and the Nationalist administration introduced a different way to tackle the under-declaration phenomenon. Stamp duty levied on property transactions was to be calculated on the market value and the Inland Revenue Department had a six-month window after the date of the deed during which it could claim the stamp duty on the difference between the market value and the declared value. Hence the creation of the system that still exists today.
Human beings adapt to all circumstances and the under-declaration phenomenon has never been eradicated, although with the more recent changes in the Capital Gains tax, the attraction of this practice has diminished substantially from the seller’s point of view.
The problem has always been that it is never easy to establish a fair market value of a property as this depends on many factors. Architects who are sent to value property by the responsible Board are not told of the declared price on the deed – something that is correct in principle but is undermined immediately by the parties to the contract who divulge it to the architect during the relevant inspection.
Incidentally, this has led to a game of double bluff with the price indicated to the architect being lower than that of the contract price, so that when the architect ups the value on the basis of the misleading information he is given, the ensuing ‘damage’ is limited.
Problems abound. Foreign buyers cannot understand how they are charged an extra ‘tax and fine’ in relation to a property purchase after doing everything according to the law and as directed by the notary and their legal advisor. An even more damning situation occurs when a promise of sale is made when the property to be sold is still on the drawing board and the actual contract is made years after the preliminary agreement. The market price of the finished property at the time of the publishing of the deed would probably be much more than the price that was agreed upon in different circumstances. The Department holds that the tax is to be levied on the market price at the time the contract is published and could not be bothered about when the original agreement was made or about the fact that a payment programme commenced much before the property was available.
What is more serious is the fact that the government-appointed architects are only given the description of the property while other information that impinges on the price is withheld from them, even though this is part of the contract. In one particular case in which I was personally involved, the architect reviewing the market price of a piece of agricultural land was not told that the contract also stipulated that the land was leased for agricultural purposes (qbiela) to a third party and he valued the property as if it was free an unencumbered. The procedure, therefore, could lead to unnecessary complications.
The main problem remains the fact that there is no set method on how a valuation is made and hence the valuation of the government appointed architect cannot be verified or challenged. This was pointed out by the Malta Institute of Accountants in a report that the Auditor also referred to in his report.
All these problems could be eliminated by the establishment of a property price index as has been suggested by the Construction and Development Section of the GRTU. Now that Malta is an EU member state, the number of Maltese citizens buying property in other EU states is slowly but surely on the rise. Many have found that in a number of countries, taxation of deeds of property transfer is based on officially established valuations – based on a rate per square metre – and not on the amount that is declared on the contract. Obviously this rate would vary in different areas.
An article on the property market in the latest edition of the newspaper ‘Business Agenda’ – published by the Malta Business Bureau – quotes Mario Spiteri, who has business connections with the property market in Sicily: “In Italy, all properties are registered at the land registry, from where one can determine various attributes of the property, including the valuation which the state gives to property. As a result of this valuation transferors of property are guided prior to entering into the transfer commitment as to the valuation which the state would expect should that particular property be transferred.” Tax is then levied on this valuation, irrespective of the contract price. “In this way,” Mr Spiteri continues, “the seller can avoid unwarranted penalties brought about by the subjectivity with which the matter is treated in Malta.”
Establishing such an index and using it as a basis for taxation is the only realistic and serious way out. This would avoid the present shambles and uncertainty in the system and the vexation of whoever buys or sells property as the final amount of taxation due as a result of the sale is fixed beforehand.
To plagiarise a slogan used by the Inland Revenue in Britain, tax doesn’t have to be taxing.
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