I am in favour of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible. - Milton Friedman

COMMENT The authorities in Malaysia are full of surprises. Kuala Lumpur City Hall (DBKL), like the federal government on the Goods and Services Tax (GST), has surprised many with the sudden increase in the assessment hike. The manner which DBKL went about increasing the assessment fees was impulsive, seeing that there were no studies shared with residents to justify the sudden hike in assessment fees.

In its favour, DBKL argued that the revaluation is acceptable as it has not been done in the last 21 years.

By now, notices have been sent out to 507,000 residents, many whom are shocked by this sudden increase. They feel that the increase of between 100-300 percent is exorbitant, for example, residents in Jalan Loke Yew would have to pay 236 percent more in assessment tax, ie from RM2,376 to RM7,992.

Does anyone know how the assessment fee is calculated?  

Key to introducing change is to make it palatable. Unfortunately, there is no information on the DBKL website to educate property owners on how the assessment fee is computed. This has caused many different news and views within the last one-and-a-half weeks on the new ‘assessment rates’.

There are generally three different methods to value properties:

1. Sales Approach - fair market value of a given property may be determined by examining the sale prices of comparable properties.

2. Cost Approach - fair market value of a given property equals the total of the cost to construct a similar improvement, less any depreciation for age and condition, and the price of the land.

3. Income Approach - appropriate for properties which produce an income stream from a rent or lease agreement.

All these three valuation methods were stated on the Department of Assessments and Taxation of the state of Maryland. Most countries are either adopting a sales approach, which is also known as Capital Value, or income approach, also known as Annual Value.

For countries like Malaysia and Singapore, the Annual Value method is adopted when valuating properties. Property owners in Singapore are provided with this information on the Inland Revenue Authority of Singapore (IRAS) website. Understanding how the property tax is computed is just within a few clicks away.  

There are a few things we can learn from other countries, by analysing our property market and taking into account DBKL budget requirements.

Inform public and fix the frequency in valuation

Property revaluation should be performed on a consistent basis to keep property owners abreast with the latest change in their property value. DBKL should at least have a fixed frequency to perform a revaluation.

Singapore does an annual valuation of its properties, while Jakarta does it on an average of between one to three years. Auckland and Manila both perform a revaluation every three years. The Bureau of Property Valuation (GAV) in Bangkok on the other hand, ensures properties are revalued every four years, while independent professional valuers are appointed by the Victoria State Valuer-General to determine property values every two years.

Hence, this sudden revaluation after 21 long years is not going down to well with property owners as they have long been too comfortable paying the same amount of fees year in, year out.

Annual Value does not work in KL due to price speculation

As we all know by now, property prices in Kuala Lumpur are extremely high. The recent budget announced by the PM included measures to cool off property prices by eliminating Developer Interest Bearing Scheme (DIBS) and also increasing Real Property Gains Tax (RPGT).

This means that the government strongly believes that property prices are inflated. Therefore, is it accurate then for DBKL to utilise an Annual Value method to value the properties in Kuala Lumpur? Using a Capital Value method is most likely not going to solve this problem either.

As market value rises, so does expected rental yield, and as property prices skyrocket, less people are able to afford homes. People will turn to renting, and resulting in an increase in demand for rental, providing more bargaining power to landlords. These rates are used across the board for properties within a certain area to derive the Annual Value.

This makes perfect business sense if I was a landlord and aiming to maximise my rental income potential. But does this justify how we are taxed if we use it to provide our family shelter?

DBKL revenue is high, even without a hike in assessment rates

Similarly with the federal level, our capital city is not facing a revenue problem but a cost problem. During the Fourth IMF-Japan High-Level Tax Conference for Asian countries, a conference organised jointly by the Fiscal Affairs Department (FAD) of the International Monetary Fund (IMF) and Japan’s Ministry of Finance in Tokyo, a research presentation showed that KL has the highest percentage of property tax as percent of city revenue.

This research compared seven cities in Asia, and shows that 44.9 percent of Kuala Lumpur’s revenue is from property tax. The DBKL website states that the result of the tax assessment is used for construction, maintenance, cleaning of public facilities, construction and maintenance of infrastructure and street lights and KL development.

While the usage of the revenue seems reasonable, more transparency is required to demonstrate that these extra revenues are justifiable. Looking at the mayor’s annual budget speech for 2013, the revenue amount of RM 2.18 billion which was an increase of 15.3 percent from 2012, while the same year national budget increase by less than 1 percent from 2012.

The recently tabled 2014 national budget expects an increase of 2 percent from 2013 actual revenue, and soon enough we will know DBKL’s expected revenue for the 2014 city budget.

In the 2013 budget, it is apparent that DBKL will increase revenues by a large percentage. Therefore, is it really necessary to further increase revenues? Perhaps DBKL should look into ways to operate more efficiently and effectively and reduce costs.

Reassess the need to hike assessment rates

DBKL is moving forward with the new assessment fees. It would be imperative for DBKL to further study or find ways to ease the burden for the city folk as we now have to face rising prices due to less subsidies and additional taxes in the soon-to-be-implemented GST.

NONE KL MPs - YB Nurul Izzah Anwar, YB Teresa Kok, YB Tian Chua and others - have been fighting hard to ensure that residents are not unduly and continuously burdened by this sudden tax hike.

Across the border, a more systemic approach is taken. Singapore will be implementing a new property tax system starting 2014. Instead of implementing a fixed rate on a property’s Annual Value, it will shift towards a more progressive tax rate system for its residential properties.

This mechanism helps to take off the burden for property owners who are living in lower valued properties compared to higher valued properties. Further incentives are also given for owner-occupied homes. Furthermore, the IRAS is already providing information on its website on the 2015 rates, which are 1 percent higher at all Annual Value levels, to manage the property owners’ expectations. Something DBKL could think about.

RAJA AHMAD SHAHRIR is a research associate at Institut Rakyat. He tweets at @RajaShahrir and Facebook Raja Ahmad Shahrir .