Widening wealth inequality, coupled with the depletion of government reserves as a result of the COVID-19 pandemic, has propelled the discussion of wealth taxes in many jurisdictions. Oxfam Ireland is calling for a wealth tax after a “terrific pandemic” for rich people added billions to the wealth of HNWIs in several countries.
Singapore is no exception. During his opening speech at the 35th Singapore Economic Roundtable on 15 October 2021, the Singapore Minister for Finance Lawrence Wong emphasised the need to guard against rising inequality and for more fiscal resources to tackle such challenges effectively. Specifically, the Singapore Finance Minister noted that an important element of a progressive system of tax is to consider not just a person’s income but also their wealth.
In its purest form, wealth taxes are recurrent taxes on a broad range of an individual’s movable and immovable properties, net of debts. They are separate and distinct from taxes levied on income generated by assets such as capital gains taxes, taxes on transactions involving immovable properties e.g., stamp duties and property tax as well as inheritance or estate taxes which are only levied when wealth is inherited.
One of the main arguments against wealth taxes is the concern for capital flight i.e., the risk that wealthy individuals might relocate themselves or their capital or assets outside the jurisdiction to avoid the tax. From a policy perspective, wealth taxes have also been criticised on the basis that they are imposed irrespective of the actual returns generated by the underlying assets. Therefore, a net wealth tax can potentially penalise the owners of low-return assets and favour the owners of high-return assets.
Singapore As A Business And Wealth Management Hub
Even as Singapore continues to study options as well as experiences in other jurisdictions to expand her system of wealth taxes and to add to her revenue resilience, the Singapore Finance Minister made it clear that this must be done without undermining Singapore’s overall competitiveness.
Singapore has climbed the ranks amongst the world’s largest asset-management centres and positioned itself as the destination of choice for wealth management. This is well illustrated by the growing presence of family offices in Singapore. As of September 2022, Singapore has almost 700 family offices, up from fewer than 100 just five years ago. Singapore has seen burgeoning wealth over the past decade, with Assets Under Management (AUM) rising every year. In 2019, 2020 and 2021, Singapore’s AUM respectively grew 15.7 per cent (to S$4 trillion), 17 per cent (to S$4.7 trillion) and 16 per cent (to S$5.4 trillion). Out of these AUM, approximately 76-78 per cent originated from outside Singapore.
Much has to be credited to Singapore’s stable economic and political environment with a strong rule of law, the availability of high quality legal, investment, financial and wealth management expertise and the developed and well-regulated financial sector in Singapore. Singapore is perceived as a safe and comfortable place for families to live and work in and a convenient and efficient hub for businesses in the region and globally.
The growing presence of family offices in Singapore is due no less to the availability of tax exemption schemes for funds that are managed by a Singapore based single family office fund manager such as the sections 13O or 13U of the Singapore Income Tax Act 1947. Applications can be made for the income from such funds to be exempt from tax. Given the minimum AUM of S$10 million (which shall be increased to S$20 million within a 2-year grace period) and S$50 million for the sections 13O and 13U applications respectively, such tax exemption schemes are clearly reserved for the wealthy.
The availability of such tax exemption schemes would tend to suggest that Singapore would be slow to introduce any form of wealth taxes. Indeed, the implementation of wealth taxes would directly conflict with the tax exemption schemes for Singapore based family offices, which were clearly implemented to attract the wealthy and enhance Singapore’s position as a wealth and asset management hub.
Singapore’s Taxes On The Wealthy
While Singapore does not have any form of wealth taxes, its current system of tax does place a bigger burden on the wealthy, though, it would appear, at a level which achieves equity and acceptance both from the wealthy and the less so.
For instance, the rates for personal income tax depends on the personal income of the taxpayer. The higher income earners pay a proportionately higher tax, with the current highest personal income tax rate at 22 per cent. With effect from YA2024, chargeable income in excess of S$500,000 up to S$1 million will be taxed at 23 per cent, while that in excess of S$1 million will be taxed at 24 per cent.
