The Government should adopt a system based on area of property. As the benefits and facilities available to residents in some local authority areas are far greater than in others, a zoning adjustment could be applied.
The current system lends itself to anomalies, inconsistencies and subjectivity. A tax based on valuation takes no account of ability to pay or indeed of income
IN 2013, the government introduced the Local Property Tax (LPT) which is payable by most people who own Irish residential property. The amount people pay depends on the market value of the residential property. In my opinion a property tax based purely on value is unworkable and should be replaced by a clearer more objective system. A value-based tax did not work in the past and I don’t believe it will work now.
Over the past few weeks there has been considerable controversy regarding the payment of tax due for 2014. This is symptomatic of the lack of clear thinking behind the imposition of this tax.
It might only be the first of many issues which could arise with the LPT if past experience of a Residential Property Tax is anything to go by. In 1983, a Residential Property Tax was introduced which charged tax at a rate of 1.5% of value, where both the market value of the property exceeded an exemption limit and the income of the taxpayer exceeded an income limit. There were specific rules as to how the valuation and income limits were to be arrived at. However, the values of houses, especially in some urban areas, grew at a rate which far exceeded the rate of growth in incomes. The tax therefore became punitive for those who had to pay it, especially those who were on modest incomes but whose house values were increasing rapidly. This tax was abolished in 1997. Clearly a tax based on property values was not working.
The lessons of the past experience have not been learned. History is repeating itself with the introduction of a tax based on property values. On the face of it, it might appear the new Local Property Tax is a simpler way of computing the tax than the previous system. However, this is not the case, as the current system lends itself to anomalies, inconsistencies and subjectivity. Furthermore, a tax based on valuation takes no account of ability to pay or indeed of income. An increase in house value means increased tax, even if no increased income. Even if income kept pace it would need to increase at up to twice the rate of property inflation, as the tax is paid out after tax income. We all know this will never happen. Property prices are now at the lowest and have only one way to go — UP. I doubt if there will be any increase in income in the foreseeable future, in some cases it may in fact go down.
Any tax should be straightforward, consistent and objective. While the Revenue has issued guidelines on property valuations, the valuation placed on property is effectively the subjective decision of the owner. The amount of tax one pays therefore is entirely subjective and similar properties may attract different levels of tax, depending on the owner’s view of the value. Such valuations are always open to challenge and dispute and while there are penalties for undervaluation, this is going to be very difficult to police. It may ultimately cost the house owner to pay a professional valuer to dispute any assessment imposed by the authorities. This adds to the cost for the house owner. People need to be aware that the suggested values given by the Revenue this year were unrealistic values and in many cases were extremely low, bringing me to the conclusion that it was done for the sole purpose of getting people to register for the tax. The initial valuation is valid up to and including the year 2016. The Revenue/local authorities are reviewing all our valuations and I think come 2016 many people are in for a shock when it is quite likely increased values will be issued. This will lead to increased tax bills and increased professional fees to dispute valuations. Some recent reports indicate that property values may be increasing in certain areas. this will lead to increased tax by stealth from 2016, if the rate of tax remains the same. This will be even more onerous if incomes remain static.
A further feature of the LPT is that from Jan 1, 2015 local authorities will have discretion to vary the LPT rate by plus or minus 15% of the national central rate. This will mean that similar valued houses in different local authority areas could have tax liabilities which differ by up to 30%. This again is unfair and inconsistent. However it is probably more likely local authorities will increase rather than reduce the rate, given the state of their finances. This means the rate will become 0.207% rather than 0.18% — a further stealth tax increase. It is also worth noting that, in a document issued by the Department of Finance in Budget 2013 on Local Property Tax, it was specifically stated that “Revenue from the LPT will accrue to local authorities and will support provision of local services”. It now appears this may not be happening and the tax is just another form of taxation going into central Government funds.
In my opinion there is an alternative form of property taxation which is not value-based and which is fairer and far more objective. This is a system based on the area of the property, or a tax per square metre. As the benefits and facilities available to residents in some local authority areas are far greater than in others, a zoning adjustment could be applied to ensure that those benefiting must pay most. In other words, a house owner in a well-serviced urban area would pay a higher rate than one in a remote country area. The Revenue has already produced LPT guidance valuations for every local authority and electoral area in the country. Perhaps these could form the basis for deriving appropriate zoning adjustments for each area.
All local authorities should have full planning records of all residential properties built since the current planning system was established in 1963. That must represent a huge proportion of the residential housing stock in the country. It should not be too difficult to calculate the total square metres of built residential property in a local authority area by extracting information from these records and compiling details in respect of older houses. Any change in the rate per square foot should be justified by a detailed computation, similar to how the municipal rates are computed by local authorities in respect of commercial premises. To ensure each local authority area receives an appropriate level of funding, a transparent system of transfers between areas could also be implemented.
By adopting this system each house-owner would know exactly the basis on which the property tax is based. Any increase in the rate would have to be justified by the authorities demonstrating why it is needed. House owners should not be penalised because the value of their house increases due to market or other forces.
Any other method is just a lazy way for the government to increase the tax take.
* Niall Welch is a former chartered accountant who specialised in corporate finance, mergers and acquisitions.
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