INTRODUCTION
Taxation is the system by which money is raised for public purposes by compelling eligible tax payers (individuals and corporate bodies) to pay an amount of money to the relevant tax authority.
Property Tax liability is on ownership and/or occupation of property. The proceeds are traditionally used to offset the costs of providing municipal services such as refuse disposal, provision of motor parks, cemeteries, maternity centres, e.t.c.
The tax to be paid by the owner or/and occupier of the property is determined upon the derivation of either the Capital Value of the property, where the tax is on the capital worth of the property or Rental Value where the tax is on the annual income of the property as in property/tenement rating.
Determination of value whether capital or rental is the sole preserve of the Estate Surveyor and Valuer. He has the backing of the law, Decree 25 of 1975, requisite training, skill and experience to form such opinions of value. It is therefore of utmost importance that his services be put to use by the various tax agencies.
VARIOUS PROPERTY TAXES IN NIGERIA
There is a multiplicity of levies, fees, charges, rates, contributions and development funds being demanded and collected by Government, all in a bid to generate the much needed revenue.
Various property taxes are enumerated hereunder:
A. Capital Gains Tax
B. Stamp Duty
C. Consent Fees
D. Development Levy
E. Withholding Tax
F. Property/Tenement Rate
G. Land Use Charge
H. Probate Tax
A. Capital Gains Tax
Capital Gains Tax is tax charged on capital gains on disposal of an asset, real estate inclusive. Certain proportion of the gains realized is not a direct result of any expenditure incurred by the owner to enhance or improve the property in any way. Such gains accrue as a result of the day to day movement of the economy, which is a direct result of the various inputs/provisions of government.
Capital Gains can also be due to the fall in the value of money or inflation. For proper collection of this tax, the price of acquisition of the real estate in question must be known as well as the disposal price. It is however a well known fact that more often than not, these prices are not disclosed to the relevant authorities. Disclosed figures are usually far lower than the actual acquisition and disposal figures.
Some State Governments are known, probably due to the above to charge this tax on the sale price, as opposed to the gain. This ought not be so. The current rate of this tax is 2% of assessed value in Lagos State.
B. Stamp Duty
These are taxes collected on written instruments, leases, mortgage deeds, e.t.c. Non-payment of Stamp Duty does not invalidate or nullify the document. The document however cannot be tendered in a court of law as an exhibit, if there is need to seek redress, except it is stamped. A penalty is usually demanded for deferred stamping.
If the value in the stamped document is less than the open market value, the party who requires redress by reason of the document is at risk. It therefore behoves the said party to ensure that the value indicated is as close to the open market value as possible. This devise can be used effectively to create a database of property ownership, for effective land administration and revenue collection.
C. Consent Fees
These are fees paid by applicants seeking the Governor’s consent for land transactions, e.g. assignment, mortgages, sales sub-leases, sub-division of plots e.t.c. A certain percentage of the capital value of the property in question is charged as consent fee.
D. Development Levy/Capital Contribution
When layouts or estates are prepared, there is a need to provide adequate infrastructure, such as roads, drainage, electricity, water, e.t.c., to service the estates or layouts. Money for the provision of these infrastructures are demanded from those who acquire rights and interests in such layouts and estates. These services are known as a Development Levies or Capital Contributions. Such monies may be collected as huge sum once and for all, or on the other hand it could be spread over the succeeding years as several smaller sums.
E. Withholding Tax
This is the tax deducted at source and paid over to the relevant tax authority as deposit, for the purpose of reducing the amount of tax, which the payer would be called upon to pay when the assessment is finalized. It is payment on account. The provision for withholding tax with respect to rent has not been very effective, since very few persons are complying. One finds that mainly corporate organizations comply, As they easily be detected for non-compliance. Withholding tax is currently 10%
F. Property/Tenement Rate
Levied on ownership/occupation of property based on the rental value of the property. In tenement rating the tax or rate is based on the Rateable Value of the property. This value is derived from the rental value of the property.
G. Land Use Charge
This law was enacted on the 22nd of June 2001. It is a law to make provision for the consolidation of all property and land based rates and charges payable under the Land Rate, the Neighbourhood Improvement Land Charge and Tenement Rate Law in Lagos State into a new Land Base Charge. The Law is aimed at consolidating the three existing Land Use Charges available to the State Government and the Local Government, as enumerated above.
H. PROBATE TAX
This is a subject of the next paper.
