Real property gains tax: Is it really gone?

By BUSINESS TIMES

ON MARCH 22 2007, the Prime Minister announced at the “Invest Malaysia” conference that “to further improve the national property sector, the Government has decided not to impose real property gains tax throughout the country commencing April 1 2007”.

This was subsequently reported by various parties to mean that the Real Property Gains Tax (RPGT) Act 1976 was repealed or that the RPGT was abolished.

Well, that is not exactly how I interpreted this announcement – where did it say “abolished” or “repealed”?

The announcement was followed up by the Real Property Gains Tax (Exemption) (No.2) Order 2007 where it was stated that an exemption from all provisions of the RPGT Act would apply to all persons in respect of disposals of chargeable assets after 31 March 2007.

This means that for such disposals, one would no longer need to complete the relevant forms (i.e. CKHT 1 and CKHT 2) to report the purchase or the sale of property.

The speed with which the gazette order was released was remarkable and perhaps represents what we do aspire to achieve in enhancing service delivery.

The Ministry of Finance also came out with clarifications in a speedy manner. Of course, it was a simple matter but we certainly do hope that other announcements are also gazetted/clarified in a similar fashion!

Overall the exemption has been well-received and it should spur the growth of the property sector.

What we would realise is that RPGT only affected property transactions in the secondary market as new units acquired from property developers are not subject to RPGT on the developers but the exemption may spur persons to purchase more property units with a view to sell these at a profit later.

This means that the exemption would also encourage speculative transactions when the market is on an uptrend. Isn’t that what the RPGT Act (and its predecessor, the Land Speculation Tax Act 1974) was meant to curtail?

Nevertheless, an exemption will assist in giving a boost to the sluggish property market. We may sell our existing property and upgrade to one in a better location, etc since the RPGT would not be a factor in our decision to sell. Of course, Malaysian citizens who sold their property after 5 years were exempt anyway under the RPGT Act.

The question does arise as to why this change was implemented by way of an “exemption order” rather than a repeal of the RPGT Act, 1976.

Quite obviously, the issuance of an exemption order is easy and quick. On the other hand, we have had the RPGT Act in place for over 30 years and it is the only legislation which imposes tax on capital gains.

There is economic merit in imposing taxes on both income and on capital gains but as a developing country, we also need to manage and steer the economy in specific directions on the road to achieve developed nation status.

Do we anticipate that the Government will reintroduce RPGT once the property sector has achieved progress and shows a healthy growth?

This is certainly a strong likelihood and all it would take is to simply revoke the exemption order and everything is back to normal.

In that sense, the approach taken by the Government to exempt rather than to abolish the legislation is most appropriate.

Therefore, taxpayers with property assets seeking to unlock the value of these or seeking to streamline group properties should take the opportunity to address how best to achieve their needs sooner rather than later.

It may also be possible that in the wake of the RPGT exemption, stamp duty may be increased in the future if the Government’s revenue needs require it.

An interesting thing to note is that the tax revenue generated by RPGT was quite insignificant (around RM250 million annually) and with the expected increase in property transactions, stamp duty collection should easily compensate for this small loss.

A further important point to note is that not all property transactions will be altogether tax-free. While these will no longer be subject to RPGT, the possibility of transactions being subjected to income tax remains. Where companies and individuals acquire and sell real properties such that a trading pattern emerges, such transactions are likely to be subject to income tax.

Therefore, to determine whether a property transaction will be subject to income tax, one will need to establish whether the gain is capital in nature or revenue in nature and whether the various indicators of trade (i.e. the “badges of trade”) exist.

So, since the RPGT Act has not been abolished/repealed yet, it is likely that it may be brought back into effect when the need arises and the timing is appropriate especially to curb excessive speculation and rise in property prices.

The views expressed are the personal views of the writer who is Managing Director of TAXAND MALAYSIA Sdn Bhd (a member of the TAXAND Global Alliance of independent tax firms ). He can be contacted at vs@taxand.com.my

CPA Australia has a worldwide membership of over 112,000 and is one of the largest accounting bodies in the world. CPA Australia can be contacted at my@cpaaustralia.com.au or visit www.cpaaustralia.com.au

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