Budget 2022: Higher personal income taxes can be double-edged sword

WHILE Singapore continues to study options to tax wealth effectively, it will raise the personal income tax rate of top earners with chargeable income exceeding S$500,000 from 2024 Year of Assessment (YA).

Finance Minister Lawrence Wong said a wealth tax is an important part of the tax system to generate revenues and "help to recirculate a portion of the wealth stock into the economy, and in doing so, mitigate social inequalities''.

Ideally, he said, Singapore would seek to tax the net wealth of individuals, but this would not be easy to implement effectively.

"Estimating wealth accurately and fairly is a more complex exercise than estimating income. Furthermore, many forms of wealth are mobile, and as long as there are differences in wealth taxes across jurisdictions, such wealth can and will move.''

Wong said Singapore would continue to strengthen the current system of taxes. In addition to higher personal income taxes for top earners, it will also implement higher property taxes as the principal means of taxing wealth. Taxes on luxury cars will also be raised.

On personal income, the portion of chargeable income in excess of S$500,000 to S$1 million will be taxed at 23 per cent. The portion of chargeable income in excess of S$1 million will be charged at 24 per cent. These represent a 1 percentage point and 2 percentage point increase, respectively, from the 22 per cent rate of tax today.

Based on the Inland Revenue Authority of Singapore data for YA 2020, over 20,900 tax-resident individuals earn between S$500,000 and S$1 million. Their net tax assessment is listed as S$2.36 billion.

There are over 6,000 who earn in excess of S$1 million. Their net tax assessment was S$2.37 billion.

Wong said the changes to the personal income tax rate is expected to affect the top 1.2 per cent of personal income taxpayers and raise an additional S$170 million of tax revenue a year.

Chris Woo, PwC SingaporePwC tax leader, said: "The personal tax rate increase is in line with the Minister's ask that those who have more should contribute more. It touches on two of the four pillars where one pillar (the individual) gives to the other pillar (the community) - by paying more taxes.

"But what is also noteworthy is that the estimated increase in tax collection of S$170 million from such a personal tax rate increase is not significant when measured against the rising spending needs. We can expect more to be asked from the first pillar (the individual) in future years.''

Grant Thornton Singapore tax and private client partner Adrian Sham said he is not surprised by the increased personal income tax bands. This move would increase the tax system's progressiveness and help reduce income disparity.

"However, it is a double-edged sword as increasing personal income tax rates may discourage high-income people to relocate or stay in Singapore. Therefore, we feel that the government should have implemented some tax reliefs to encourage business owners and decision makers to relocate and to remain in Singapore, which in turn would bring high-value jobs (and the taxes related to them) to Singapore."

DBS Bank senior economist Irvin Seah said while the hike in the top-tier personal income tax is progressive, high income earners will be confronted with a "multiple whammy'', including property tax and ARF for luxury cars. "As such, some negative wealth effect on consumption of luxury goods and property investment is to be expected. Some relocation of wealth could also happen but in this regard, Singapore still compares favourably to regional cities such as Hong Kong.''

On the impact on the wealth management sector, Anuj Kagalwala, PwC Singapore asset and wealth management tax leader, said wealthy families looking to set up family offices in Singapore have been watching the issue of wealth taxes closely. "Today that mystery has partially solved and probably in line with expectations... Furthermore, the wait-and-watch approach on the taxation of net wealth ensures that Singapore adopts a balanced approach, if and when needed.''

Singapore, he said, is faring well in the family office and wealth management space. There are currently well over 400 family offices here, and with the "growth continuing, Singapore is in a good position''.

"But we should not be complacent since there is a lot of competition out there. Whilst choosing a location for a family office or wealth managers depends on several factors, tax complexity and compliance burden are important considerations.''

Wong said countries like France, Germany and Denmark stopped levying taxes on individuals' net wealth. The number of Organisation for Economic Co-operation and Development countries with a net wealth tax dropped from 12 in 1990 to 3 in 2020. "We will continue to study the experiences of other countries and explore options to tax wealth effectively.''