The first-time buyer Stamp Duty exemption was “not designed for what some attorneys” are using it for, one Bahamian lawyer saying their interpretations were resulting in “huge revenue leakage” and something that was “fiscally unsustainable”.
Tavares LaRoda, the in-house legal counsel for Sunshine Holdings and Arawak Homes, told Tribune Business that successive changes to the first-time buyer exemption provisions in the Stamp Act had created confusion in the Bahamas real estate market as to how it was being applied.
Providing an alternative, and interesting, view on Tribune Business’s report last Friday, which disclosed how many attorneys felt the Government’s current policy interpretation was discriminating against first-time buyers needing mortgage financing, Mr LaRoda said the exemption was now being used in way never contemplated by the Government when it first implemented the policy.
Recalling the exemption’s history, Mr LaRoda said it was first introduced by the Christie administration for first-time buyer transactions worth less than $250,000.
At that time, Stamp Duty on Bahamas real estate transactions was normally - and largely still is - split 50/50 between the purchaser and seller.
With the maximum duty rate on a $250,000 property standing then at 10 per cent, Mr LaRoda said the Government viewed $12,500 as the maximum amount of revenue it was conceding on any transaction - $12,500 being the 5 per cent share paid by the purchaser.
However, the Ingraham administration increased the exemption threshold to $500,000 or less, and Mr LaRoda said attorneys became creative in their tax avoidance strategies.
When first-time buyers were involved, the transaction was increasingly structured to leave the purchaser paying all the Stamp Duty. If the application as approved, this meant the Government was giving up as much as $50,000 in revenue on a $500,000 deal - or $60,000 at the previous 12 per cent rate.
Describing the revenue loss as “huge”, Mr LaRoda said the way some attorneys were interpreting the first-time buyer Stamp Duty exemption was not sustainable where the Government’s parlous finances were concerned.
“When the Government first looked at this issue, the prevailing market transaction was the purchaser split the Stamp Duty 50/50 with the seller,” Mr LaRoda told Tribune Business.
“So, when the Government looked at its books and the impact it would have, it was looking at 50 per cent of the Stamp Duty, which was then a maximum of $12,500. US lawyers, being what we are, began to change the parameters.
“The Government revenue loss went from that amount, $12,500, to situations where people were claiming $50,000 worth of exemptions.......
“If the Government affirms what everyone’s interpretation of it is, it cannot be fiscally sustainable to exempt $500,000 worth of duty. It was never the intention. The reality is there’s huge leakage because of that.”
The 2008 amendments passed by the Ingraham administration also included ‘vacant land’ purchases as a transaction that could earn the exemption.
It had previously been excluded, and Mr LaRoda questioned whether the buyer of a $500,000 vacant lot was “really the person we are aiming at with this”.
“Our Stamp Tax rates are high, and we need to look at it from that perspective, but from the perspective of fiscal policy and revenue leakage, the policy is not designed for what some of the attorneys are contemplating,” he told Tribune Business.
“If they lowered those rates, people would be less inclined to come up with these complex tax avoidance schemes. The amount of the exemption now being claimed, we’re seeing larger and larger sums.”
His colleague and Bahamas Real Estate Association (BREA) president, Franon Wilson, urged the Government to clarify the Act and its policy, warning that different interpretations were creating uncertainty that could undermine the Bahamian real estate market and numerous potential transactions.
Pointing out that “time and certainty” were vital to the market’s health, Mr Wilson said: “From the BREA perspective, if you have a transaction and everything is going well, but at the last leg the Treasury says your attorney interpreted it one way, we interpreted it another way, either the transaction can’t close or it will take longer to close.
“The main thing is whenever there is uncertainty in business, it’s not good. Creating certainty would lead to faster transactions. We would have certainty when we talk to people, telling them they can or can’t do this.”
Mr Wilson acknowledged that closing costs, of which Stamp Duty is the largest chunk, were “a big hurdle to home ownership”.
Attorneys had previously complained to Tribune Business that the Treasury was combining the conveyancing and mortgage values of a real estate transaction, and where the aggregate exceeded $500,000 first-time buyers were being turned down.
The Act, as it currently stands, says applications will be rejected where “the total value of the transaction or transactions exceed $500,000”. This is likely the wording that is open to interpretation.