Govt to alter VAT 'exempt' for real estate


Tribune Business Editor

The government appears poised to reverse the budget's VAT "exempt" treatment of real estate, following lobbying from top developers such as Albany and Baker's Bay.

KP Turnquest, deputy prime minister, told Tribune Business to "stand by" for a potential "change" when asked why the government had imposed what one developer representative yesterday described as "a disaster" for the sector.

"There may be a change in respect of that. Stand by on that particular point," he replied when asked about VAT "exempt" real estate. He declined to be drawn further on any specifics of such "change", saying: "I'd like to leave it right there."

Real estate developers were similarly coy when contacted by Tribune Business yesterday, suggesting they were aware that change was coming but providing no details. None wished to speak on the record.

"I know they [the government] are planning something, but I cannot say what. There is something in the works I suspect. We're making some progress," one developer's representative told Tribune Business.

This newspaper was told that a newly-formed industry group, the Bahamas Developers Association, had taken the lead in emphasising to the government just how badly VAT "exempt" status will affect a sector - and associated professions such as real estate and construction - that is vital to economic growth and job creation.

The association's members are said to include major foreign developers, such as Albany and Baker's Bay; Sterling Global Financial, the company behind the $250m Hurricane Hole project; and Arawak Homes.

"That group stuck together pretty well," one source close to developments told Tribune Business. "If that group is telling you what you are doing is a disaster, for you to ignore that kind of thinking is kind of reckless.

"We've received some feedback similar to what the Deputy Prime Minister told you. We'll see. We have reason to believe that when the Deputy Prime Minister says what he says, we believe the Cabinet has come to a conclusion and it's only a matter of time before they announce it. My suspicion is a lot is going to change.

"I believe the Association was able to bring to their attention some of the impacts of what they were proposing to do, and they came to the conclusion that what they were contemplating doing was not good public policy," the source added.

"It's never too late to do the right thing. It's unfortunate we do these things after the fact, rather than preceding, with prudent consultation. How you skin the cat, whatever you propose to do, you can't drive up the cost of construction the way the law is.

"To ratchet up the cost of construction the way it is now is not a good thing. Certain positions were put to the Government, and we'll see what they say."

It is unclear what reforms the Government is proposing with the new Budget just nine days old, but it will almost certainly involve some mechanism allowing developers to recover their VAT 'input' costs - something 'exempt' status does not allow them to do.

Developers, via the pages of Tribune Business, had previously warned such tax treatment would mean "millions of dollars are on the line" as it would be "impossible" for them to claim back the now-increased 12 per cent VAT on their input costs.

The former Christie administration changed the ten percent Stamp Duty levied on real estate sales to accommodate the previous VAT rate, splitting this 7.5 percent/2.5 percent between VAT and Stamp Duty. But the 2018-2019 budget goes back to the 10 percent stamp duty on all real estate purchases over $100,000.

This prompted warnings of increased real estate costs for both Bahamian and international buyers. Developers currently 'net off' the VAT they pay on construction materials, and the likes of contractor, engineer and architect bills, against the 'output' tax whenever a property is sold.

But the Budget's altered tax structure, by eliminating VAT, robs developers of the ability to claim back already-paid input tax, thus saddling them with a multi-million dollar increase in development costs that will likely be passed on to purchasers of new housing units.

This, in turn, could depress real estate development activity and have negative consequences for all industries that rely on the housing market - especially realtors, contractors and attorneys.

The VAT 'transition notes' confirmed that all property sales/purchases are now being treated as VAT 'exempt', meaning that developers can no longer recover the tax paid on their 'input' costs.

"If you are a developer you may have, or be in the process of, acquiring real property. Transactions involving the sale or purchase of real property are now exempt as of July 1, 2018. Stamp tax is now, however, charged on all such transactions," the transition notes state.

"All of the VAT you incur in the process of your development is not recoverable, as VAT on any taxable supplies in relation to an exempt supply is not available as an input tax credit deduction."

Franon Wilson, Arawak Homes' president, had previously revealed the company's most popular 'home and lot' package - that for a three-bed, two bath home - would increase in price by $23,000 - going from $192,000 to $215,000 - as a result of the Budget's tax changes.

He warned that a "huge" number of Bahamians will thus be priced out of home ownership, with the VAT rate hike and changed real estate taxation structure having "a bigger impact than VAT's introduction" back in 2015.

His father, Sir Franklyn, subsequently told Tribune Business: "One needs to recognise that any time you do anything to cause the cost of a home to go up $1,000, you guarantee you are moving hundreds of people across the line from being able to qualify to not being able to qualify [for a mortgage], even for the most inexpensive home."

He told this newspaper that the Budget was incompatible with the Access to Affordable Homes Bill 2018, which was recently passed by Parliament. This aims to provide serviced lots for less than $30,000 to Bahamian home purchasers, with incentives - such as Customs duty and excise tax exemptions - provided for a two-year period to persons who construct their own homes on the property.

"They say they wish to encourage home ownership, and the Prime Minister himself has been vocal in stating that," Sir Franklyn said. "He's to be commended for that, but this Budget is highly incompatible with that. That's the bottom line.

"It's material enough that I've got to hope and pray it's not too late for someone to think after all that this is not likely to have a positive impact, and that it's worth another look."