DETERMINATION OF VALUERS OPINION
The value of a particular interest in landed property may be defined as the amount of money which can be obtained for the interest at a particular time from persons able and willing to purchase it.
A valuer is requested to give his opinion on various types of interest in various types of property for multifarious purposes. The approach to the determination of value in one case will of necessity differ from the other, depending on the interest to be valued, e.g. leasehold or freehold and the purpose of the valuation e.g. mortgage or annual rental value.
The various approaches, that is, methods of valuation are enumerated hereunder, both conventional and contemporary:
A. Direct Comparison: The simplest and most direct approach in arriving at a value is to compare the property to be valued with the evidence of sale of similar property. The following should be noted when using this method of valuation. The properties must be similar. The properties must be in the same locality and there must be adequate record of transactions. Isolated sales are not sufficient evidence for the comparative method.
B. Investment Method: What is basic to this method is that the property is considered as an investment. The investor wishes to invest capital to obtain an annual return thereon in the form of a rent income, which represents an acceptable rate of returns
C. The Depreciated Replacement Cost Method: Formerly known as the Contractors Method. This is usually used where the property is such that seldom changes hand in the open market. The method is on the assumption that the value is based on the cost of procurement of the property
D. Residual Method: The valuer at times needs to give a valuation of land or buildings which are to be developed or re-developed. This method is used to value properties with development potential. Development potential is present when a property can be improved or developed so that the value will be increased by more than the expenditure.
The residual value is the value of the property after it has been developed less total cost of development. It represents the value of the property in its unimproved state, reflecting the development potential.
E. Discounted Cash Flow (DCF): The principle underlying the valuation of a future income flow within the investment method of valuation is that the future income should be discounted at an appropriate rate of interest to determine its present value.
DFC calculation involves the discounting of all future receipts and expenditures, similar to the investment method of valuation, but they can readily be used to allow for inflation, taxation and frequent changes in the amount of income and receipts as may be required.
DIVERGENT VALUATION OPINIONS
Johnson, Davis and Shapiro (2000) ‘Although the aim of the valuer is to provide an estimate of market value, it should not be assumed that each valuers estimate of value and the market price or market value will always be the same. Different valuers could well place different values on a particular interest at a particular time, because they are making estimates and there is normally room, within certain limits for differences of opinion.’
S. Udo-Akagha (1985) “Valuation is not a precise science. This has never been denied. In fact, it is why this ‘imprecise’ science of estimating (by a professional valuer) of a things worth can only be practiced by people of care and diligence.’
The introduction of the ‘NIESV Guidance Notes on Property Valuation (1985) says in part that ‘It is often discovered that in practice problems do arise where differences of opinion of two valuers on the same property are so wide that the values could not be relied upon. As the society is demanding high standards for the services it receives and for which it pays, it is important our profession ensures that high standards are maintained by all members’.
NIESV Journal 1998 Editorial comment ‘the valuation process has been the focus of recent debate and controversy both within and outside the profession. Cases of two or more valuers giving as many different capital values with wide margins of variation, for the same property abound …. We must respond to the market and if necessary change from long established practices. This is particularly important in our valuation work’.
Taxation is the system by which money is raised for public purposes by compelling eligible tax payers (individuals and corporate bodies) to pay an amount of money to the relevant tax authority.
Property Tax liability is on ownership and/or occupation of property. The proceeds are traditionally used to offset the costs of providing municipal services such as refuse disposal, provision of motor parks, cemeteries, maternity centres, e.t.c.
The tax to be paid by the owner or/and occupier of the property is determined upon the derivation of either the Capital Value of the property, where the tax is on the capital worth of the property or Rental Value where the tax is on the annual income of the property as in property/tenement rating.
Determination of value whether capital or rental is the sole preserve of the Estate Surveyor and Valuer. He has the backing of the law, Decree 25 of 1975, requisite training, skill and experience to form such opinions of value. It is therefore of utmost importance that his services be put to use by the various tax agencies.
VARIOUS PROPERTY TAXES IN NIGERIA
There is a multiplicity of levies, fees, charges, rates, contributions and development funds being demanded and collected by Government, all in a bid to generate the much needed revenue.
