There was an article in the Nikkei about revising inheritance-tax valuations for tower condominiums.
The Ministry of Internal Affairs and Communications and the National Tax Agency have begun considering measures to take effect as early as 2018 to curb the purchase for tax-saving purposes of high-rise condominiums whose inheritance tax is low relative to their price. The inheritance-tax “valuation,” which is currently uniform regardless of floor level or purchase price, would be raised for higher floors, reducing the tax-saving effect. While the tax burden on high-floor units would become heavier, some people, mainly those on lower floors, may see their burden become lighter.
OmittedIf the tax burden on higher floors is increased substantially, more people may refrain from purchasing them, potentially cooling the condominium market. The Ministry of Internal Affairs and Communications and the National Tax Agency will carefully consider the impact on the market while prudently examining the extent of the tax increase.
I previously wrote an article, “The Inventory of Used Condominiums Is Surging. Will They Not Sell? Tax Policy Begins to Turn Against Real Estate,” about the National Tax Agency’s concerns over inheritance-tax valuations for tower condominiums. This can be regarded as its sequel.
This time, a survey by the National Tax Agency revealed that the inheritance-tax valuation was about one-third of the actual market value.
In addition, the policy of the Ministry of Internal Affairs and Communications and the National Tax Agency appears to be to apply adjustments that raise the price for higher floors. As a result, there may conversely be cases in which inheritance-tax valuations are favorable for people on lower floors.
The article also mentions the possibility of cooling the condominium market. Looking only at the adjustment rate, it does not seem likely to have that much impact, but the psychological impact is an unknown.
Even if the current situation, in which the inheritance-tax valuation falls to about one-third of market value, becomes two-fifths after adjustment rates are applied in the future, it will still remain advantageous.
However, many people who had already purchased at the time in anticipation of tax savings may find it difficult, as the tax-saving effect diminishes and directly leads to a larger cash outflow.
When Buying Tax-Saving Products, Watch for Future Changes in Laws and National Tax Agency Policy
This is not limited to tower condominiums, but when buying tax-saving products, it is necessary to properly recognize the risk that future legislation (tax law) and National Tax Agency policy (administrative guidance) may change.
Insurance, leases, and real estate are probably the main ones. Trust products involving overseas jurisdictions can also become targets.
In recent years, aircraft leases have probably given people the greatest scare.
Aircraft leases are popular tax-saving products.
They take a relatively simple form: establish a partnership, collect funds, purchase an aircraft, and lease it to an airline.
I previously explained partnerships in “Check Investment Partnerships! No Corporate Tax... Really? Forms Other Than Stock Companies That You Should Know.” In the case of the Civil Code partnership dealt with here, however, profits and losses belong to the partners rather than to the partnership itself.
Therefore, each partner can record a fixed proportion of the depreciation expense for the aircraft owned, which produces tax savings. Because aircraft have a depreciation period shorter than their useful life, a large amount of depreciation expense can be recognized over a short period.
Many people purchased this tax-saving product, particularly large-scale purchasers investing hundreds of millions of yen.
Then... the National Tax Agency’s view changed.
An Aircraft Held by a Partnership Is Not Real Property but a Capital Contribution
It was quite an aggressive view that went beyond the legal form.
Under this view, if it is treated as a capital contribution, expenses such as the depreciation arising from an aircraft-lease product cannot be offset against other income. That eliminates its tax-saving power.
Based on this view, the National Tax Agency conducted tax audits one after another using a list of aircraft-lease purchasers, sending shockwaves through wealthy people. News reports at the time also stated the following.
With respect to an aircraft-leasing business devised by Nomura Babcock & Brown, a Nomura Securities-affiliated leasing company, which solicited investments from wealthy people nationwide, the National Tax Agency determined it to be a “product for avoiding taxation.”
Seventy wealthy people had invested in this “tax-avoidance product” and reported income lower by a total of several billion yen, and the National Tax Agency moved to impose tax on all of them on the grounds that this was unreported income.
Investors found to have unreported income included 21 people in the Kanto region and 6 in the Chubu region, as well as people across the country in Osaka, Fukuoka, Hokkaido, and elsewhere; a well-known economic commentator was also included. It appears that additional taxes (assessment dispositions) were imposed on wealthy people who did not agree to file amended returns.The rest is omitted. (Yomiuri, March 16, 2004)
There is no doubt that people who had actually invested hundreds of millions of yen were thrown into a panic by the sudden determination.
However, the case was contested in court, and the National Tax Agency lost (2004 (Administrative Appeal) No. 48, among others). Presumably, this was because the interpretation, focused on economic effects, was too forced.
For those who would like to know the details, please refer to the National Tax College paper from that time, “Income Classification of Distributions Under Silent Partnership Agreements: Prompted by a Review of the So-Called Aircraft-Lease Case (Japanese),” which summarizes them well. Its tone is somewhat strongly from the National Tax Agency’s perspective, so it should be read with that allowance in mind.
This case made many people anxious, and many also paid additional taxes and the like, but in the end the National Tax Agency lost and things returned to how they were—a close call. In this way, it is necessary to clearly recognize that tax-saving products are always accompanied by the risk that they may suddenly cease to provide tax savings.