Property Tax Only For Sales Within 5 Years Of Purchase (24 December 2009)

The Prime Minister of Malaysia said last night that Real Property Gains Tax (RPGT) of 5% announced during the 2010 Budget will only apply to property sold less than 5 years from its purchase. The Prime Minister also announced that hotels undertaking additional investments to renovate, refurbish and expand their property would enjoy 60% re-investment allowance extended to 15 years, adding that the incentive was for a period of 10 years. The following is the full text reported in the Star Newspaper today:-

“The Star Newspaper, Thursday December 24, 2009

Property tax only for sales within five years of purchase

PUTRAJAYA: The real property gains tax (RPGT) announced during the 2010 Budget will now only apply to property sold less than five years from its purchase, Datuk Seri Najib Tun Razak said.

The Prime Minister said the 5% tax would now only be imposed on property sold within five years of the date of purchase.

He said the decision would cause the Government to lose about RM200mil in revenue, adding the move was made following appeals from the Federation of Chinese Associations of Malaysia (Hua Zong) and the business sector.

“This was also decided upon as the Government wants to see a stronger growth in the property sector next year. We are willing to forgo a substantial amount of revenue so that the sector can expand and grow.

“The property sector has shown signs of improvement but we feel that it requires further impetus so that it can continue to grow from strength to strength.

“We have met one of Hua Zong’s request and we hope they will respond accordingly by working even closer with the Government in the future,” he said at the swearing-in ceremony of Hua Zong’s office bearers for the 2009-2011 term at a hotel here last night.

Also present were MCA president Datuk Seri Ong Tee Keat, vice-president Datuk Seri Liow Tiong Lai and Hua Zong president Tan Sri Pheng Yin Huah.

Najib also announced that hotels undertaking additional investments to renovate, refurbish and expand their property would enjoy 60% re-investment allowance extended to 15 years, adding that the incentive was for a period of 10 years.
Najib said he also wanted to see a more active private sector, which he noted had been rather “lethargic” and had been more interested in investing abroad compared to domestically.

He also said that the country needed leaders who were moderate and pragmatic in fighting for the interest of the people.

“The Chinese can fight for the rights of the Chinese while the Malays can fight for the Malays. Likewise with other races. But it does not have to be at the expense of others,” he stressed.”

Article – Raising Revenue Via Real Property Gains Tax (22 December 2009)

An article I read from The Star, Tuesday December 22, 2009:-

“Tax Insights – By Kang Beng Hoe

WHEN the Finance Minister introduced Budget 2010 in October, he surprised many and disappointed some with his tax measures.

Those who were expecting an announcement on a firm date for the implementation of the goods & services tax (GST) were disappointed that the Government has deferred a decision pending further studies on aspects of the tax.

The reintroduction of the real property gains tax (RPGT) came as a surprise to many as it is barely three years since the exemption from the tax was announced.

This is a relatively short time-frame in the context of a structural change in a country’s tax laws. However, we are not in normal times what with the economy still in recovery mode and the Government seeking new ways to reduce its budgetary deficit position.

Both the GST and RPGT are intended to be revenue-generating measures; particularly the GST, which will be broad-based, affecting a significant segment of the community.

It is this feature which makes the tax efficient as it is expected to raise sizeable tax revenue; the very feature which also makes the decision to impose it difficult.

On the other hand, the re-imposed RPGT at a flat rate of 5% is unlikely to result in much tax being collected and there has been speculation that it will not end there and, before long, we will see the scale rates under the previous regime brought back.

These rates applied at 30% to a sale of a property if held for less than two years with a drop in the tax rate for every year longer the property was held.

A property, which was held by an individual for more than five years, was taxed at zero rate. The tax is now 5% regardless of the holding period.

The RPGT is a capital gains tax and it will be useful to understand the characteristics of this form of tax and what other countries are doing in this area.

The RPGT, like all capital gains tax, differs from almost all other forms of taxation in that it is a voluntary tax.

Since the tax is paid only when the property is sold, one can legally avoid paying the tax by holding on to the property.

This phenomenon is known as the “lock-in-effect”. This effect is likely to come into play if the tax is set at a high rate.

This can represent a deliberate policy measure to dampen excessive property speculation.