Singapore also levies property tax on the annual value of the property (this is loosely based on the potential rental which the property may fetch in that year). The applicable tax rate is similarly progressive in nature depending on the annual value of the property and on whether the property is owner-occupied or not, with a higher applicable tax rate for non-owner-occupied (i.e. investment) properties. In the Singapore Budget 2022, it was announced that property tax rates for owner-occupied residential properties (the portion exceeding S$30,000 annual value only) would be increased from the range of 4 - 16 per cent, to 5 - 23 per cent (from 1 Jan 2023) and to 6 - 32 per cent (from 1 Jan 2024); and the property tax rates for non-owner-occupied (i.e. investment) residential properties would increase from the range of 10 - 20 per cent, to 11 - 27 per cent (from 1 Jan 2023) and from 12 - 36 per cent (from 1 Jan 2024).
In addition to the usual stamp duties which would be payable for purchase of properties, Singapore also levies an additional tax in the form of Additional Buyer’s Stamp Duty (ABSD) on homeowners who have the means to and did purchase multiple residential properties. ABSD, like stamp duties, is based on the higher of the purchase price or market value of the property transacted. Presently, for Singapore citizens, the ABSD is 17 per cent for the second residential property and 25 per cent for the third and subsequent residential properties. Non-Singaporeans pay a higher rate for ABSD.
In February 2022, the Singapore government also introduced a new tier of Additional Registration Fee (ARF) of 220 per cent for the portion of the Open Market Value (OMV) of a motor vehicle which is in excess of S$80,000. This would mean that owners of luxury cars with OMV in excess of S$80,000 such as the Porsche Cayenne, Lamborghini Urus and Bentley Continental GT, just to name a few, would have to pay more taxes to own their luxury vehicles.
Thus, even without the implementation of wealth tax, the wealthy are contributing more towards the tax coffers of Singapore through their consumption behaviour. For FY2021, in line with the increase in the number of family offices in Singapore, the revenue collected from individual income tax rose 11.6 per cent (to S$14.2 billion), revenue from property tax rose 49.3 per cent (to S$4.7 billion) and revenue collected from stamp duties rose 73.6 per cent (to S$6.8 billion).
Other Indirect Ways Of Taxing The Wealthy
There were concerns as to the likelihood of re-introduction of more familiar taxation concepts in Singapore such as the estate duty. Estate duty was abolished in Singapore in 2008. As the Singapore Finance Minister noted in his Budget Debate 2022 Round-Up Speech, the abolition of estate duty was because it did not achieve the social equity outcomes we had hoped for. The middle and upper-middle income individuals were disproportionately affected by estate duties compared to the wealthy who were able to plan their ways out of their estate duty liabilities.
The inadequacies in the previous estate duty regime affected the proportion of tax collected, making it ineffective as a stream of revenue. It was noted in the Singapore Budget 2008 by the then Singapore Finance Minister that prior to its abolition in 2008, on average, Singapore only collected S$75 million in estate duties per year. In 2007 (i.e., a year before its abolition), due to the death of a certain high-net-worth individual, Singapore had collected S$153.7 million in estate duties. This is to be contrasted against the amount of personal income tax of S$4.55 billion and S$5.4 billion collected for 2007 and 2008 respectively.
Considering the fact that many jurisdictions in the region e.g., Hong Kong, Malaysia, Australia had similarly abolished their estate duty regimes, it would appear unlikely that Singapore will re-implement the estate duty regime in order to collect more taxes from the wealthy.
Looking Ahead – A Pure Wealth Tax Unlikely
While the concept that the wealthy should pay more in taxes is certainly attractive, it is crucial for Singapore to strike a balance and ensure that it can still maintain its competitiveness and stay attractive as a business and wealth management hub for high-net-worth individuals and foreign investments. Discussions by countries on the implementation for wealth tax aside, the fact remains that this appears to be a declining trend.
As compared to the 1990s, net wealth taxes are now far less common in the Organisation for Economic Co-operation and Development (OECD) countries. In 1990, there were 12 OECD countries, all European countries, which levied individual net wealth taxes. However, in 2020, Norway, Spain and Switzerland were the only OECD countries that still levied individual net wealth taxes. Countries like Germany, France and Denmark have stopped levying taxes on individuals’ net wealth and have not reinstated it.
