News analysis: Budget 2023's luxury taxes a step in right direction but future moves shouldn’t ‘swing too far’, say experts

SINGAPORE — It may seem progressive of the Government to raise taxes on luxury items, but economists and tax experts are cautioning that future tax moves should be executed in a manner that do not further pinch the middle-income and upper-middle-income groups or deter top talents from coming here.

They were speaking to TODAY after Deputy Prime Minister Lawrence Wong on Tuesday (Feb 14) announced several tax changes, which included higher incremental taxes on cars and properties in excess of certain value tiers.

They explained why the move was a “step in the right direction”, how it will affect various income earners differently, and whether it might affect Singapore’s attractiveness during the ongoing global crunch for top talents.

WHY LUXURY TAX IS A WELCOMED CHANGE

Economics lecturer Walter Theseira from the Singapore University of Social Sciences (SUSS) described the taxes as “a move in the right direction” because they rebalance the tax system by shifting more towards higher-income and wealthy residents.

Mr Desmond Teo, private tax leader for Southeast Asia at consultancy firm EY, said that with the latest change, the level of tax that taxpayers pay will be determined by their lifestyle choices.

He noted how the tax proposals were asset-based, such as the Buyer's Stamp Duty on residential properties and the Additional Registration Fee on luxury cars, which "can be tailored to be more targeted and are also captive in nature". 

This is because the assets are physical in nature and situated within Singapore, "unlike digital and financial assets that are more fluid and can easily flow out of Singapore", he added.

Asked how Singapore fares against other countries in terms of tax progressiveness, Mr Vikna Rajah, who heads the tax, trust and private client practices at law firm Rajah & Tann said: “Singapore strikes a good balance now — corporate and individual income tax rates are relatively low and competitive, while (there are) very high taxes on luxury cars and high-value homes.”

HOW WILL IT AFFECT MIDDLE-UPPER INCOME GROUPS AND ULTRA-RICH 

Some realtors said earlier that under the new tax regime, the difference in the incremental Buyer Stamp Duty would be more apparent only on more luxurious property.

For example, a residential property with a value of S$2 million will attract a stamp duty of S$69,600, up 8 per cent from the prevailing S$64,600.

A home that costs S$10 million will now have this stamp duty of S$539,600, which is a 40.3 per cent jump over the S$384,600 now.

Mr Nicholas Mak, head of research and consultancy at ERA Realty Network, cited an example of how a S$2.6 million condominium apartment would incur an extra S$11,000 in Buyer's Stamp Duty.

Putting things into perspective, he said: “The renovation cost would typically exceed the extra Buyer’s Stamp Duty payable under the new schedule.” 

However, Mr Rajah from Rajah & Tann said that the impact of the higher taxes on cars and homes may be felt differently by different groups of buyers or income-earners.

“A 2 per cent increase in stamp duty for a Good Class Bungalow buyer would not affect them as much as a 2 per cent increase for a S$1 million condo purchaser,” he said as an example.

“The middle-income to upper-middle-income group may already be feeling quite squeezed and it may be best to tax the segment of the market that is less elastic and willing to bear the heavier taxes,” he added.

WILL IT MAKE SINGAPORE LESS ATTRACTIVE?

Manpower and talent shortage is a perennial problem here as it is with many other advanced cities globally.

However, as it stands, the shift to impose higher taxes does not leave a dent on Singapore’s attractiveness while it vies with other cities to attract top talents, the analysts said.

Noting that the type of tax implemented matters, Mr Rajah said that “taxing discretionary luxury expenditure whether it’s a Rolls Royce or a Good Class Bungalow is not as much of a deterrent as imposing a capital gains or net wealth tax”.

Mr Finian Toh, managing director of global human resource executive search firm ChapmanCG, said that despite the Government already raising some taxes against the higher-income earners last year, for example, interest among global talents to work in Singapore has “remained healthy”.

Deputy Prime Minister Wong, who is also Finance Minister, introduced changes last year to personal income tax as well as taxes on luxury property and cars.

Associate Professor Laavanya Kathiravelu from the School of Social Sciences at the Nanyang Technological University said that compared to many other developed nations in North America or Western Europe, Singapore still looks like an attractive destination because it does not have capital gains tax or inheritance tax. 

“Even with this increase in taxes at the high end, it is still lower than what high-earning individuals would be paying in income tax in other comparable locations,” she added.

Ms Sabrina Sia, global employer services leader at advisory firm Deloitte Singapore, said "there is probably a view that individual tax rates can still be increased or that more can be done to tax the wealth and assets of the affluent" to raise tax revenue.

However, the analysts do not rule out a possibility where tax hikes in the name of progressiveness might one day tip the scale.

“This is why tax adjustments have to be made gradually and also targeting aspects that are less likely to weaken Singapore's competitive position,” Assoc Prof Theseira said.

Building on the point raised by Mr Rajah about how the middle-income to upper-middle-income earners are feeling the pinch, Mr Toh said that even among these groups, there are foreign talents who would feel the impact more keenly in the future should the Government further raise taxes.

“They would be concerned about moving to Singapore because it would get too expensive for them, since they don’t earn as much (as the ultra rich),” he added.

Singapore should not heedlessly tax the top earners either.

"The Government has been careful to not swing too far and has treaded a careful line by increasing taxes in a calibrated and progressive manner," Mr Rajah said.

“(It has to be cautious to) not deter ultra-high-net-worth families who are able to contribute to the ecosystem and economy as well as highly capable professionals by going too far down the line of progressive taxes.” 

By and large, though, the analysts felt that Singapore’s attractiveness lie beyond a favourable tax system and there are other factors such as political stability and efficiency in running a business.

“To the rich, some tax increase may be a small price to pay for a safe and stable environment to bring their business and their family to Singapore,” Mr Toh said, based on his experience of recruiting global professionals.

Agreeing, Assoc Prof Theseira pointed to how Singapore topped many global rankings such as for business competitiveness, human development or infrastructure quality. 

“And I think if we maintain our leads in those areas, it becomes easier for investors to accept our tax adjustments. In a way, it's a payment for access to the high-quality business and living environment we offer.”