In fact, the RPGT – which we have today – had its birth in this country as the Land Speculation Tax Act, introduced at a time when real estate speculation was rampant.

It is interesting to note that in September, Vietnam introduced a capital gains tax on property transactions. Every time a property changes hands, the tax is either at 25% of the gain or 2% of the transaction value.

It has been reported that this new tax has “paralysed” the local property market with transactions being reduced by some 80%.

Coincidentally, Malta in its 2010 budget imposed a 12% tax on the transfer value of immovable property with the option of paying tax on the gain at the applicable income tax rate.

So our 5% RPGT rate is somewhat benign in comparison although it has not stopped those who have held their properties for a very long time from being hot under the collar.

This is due to the inherent unfairness of the tax. Unless the capital gains are indexed for inflation, the seller not only pays tax on the real gain in purchasing power but also on the illusory gain attributable to inflation.

The second large inequity of the RPGT, or capital gains tax in general, derive from how economists view it. Land derives its value from the owner’s productive use of it or to sell it to someone who will.

The value of this type of asset is the discounted value of the future stream of income from the use of the asset.

The “gain” that the seller makes would have been reflected in the asset price paid by the buyer and when the buyer derives income from it, he would be taxed on such income when earned.

This is economic double taxation and why many analysts argue that the most equitable rate of tax on capital gains is zero.

Going forward, it would seem that any attempt to use the RPGT to collect more tax by increasing the applicable rate, or rates, would need to consider the inherent paradox that this would bring about.

A higher rate could deter buyers and sellers from entering into property transactions.

This is fine if the intention is to cool down a hot property market. It would then not serve as an effective tax-generating measure.

•Kang Beng Hoe is executive director of Taxand Malaysia Sdn Bhd.”

Can Real Property Gains Tax Be Minimised? (3 November 2009)

Following the recent 2010 budget announcement on 5% Real Property Gains Tax (RPGT) to be levied on disposal of real property with effect from 1 January 2010, questions have been raised as to how to minimise or even avoid this. The following article gave a good overview and good highlight on this:-


“The Star, Tuesday November 3, 2009

Can real property gains tax be minimised?



It may be possible by transferring properties to a company, but there are many pitfalls to consider

AT the recently concluded budget seminar of our firm, a major focus of the 650 attendees was the proposed real property gains tax (RPGT) of 5% to be imposed on disposals of property after Jan 1.

Resigned to the inevitability of the tax and the futility of objections, the ingenious ones posed the question to us on the possibility of tax minimisation by transferring their current properties to a company before Jan 1.

The plan calls for properties which were acquired many years ago at a cheap price (say RM1mil) to be transferred to a company controlled by them at the prevailing market price (say RM3mil).

The transfer will be effected before Jan 1, thus attracting no RPGT on the disposal.

In the future when the property is disposed off by the company, the company will only be taxed on the capital gain over and above the new cost of RM3mil.

If the disposal price by the company is RM4mil, the company will only pay tax on the capital gain of RM1mil (RM4mil less RM3mil) at the rate of 5%, thus resulting in RPGT of RM50,000.

A very ingenious idea indeed. The comparison of taxes payable shows a tax saving of RM100,000 calculated as seen in the table.

Can RPGT Be minimised 3 November 2009 

Before anyone embarks on such a potentially lucrative move, one has to bear in mind many of the pitfalls, some of which are discussed below.

Date of disposal

For the purpose of this discussion, the term “chargeable assets” is used to refer to properties and other assets that can be caught under RPGT.

Chargeable assets include shares in real property companies which are companies that predominantly hold assets in the form of properties or shares in other real property companies. Only chargeable assets disposed on Jan 1 or after will be assessed to RPGT. Those disposed of from April 1, 2007 to Dec 31, 2009 will not. A day is literally night and day for tax purposes!

But the term “disposal date” has a technical definition and it is not the date when the sales price is paid over as we usually consider a sale to be. In sales circles, as they say, a sale is not a sale until the money is collected!

However, for RPGT purposes, a sale is a sale on the day a written agreement is entered into.

Hence, the date that a sale and purchase agreement is entered into for the sale of a property is usually the date of disposal for RPGT purposes. But what if there is no written agreement?

The law provides that the date of disposal is the earlier of two dates – the date that the sales price is fully received or the date that the ownership is transferred. Disposals of this nature may have disposal dates being deferred to a later date, which may fall in the 5% taxable period!