Various property taxes are enumerated hereunder:
A. Capital Gains Tax
B. Stamp Duty
C. Consent Fees
D. Development Levy
E. Withholding Tax
F. Property/Tenement Rate
G. Land Use Charge
H. Probate Tax
A. Capital Gains Tax
Capital Gains Tax is tax charged on capital gains on disposal of an asset, real estate inclusive. Certain proportion of the gains realized is not a direct result of any expenditure incurred by the owner to enhance or improve the property in any way. Such gains accrue as a result of the day to day movement of the economy, which is a direct result of the various inputs/provisions of government.
Capital Gains can also be due to the fall in the value of money or inflation. For proper collection of this tax, the price of acquisition of the real estate in question must be known as well as the disposal price. It is however a well known fact that more often than not, these prices are not disclosed to the relevant authorities. Disclosed figures are usually far lower than the actual acquisition and disposal figures.
Some State Governments are known, probably due to the above to charge this tax on the sale price, as opposed to the gain. This ought not be so. The current rate of this tax is 2% of assessed value in Lagos State.
B. Stamp Duty
These are taxes collected on written instruments, leases, mortgage deeds, e.t.c. Non-payment of Stamp Duty does not invalidate or nullify the document. The document however cannot be tendered in a court of law as an exhibit, if there is need to seek redress, except it is stamped. A penalty is usually demanded for deferred stamping.
If the value in the stamped document is less than the open market value, the party who requires redress by reason of the document is at risk. It therefore behoves the said party to ensure that the value indicated is as close to the open market value as possible. This devise can be used effectively to create a database of property ownership, for effective land administration and revenue collection.
C. Consent Fees
These are fees paid by applicants seeking the Governor’s consent for land transactions, e.g. assignment, mortgages, sales sub-leases, sub-division of plots e.t.c. A certain percentage of the capital value of the property in question is charged as consent fee.
D. Development Levy/Capital Contribution
When layouts or estates are prepared, there is a need to provide adequate infrastructure, such as roads, drainage, electricity, water, e.t.c., to service the estates or layouts. Money for the provision of these infrastructures are demanded from those who acquire rights and interests in such layouts and estates. These services are known as a Development Levies or Capital Contributions. Such monies may be collected as huge sum once and for all, or on the other hand it could be spread over the succeeding years as several smaller sums.
E. Withholding Tax
This is the tax deducted at source and paid over to the relevant tax authority as deposit, for the purpose of reducing the amount of tax, which the payer would be called upon to pay when the assessment is finalized. It is payment on account. The provision for withholding tax with respect to rent has not been very effective, since very few persons are complying. One finds that mainly corporate organizations comply, As they easily be detected for non-compliance. Withholding tax is currently 10%
F. Property/Tenement Rate
Levied on ownership/occupation of property based on the rental value of the property. In tenement rating the tax or rate is based on the Rateable Value of the property. This value is derived from the rental value of the property.
G. Land Use Charge
This law was enacted on the 22nd of June 2001. It is a law to make provision for the consolidation of all property and land based rates and charges payable under the Land Rate, the Neighbourhood Improvement Land Charge and Tenement Rate Law in Lagos State into a new Land Base Charge. The Law is aimed at consolidating the three existing Land Use Charges available to the State Government and the Local Government, as enumerated above.
H. PROBATE TAX
This is a subject of the next paper.
DETERMINATION OF VALUERS OPINION
The value of a particular interest in landed property may be defined as the amount of money which can be obtained for the interest at a particular time from persons able and willing to purchase it.
A valuer is requested to give his opinion on various types of interest in various types of property for multifarious purposes. The approach to the determination of value in one case will of necessity differ from the other, depending on the interest to be valued, e.g. leasehold or freehold and the purpose of the valuation e.g. mortgage or annual rental value.
The various approaches, that is, methods of valuation are enumerated hereunder, both conventional and contemporary:
A. Direct Comparison: The simplest and most direct approach in arriving at a value is to compare the property to be valued with the evidence of sale of similar property. The following should be noted when using this method of valuation. The properties must be similar. The properties must be in the same locality and there must be adequate record of transactions. Isolated sales are not sufficient evidence for the comparative method.
B. Investment Method: What is basic to this method is that the property is considered as an investment. The investor wishes to invest capital to obtain an annual return thereon in the form of a rent income, which represents an acceptable rate of returns
C. The Depreciated Replacement Cost Method: Formerly known as the Contractors Method. This is usually used where the property is such that seldom changes hand in the open market. The method is on the assumption that the value is based on the cost of procurement of the property
D. Residual Method: The valuer at times needs to give a valuation of land or buildings which are to be developed or re-developed. This method is used to value properties with development potential. Development potential is present when a property can be improved or developed so that the value will be increased by more than the expenditure.
