PLC Paper No. CB(1) 479

Ref: CB1/SS/6/97

Paper for the House Committee meeting
on 14 November 1997

Report of the Subcommittee on
Resolution under section 29I(2) of the
Stamp Duty Ordinance (Cap.117)

Purpose

This paper reports on the deliberations of the Subcommittee on Resolution under section 29I(2) of the Stamp Duty Ordinance (Cap.117).

The Resolution

2.The Resolution seeks to extend the provisions in the Stamp Duty Ordinance for charging stamp duty on all agreements for sale of residential property by a further period of two years until 31 December 1999.

Background

3.As one of a series of measures to help dampen speculation on residential property, the Stamp Duty (Amendment) Ordinance 1992 came into operation in January 1992. The Amendment Ordinance stipulates that each agreement concluded in respect of residential property prior to assignment is chargeable to stamp duty. Under the original terms of the Amendment Ordinance, the provisions would expire at midnight on 31 December 1993 unless they were extended by a resolution under section 29(I)2 of the Ordinance. The expiry date was extended on two occasions in November 1993 and December 1995. The last resolution extended the provisions until 31 December 1997.

4.In 1996, the Administration had made an attempt to make the provisions permanent by introducing the Stamp Duty (Amendment) (No.2) Bill 1996 into the Legislative Council. However, the Bill was not accorded priority on account of the tight legislative programme and it lapsed after 30 June 1997.

5.The Administration has given notice to move a motion to extend the validity of the provisions by another two years until 31 December 1999, to be followed by an amendment to the Stamp Duty Ordinance to make the provisions permanent when the first Special Administrative Region Legislative Council is in place.

The Subcommittee

6.A Subcommittee to study the resolution was formed at the House Committee meeting on 24 October 1997. Mr Eric LI Ka-cheung and Mr CHAN Kam-lam were elected Chairman and Deputy Chairman of the Subcommittee respectively. The Subcommittee held two meetings with the Administration. A membership list of the Subcommittee is at the Appendix.

7.To enable the Subcommittee to study the Resolution in detail, the Administration has withdrawn its notice of moving the resolution, which originally was intended for the Council meeting on 5 November 1997, until the Subcommittee has completed its deliberations.

Deliberations of the Subcommittee

8.As the fundamental objective of introducing the measure in 1992 was to help dampen speculation on residential property, the Subcommittee has focused its attention on the effectiveness of the measure in this respect and on the need for extending the provisions by another two years. The Administration's position and members' views are set out as follows.

Effectiveness of the measure in curbing property speculation

9.As the prices of property are determined primarily by market forces and in view of recent downward adjustments in property prices matched by a corresponding decrease in speculative activities, members are concerned with whether the stamp duty provisions are serving their original purposes and are worried that the measure has deviated from the original motive of dampening speculation on residential property. They therefore ask for an analysis of the effectiveness of the measure.

10.The Administration advises that it is not possible to gauge precisely and scientifically the effectiveness of the provisions in curbing property speculation since other factors such as the state of economy and market sentiment are also at play in parallel. It emphasises however that the provisions:

1. serve as a disincentive for speculation as stamp duty charged on intermediate transactions increases the cost for speculation. On the basis of the $1.3 billion stamp duty collected from some 13,600 confirmors during the 12-month period from September 1996 to August 1997, confirmors have to pay an average of $100,000 stamp duty per case. Allowing the provisions to lapse will reduce such costs thereby fuelling speculative activities, and send a wrong signal to the community that the Administration is no longer committed to containing speculation;

2. enable the Inland Revenue Department (IRD) to detect and obtain information about intermediate transactions and to make profits tax assessment where trading is established. The average profits tax assessed annually from such cases is $480 million; and

3. enable the timely collection of information about property market operation to facilitate monitoring and formulation of appropriate measures in response to market changes.