Likewise, disposal dates may be deferred even much later if the sale is dependent on securing approvals from the “Government or an authority, or committee appointed by the Government” – for example, the state government, the Securities Commission (SC) or Foreign Investment Committee.

For these “conditional contracts” which are covered by Para 16 of Schedule 2 of the RPGT Act, the disposal date is when the last of the approvals is obtained.

If a sale and purchase agreement is signed in December 2009 that is subject to SC approval which is obtained in February 2010, the disposal will be treated as having taken place in 2010 and thus subject to the 5% RPGT!

Stamp duty on the transfer

Stamp duty is imposed on the documents for the transfer of title; for example, the memorandum of transfer for transfer of property.

The rates applicable are fairly steep for properties which range from 1% to 3% with the highest rate of 3% being applicable for transfer prices which exceed RM500,000.

Transfers of shares attract duty at the rate of RM3 for every RM1,000 of the transfer price or 0.3%.

However, to avoid stamp duty, one may wish to transfer the property without the transfer of title; for example, the owner holds the property in trust for the company.

What if no transfer of title is effected as in these circumstances? Will the issue of tax avoidance then arise? Perhaps.

Anti-tax avoidance in the RPGT Act

Section 25 of the RPGT Act contains the general anti-avoidance provisions which allow the tax authorities to disregard transactions, vary transactions or impose taxes that should have been imposed.

The law specifies that this right is available if the transactions had the effect of “altering the incidence of tax”, “relieving a person from tax liability” or “evading or avoiding any liability which would otherwise have been imposed”.

Besides these general anti-tax avoidance measures which are also found in the Income Tax Act to discourage income tax avoidance, Section 25 of the RPGT Act also provides for persons who provide loans to related parties; for example, Mr A providing loans to Company A which is owned by him.

The law provides that if Company A sells a property and the property was financed by a loan provided by Mr A, the disposal may be regarded as a disposal by Mr A and not by Company A.

However, the cost of acquisition to Mr A is the market value of the property when Company A acquired the property from Mr A. If Company A had acquired the property from Mr A at the true market value, this anti-tax avoidance provision of the RPGT Act should not pose any problem.

Previous rules by Ministry of Finance (MOF)

A few years ago, the Government had granted a similar tax free period from June 1, 2003 to May 31, 2004.

During that period, the MOF had issued some guidelines to curb the avoidance of RPGT by mandating that any disposal of property must be evidenced by a sales and purchase agreement which must be duly signed and stamped within the exemption period.

Sale of property to a company in exchange for shares

Care should be taken if the property owner transfers a property to a company controlled by him in exchange for shares, or at least 75% in the form of shares. If the transfer is done this way, the shares may be considered to be chargeable assets.

In the future when these shares are sold, the gains will be subject to the RPGT of 5%. The cost of shares for RPGT purposes is not the par value of the shares but the price paid by the property owner for the property plus incidental expenses incurred by him on the acquisition; for example, legal fees.

As such, if Mr B transfers a piece of property acquired for RM1mil to his company (Company B) at market price of RM3mil in exchange for 3 million RM1 shares, and the shares are subsequently sold for RM4mil, the gains on disposal are calculated at RM3mil which is RM4mil sales price less the acquisition price to Mr B of RM1mil.

Indirectly therefore, Mr B is taxed on his full capital gains and not merely on the gains made by Company B owned by him.

RPGT or income tax?

Another aspect which has deep implications is whether the disposer had held the property as stock-in-trade or as a long term investment.

If held as stock-in-trade, the gains on disposal will attract income tax whereas if held as a long term investment, the gains will attract RPGT.

Some property investments which are disposed as part of a quick sale, or as a single isolated transaction in circumstances which give it a cloak of “adventure in the nature of trade”, could be caught under income tax.

Due to space constraints, we are unable to elaborate on this issue. If these disposals are caught under income tax, what then is the advantage of disposing the properties before Jan 1 if the disposer has to pay income tax at 25% on the gains upfront?

The obstacles can be quite challenging as seen above and careful navigation of the tax law is necessary. But I am sure good tax advisers will find a way out of the conundrum!

  • Poon Yew Hoe is a partner of Horwath.”