The residual value is the value of the property after it has been developed less total cost of development. It represents the value of the property in its unimproved state, reflecting the development potential.
E. Discounted Cash Flow (DCF): The principle underlying the valuation of a future income flow within the investment method of valuation is that the future income should be discounted at an appropriate rate of interest to determine its present value.
DFC calculation involves the discounting of all future receipts and expenditures, similar to the investment method of valuation, but they can readily be used to allow for inflation, taxation and frequent changes in the amount of income and receipts as may be required.
DIVERGENT VALUATION OPINIONS
Johnson, Davis and Shapiro (2000) ‘Although the aim of the valuer is to provide an estimate of market value, it should not be assumed that each valuers estimate of value and the market price or market value will always be the same. Different valuers could well place different values on a particular interest at a particular time, because they are making estimates and there is normally room, within certain limits for differences of opinion.’
S. Udo-Akagha (1985) “Valuation is not a precise science. This has never been denied. In fact, it is why this ‘imprecise’ science of estimating (by a professional valuer) of a things worth can only be practiced by people of care and diligence.’
The introduction of the ‘NIESV Guidance Notes on Property Valuation (1985) says in part that ‘It is often discovered that in practice problems do arise where differences of opinion of two valuers on the same property are so wide that the values could not be relied upon. As the society is demanding high standards for the services it receives and for which it pays, it is important our profession ensures that high standards are maintained by all members’.
NIESV Journal 1998 Editorial comment ‘the valuation process has been the focus of recent debate and controversy both within and outside the profession. Cases of two or more valuers giving as many different capital values with wide margins of variation, for the same property abound …. We must respond to the market and if necessary change from long established practices. This is particularly important in our valuation work’.
CAUSES OF DIVERGENT VALUATION OPINIONS
1. Use of different methods of valuation
Valuers are yet to agree as to what method of valuation to use when valuing for a particular purpose. Use of different methods, expectedly give varying values. Clients are at a loss as to how we are unable to have a consensus of opinion as to what method to apply when valuing for a particular purpose.
2. Arbitrary Valuation Variables
The accuracy of our valuation opinion is further undermined by the fact that there is also no consensus as to the determination of variables upon which the valuation opinion is based. The variables differ from firm to firm. Basic data on costs, property yields, rate of depreciation do not reflect the true time market situation, owing partly to inadequate information on the property market. It is therefore not far fetched that the resultant valuation opinion is divergent, when valuing the same property, for the same purpose, at the same point in time.
3. Towing the Clients Opinion of Value
Some valuers are pre-disposed to reflecting valuation opinion of their client as opposed to their determining and insisting on the actual valuation opinion. This is particularly so when undertaking mortgage valuations or valuations for compensation.
4. Unavailability of Relevant Data
Data is a key requirement for valuation analysis. The collection of representative data, giving a clear indication of market activity, has been an uphill task. Buyers and sellers, lessors and lessees, refuse to disclose the actual amount of property transaction. Obtaining the actual figure is nigh impossible, as this more often than not is a closely guarded secret. Furthermore, even when available the ‘Nigerian Factor’, which should be more appropriately called corruption, more often than not ensures the figures are inflated, so as to allow for ‘settlement ‘.
RECOMMENDATIONS AND SUGGESTIONS
B. T. Aluko (1998), ‘What will endanger the valuers reputation more than anything is a belief that his methods are incorrect, illogical and by deduction capable of leading to inaccurate valuation. The profession must therefore evolve to meet the challenges on it will wither away’.
1. Bridging the gap between the Academia and the Practitioners
The Academia must be allowed to play a central role whilst ESVARBON and NIESV pay an overseeing role without asphyxiating the academia. They must be given ample room to do what they know how to do best, whilst giving room for needful practical input from the practitioners.
It is a known fact that over the years the Academia has been at the forefront in developing new approaches to property investment and valuation. Practitioners must give these efforts a chance, whilst lecturers must not fail to give practitioners their due all in the interest of the profession.
2. Research
Research is expensive business. Research must be initiated and it must be sustained. Neither ESVARBON nor NIESV can do this with its limited funds earmarked for so much, it therefore behoves us, Estate Surveyors and Valuers to make the said funds available, by making regular and worthwhile contributions to research. As we do this our profession will make meaningful development and we will handover, an enduring legacy to the next generation.