Indeed, even in the United States where there had been a proposal to implement the Billionaire Minimum Income Tax Act, which seeks to impose a minimum tax of 20 per cent on individual taxpayers whose net worth for the taxable year exceeds US$100 million, the proposal has failed to gain broad support even within the Democratic Party. The “common prosperity” objective advocated by the Chinese President Xi Jinping in August 2021 which included a pledge to “reasonably regulate excessively high incomes, and encourage high income people and enterprises to return more to society” has also triggered concerns among wealthy and upper middle-class families in China. After the 20th National Congress of the Chinese Communist Party in October 2022, speculation has been rampant that China will soon tax its rich. It remains to be seen what exact measures would be implemented by the Chinese government and how the ultra-rich Chinese will respond.
While the demands for wealth tax are likely to be greater today in light of the increases in inequality and in a post-pandemic context, a tax on the net wealth of individuals is not easy to implement effectively. Singapore will be careful not to erode the steady growth of AUM and funds that have been invested into Singapore. As the Singapore Finance Minister noted in his Singapore Budget 2022, many forms of wealth are mobile and as long as there are difference in wealth taxes across jurisdictions, such wealth can and will move.
In this highly competitive climate for global wealth and investment, it would seem unwise for Singapore to implement a tax on an individual’s net wealth and risk upsetting its stronghold as one of the leading wealth management centres globally and in Asia. As noted by the Singapore Finance Minister at the Owners Symposium of the Global-Asia Family Office Summit 2022 in September 2022, the investments made by family offices include local enterprises, investments in local enterprises, start-ups and increasingly, ESG projects, which can positively impact the local community and these benefits are likely to outweigh the revenue that may be generated by wealth taxes in both tangible and non-tangible ways. And for those of us who recall Singapore’s efficiency in passing and implementing legislation - planning is always an option!
Since the publication of this article, Singapore Deputy Prime Minister and Minister for Finance, Mr Lawrence Wong has on 14 February 2023, in his budget statement for 2023, announced an increase in the marginal rates for stamp duties for both residential and commercial immovable properties and adjustment of the ARF rates for cars. He also announced Singapore’s intention to implement BEPS 2.0 (i.e., OECD’s Base Erosion and Profit Shifting Initiative) from 2025 to align the minimum global tax rates for large Singapore multinational enterprises (MNEs) through the implementation of a domestic top-up tax to top up the MNEs’ effective tax rate to 15 per cent. It would appear unlikely that this would affect the tax exemption enjoyed by single family offices under sections 13O or 13U of the Singapore Income Tax Act 1947 as these tend not to be MNEs.
SIM Bock Eng
Head - Specialist & Private Client Disputes Practice and Partner - Private Wealth Practice. Bock Eng's main practice areas are in private wealth and civil litigation, which include family, matrimonial law, succession, trusts and probate law, mental capacity issues, banking and finance, property and employment. <br> <br>Bock Eng is the winner of 2020 Best Lawyers "Lawyer of the Year" award for Trusts and Estates in Singapore. She is recognised as a leading individual for Private Wealth and recommended in the area of Dispute Resolution in The Legal 500: Asia Pacific – The Client's Guide to the Asia Pacific Legal Profession. More recently, she was ranked by Who’s Who Legal 2021 as a National Leader for Private Client in South East Asia and a Global Leader for Labour & Employment. She is also recognised as one of the Litigation Stars in the Benchmark Litigation Rankings 2021 and was featured in the 2022 edition of Best Lawyers for Trusts and Estates. <br> <br>Bock Eng is the immediate past Chairman for the Society of Trust and Estate Practitioners Singapore Chapter (STEP Singapore) and is also the course coordinator for Wills, Probate and Administration in the Preparatory Course leading to Part B of the Singapore Bar Examinations and Vice Chairman of the committee of the Wealth Management Institute's Global-Asia Family Office (GFO) Circle.
Aw Wen Ni
Wen Ni's main practice areas are in civil commercial litigation and private wealth. As part of her private wealth practice, Wen Ni advises ultra-high-net-worth individuals and families with assets spanning different jurisdictions on succession and estate planning with a view to business continuity and providing for the future generation. This includes the setting up of trust structures, family offices and applications for the relevant tax exemption schemes. Being a litigator, Wen Ni acts for ultra-high-net-worth individuals and families in complex and high value disputes including contested estate / probate matters, shareholders' disputes, banking and financial disputes and proceedings commenced under Mental Capacity Act 2008. Wen Ni graduated from the National University of Singapore and is admitted to the Singapore Bar.