Wednesday, October 24, 2007

The property tax bills for many hotels here will go up by at least 33 per cent starting next year as the taxman tweaks his calculations.

The property tax bills for many hotels here will go up by at least 33 per cent starting next year as the taxman tweaks his calculations.

The rate for hotels remains at 10 per cent of annual value (AV). But the formula to calculate the AV itself is set to undergo a change.

Starting next year, the AV for the rooms component of all hotels will be calculated as 20 per cent of their previous year’s gross room receipts. And from 2009, this rate will be raised further to 25 per cent of the preceding year’s takings.

Effectively, it means that most major hotels will shell out more, said industry watchers. Currently, the AV for gazetted hotels that have not been leased out by their owners - apparently the majority of big hotels in town fall in this category - is 15 per cent of the previous year’s gross room receipts. When this rate is raised to 20 per cent next year, it straightaway means that the AV for rooms alone will work out to a third more than it is now. There will be a further jump in 2009.

That’s not all. From next year, estimated market rent will form the basis for determining the AV for a hotel’s food & beverage (F&B) areas. Currently, the AV is calculated as 5 per cent of the preceding year’s gross F&B receipts. Other lettable areas in a hotel will continue to be assessed based on estimated current market rent.

The new formula for determining AV will apply uniformly to all licensed hotels, whether they are gazetted or not and let out or not, a spokeswoman for the Inland Revenue Authority of Singapore (IRAS) told BT. Currently, the AV for some categories of hotels is based on the estimated current market rent for rooms, F&B areas and other lettable areas.

So from next year the rooms component of property tax for gazetted hotels that are not leased out will increase by 33 per cent, assuming the same gross receipts, said the IRAS spokeswoman. But some hotels in the other category may see a slight drop in property tax.

‘However, the actual impact on each hotel’s property tax bill may vary depending on its gross receipts,’ she added.

Industry players said that the increase in AV for F&B areas could be even steeper. This will especially be the case for five-star properties with substantial ballroom and function-room facilities.

‘This is because the ballrooms will now be assessed for property tax, regardless of whether they are occupied or not,’ explains the CFO of a major hotel in the Orchard Road belt, who forecasts a 200 per cent increase in AV for the F&B areas of his hotel under the new formula.

Or as DTZ Debenham Tie Leung executive director (consultancy and statutory valuation) Ng Poh Chue puts it: ‘The market-rent approach does not give consideration to low-occupancy periods for ballrooms and function rooms.’

The CFO of the major Orchard Road hotel estimates that on the whole (rooms, F&B and other areas), the AV for his hotel will go up by nearly 60 per cent from next year and by more than 90 per cent from 2009 - other things remaining the same.

Some market watchers say that the hikes will eat into hotel owners’ bottom lines at a time when operating costs including labour have also been on the rise.

The Singapore Hotel Association said it is currently gathering feedback from its members.

IRAS’s spokeswoman said that both the Ministry of Trade and Industry and the Singapore Tourism Board were consulted and their feedback was taken into account, including phasing in the change over a two-year period instead of an immediate change.

She pointed out that the current formula to compute AV of hotels was introduced in 1986. ‘The 15 per cent on room receipts and 5 per cent on F&B receipts were found to be a close proxy to the standard valuation method, that is, estimated current market rent. This is the method of determining AV for other classes of property, such as residential, commercial and industrial.

‘However, given the passage of over 20 years, an update in the formula for computing hotels’ AV is needed to ensure it reflects an AV that does not vary too widely from one that is based on standard valuation method, as analysed from rentals paid for hotels that have been let,’ she explained.

As for changing the method of assessing AV for F&B areas to estimated market rent instead of a percentage of F&B receipts, IRAS said: ‘Restaurants and food outlets are widely tenanted today. So the AVs of such properties are easily determined from comparable market rents.’

However, Jones Lang LaSalle Hotels (Asia) EVP Chee Hok Yean had a different take. ‘The change will likely introduce more room for dispute due to the fact that most hotel F&B outlets are not leased to third parties, so there may not be (enough) precedent rentals. F&B outlets in hotels don’t enjoy the same traffic flow as restaurants in malls, hence there must be a distinction when comparing current market rents in these two types of properties,’ Ms Chee reasons.

Another issue is that not all hotel F&B space such as banquet halls and meeting rooms will be used on a daily basis and the authorities will have to allow for vacancy for these unoccupied periods. ‘That will create more admin work for the hotels when making submissions to IRAS,’ she added.

IRAS collected $37.3 million property tax on hotels for the year ended Dec 31, 2006, up from $33.4 million in the preceding year.

Source : Business Times - 23 October 2007

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