3. Property Data Bank
There is a need for the establishment of a property data bank. A property Data Bank will provide property indices for valuation, performance measurement and accuracy tests. The market cannot be analyzed accurately without a good data bank of market information.
4. Unbiased/Independent Valuer
Valuers must resist the influence of clients on their valuation opinion at any cost. Only when this is the case, will their valuation opinion reflect actual market conditions.
CONCLUSION
This professional skill, valuation, is our sole preserve and we do indeed, have the backing of government on same. It therefore, behoves us to be seen as thoroughly competent and above board in the discharge of this ability to our clients, private and public.
All hands, Estate Surveyors and Valuers Registration Board of Nigerian (ESVARBON), Nigerian Institution of Estate Surveyors and Valuers (NIESV), practitioners, academia, must be on deck, to ensure that we sustain competency in this core area of our discipline, by doing all that is needful.
The recommendations and suggestions enumerated above, will go a long way in helping us achieve this.
1. Use of different methods of valuation
Valuers are yet to agree as to what method of valuation to use when valuing for a particular purpose. Use of different methods, expectedly give varying values. Clients are at a loss as to how we are unable to have a consensus of opinion as to what method to apply when valuing for a particular purpose.
2. Arbitrary Valuation Variables
The accuracy of our valuation opinion is further undermined by the fact that there is also no consensus as to the determination of variables upon which the valuation opinion is based. The variables differ from firm to firm. Basic data on costs, property yields, rate of depreciation do not reflect the true time market situation, owing partly to inadequate information on the property market. It is therefore not far fetched that the resultant valuation opinion is divergent, when valuing the same property, for the same purpose, at the same point in time.
3. Towing the Clients Opinion of Value
Some valuers are pre-disposed to reflecting valuation opinion of their client as opposed to their determining and insisting on the actual valuation opinion. This is particularly so when undertaking mortgage valuations or valuations for compensation.
4. Unavailability of Relevant Data
Data is a key requirement for valuation analysis. The collection of representative data, giving a clear indication of market activity, has been an uphill task. Buyers and sellers, lessors and lessees, refuse to disclose the actual amount of property transaction. Obtaining the actual figure is nigh impossible, as this more often than not is a closely guarded secret. Furthermore, even when available the ‘Nigerian Factor’, which should be more appropriately called corruption, more often than not ensures the figures are inflated, so as to allow for ‘settlement ‘.
RECOMMENDATIONS AND SUGGESTIONS
B. T. Aluko (1998), ‘What will endanger the valuers reputation more than anything is a belief that his methods are incorrect, illogical and by deduction capable of leading to inaccurate valuation. The profession must therefore evolve to meet the challenges on it will wither away’.
1. Bridging the gap between the Academia and the Practitioners
The Academia must be allowed to play a central role whilst ESVARBON and NIESV pay an overseeing role without asphyxiating the academia. They must be given ample room to do what they know how to do best, whilst giving room for needful practical input from the practitioners.
It is a known fact that over the years the Academia has been at the forefront in developing new approaches to property investment and valuation. Practitioners must give these efforts a chance, whilst lecturers must not fail to give practitioners their due all in the interest of the profession.
2. Research
Research is expensive business. Research must be initiated and it must be sustained. Neither ESVARBON nor NIESV can do this with its limited funds earmarked for so much, it therefore behoves us, Estate Surveyors and Valuers to make the said funds available, by making regular and worthwhile contributions to research. As we do this our profession will make meaningful development and we will handover, an enduring legacy to the next generation.
3. Property Data Bank
There is a need for the establishment of a property data bank. A property Data Bank will provide property indices for valuation, performance measurement and accuracy tests. The market cannot be analyzed accurately without a good data bank of market information.
4. Unbiased/Independent Valuer
Valuers must resist the influence of clients on their valuation opinion at any cost. Only when this is the case, will their valuation opinion reflect actual market conditions.
CONCLUSION
This professional skill, valuation, is our sole preserve and we do indeed, have the backing of government on same. It therefore, behoves us to be seen as thoroughly competent and above board in the discharge of this ability to our clients, private and public.
All hands, Estate Surveyors and Valuers Registration Board of Nigerian (ESVARBON), Nigerian Institution of Estate Surveyors and Valuers (NIESV), practitioners, academia, must be on deck, to ensure that we sustain competency in this core area of our discipline, by doing all that is needful.
The recommendations and suggestions enumerated above, will go a long way in helping us achieve this.
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