We refer to the letter 'Surprised by sharp tax hike on owner-occupied homes' (The Straits Times, 3 Jul 10) by Mr Paul Chan.

Mr Paul Chan was under the impression that IRAS estimates the annual value of properties in advance of market trends. He also felt that increases in the annual value of a property based on market rentals were not right for owner-occupiers.

Mr Chan’s view reflects a frequent misconception about property tax. It is in fact a tax on property ownership, and is levied irrespective of whether the property is tenanted. This is unlike income tax which is imposed only on properties that are rented out.

The property tax is pegged to the annual value of the property, which is determined based on market rentals of similar properties prevailing at the time of assessment. It does not take into account any forecast or estimate of future movements in market rentals.

IRAS’ practice is consistent with that in countries such as UK, US, Hong Kong and Australia, which also levy property tax based on prevailing market values rather than on the actual receipts derived from renting out a property.

IRAS reviews annual values each year. It will increase or decrease annual values based on prevailing market rentals. The reliance on market rentals however leads to less volatility in estimates of annual value and hence the property tax payable, compared to relying on the market price of properties bought and sold - which tend to go through more pronounced cycles.

The annual value of Mr Chan’s property was in fact reduced in past market declines, the most recent one being in 2009.

The Government introduced in Budget 2010 a progressive property tax schedule for owner-occupied residential properties from 1 Jan 2011. Under the new progressive schedule, all HDB flat owners and the vast majority of residential property owners will enjoy an effective property tax rate lower than 4% of annual value.

We have since spoken with Mr Chan and explained the basis of property tax assessment.