11.As for the effect of the provisions on genuine home-buyers, the Administration holds the view that this is merely an earlier payment of stamp duty. The Administration stresses that it is committed to protecting the interest of home-buyers and has made genuine efforts in relieving their burden in this respect. This is demonstrated by the introduction of a number of measures over the years in the form of reduction in stamp duty for transaction of properties of certain values. One such measure announced in March 1997 involving a reduction in the stamp duty payable for properties valued at $4 million and below has resulted in a loss in stamp duty revenue income for the Government of $600 million in 1997-98.

12.Some members of the Subcommittee share the Administration's concern. They also express worries about the wrong perception by the public of Government lifting control on speculative activities if the provisions were allowed to lapse.

13.Other members however do not agree. They hold the view that speculation is an economic activity which should be allowed in a free market, and that restrictive measures should only be imposed when there are indications that the situation is out of control. With profits being the major incentive for speculators, the existence or otherwise of the stamp duty provisions is not a dominant factor. They express disappointment with the absence of an analysis of the effectiveness of the measure in dampening speculation on residential property. Above all, these members are concerned that the costs for speculation are passed on to the genuine home-buyers.

Need for extending the provisions by a further two years

14.The Administration maintains the view that the confirmor cases recorded indicate that speculative activities still exist, and that there is a need for the stamp duty provisions to be extended by two years in order to maintain the disincentive for speculation. It re-iterates its intention of making the measure permanent.

15.While most members of the Subcommittee have reservations in making the measure permanent, views are divided as to whether an extension period of two years is warranted.

16.Members who are against the Administration's proposal observe that factors leading to the decision for introducing the provisions have all changed, e.g., the state of the economy, market sentiment, supply and demand, mortgage lending policy of banks, and interest rate. They also point out that the Chief Executive in his Policy Address in October 1997 has pledged to increase the supply of housing. The proposal for extending the provisions run contrary to such a policy and cast doubt on the Administration's determination in implementing the Chief Executive's performance pledge. To address the Administration's concern on the related issue of profits tax, some members suggest that consideration be given to retaining the mechanism for stamp duty, but revising the rate of stamp duty to a fixed amount of say $1,000 on conclusion of each sales agreement. This would serve the purpose of providing information to IRD as regards assessments of profits tax on the one hand, and relieve the burden on home-buyers on the other. Some members also make alternative suggestions for shortening the period of extension to six months or one year, during which time the Administration is to conduct a review on the long term need of the measure.

17.Other members however agree with the need to extend the provisions for two years, on account of the deterrent effect such provisions have on speculation and bearing in mind that the effect of the Administration's pledge on housing production targets could only be seen in two years time at the earliest.

18.While agreeing with members that the long term solution would be adequate supply of housing to meet with demand as pledged by the Chief Executive in his Policy Address, the Administration maintains that extension of the validity of the provisions by two years is necessary as this will allow time to establish the long term need of such a measure. As regards the suggestion for a fixed rate of stamp duty, the Administration does not accept the suggestion as it will entail major amendments to the principal Ordinance whereas the existing measure is an effective and efficient system to administer. The Administration stresses that the objective of the provisions is not to raise additional revenue.

19.With regard to the proposals for shortening the period of extension to six months or one year, the Administration has been consulted but maintains its original proposal for a two-year extension up to 31 December 1999. It has further advised that, subject to any views which members may have at the House Committee meeting on 14 November 1997, it will move the Resolution at the Council meeting on 26 November 1997.

Recommendation

20.Members of the Subcommittee have divided views on the Administration's proposal for extending the validity of the stamp duty provisions for a further two years up to 31 December 1999. They nevertheless conclude that they have completed deliberations on the Resolution, and that the Subcommittee should report its deliberations to the House Committee.

Advice sought

21.Members are invited to note the views of the Subcommittee as set out in paragraph 20 above.

Provisional Legislative Council Secretariat
12 November 1997

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Appendix

Subcommittee on Resolution under section 29I(2) of the Stamp Duty Ordinance (Cap.117)

30 October 1997