Dato' Philip Chan shares his concerns on the reinstatement of real property gains tax
On 23 October 2009, the Prime Minister and Minister of Finance, Dato' Sri Mohd Najib bin Tun Razak, announced in his Budget 2010 speech that real property gains tax (“RPGT”) would be reinstated from 1 January 2010 to curb speculative activities in the property market.
Prior to the Real Property Gains Tax Act 1976 (“the Act”), there existed the Lands Speculation Tax Act 1974 (“LSTA”) which imposed a 50% tax on property gains arising from disposals of properties within 2 years of acquisition if the amount was more than RM200,000 to discourage speculation in the property market in order to avoid inflation in property prices.
The Act replaced the LSTA from 7 November 1975 and imposed taxes on real property gains for about 30 years before the Real Property Gains Tax Exemption (No 2) Order 2007 (“Exemption Order 2007”) was gazetted to exempt all persons from the provisions of the Act (including the payment of RPGT) in respect of any disposal of chargeable assets from 1 April 2007.
The legal position under the Act before Exemption Order 2007 was that RPGT was imposed at rates ranging from 30% to 5% for disposals within 2 years to 5 years of acquisition. There was no tax payable with respect to disposals made by individuals in or after the 6th year of acquisition.
Previously, both the vendor and purchaser of the property had to submit returns (by way of CKHT forms) to the Director General of Inland Revenue ("DG") under Section 13 within 1 month from the date of disposal of the asset. The purchaser had to retain the whole of the monetary consideration or a sum not exceeding 5% of the total consideration, whichever was lesser, until such time he received a Certificate of Clearance from the DG. The issue of a Certificate of Clearance would release the purchaser from the afore-mentioned retention obligation.
The Finance Bill 2009 and the Real Property Gains Tax (Exemption) Order 2009 (“Exemption Order 2009”) introduce proposals to amend the Act. These amendments will re-introduce tax on gains made from the disposal of real property or shares in real property companies from 1 January 2010.
The level of exemption given to individuals will be increased from RM5,000 to RM10,000 or 10% of the chargeable gains, whichever is the higher. Further, existing exemptions, namely gifts between parent and child, husband and wife, grandparent and grandchild and an elective once in a lifetime disposal of a residential property would be retained.
As announced, the tax rate for chargeable gains will be a flat rate of 5% irrespective of the duration for which the property was held. The Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah clarified on 25 October 2009 that this flat rate tax would be implemented through the Exemption Order 2009.
The Exemption Order 2009 sets out a formula which is to be applied to determine the exempted chargeable gain on the disposal of an asset, whereafter the taxable chargeable gain can be ascertained.
It is noted that the Exemption Order 2009 reduces the chargeable gain to achieve the effective rate of 5% while preserving the tax rates of 5% to 30% under the Act. A simple administrative order by the Minister of Finance to revoke the Exemption Order 2009 will return us to the tax rates set out in the Act.
The time period for filing the CKHT forms has been extended to 60 days from the date of disposal of a chargeable asset.
A more controversial amendment in the Finance Bill 2009 is the amendment to Section 21B of the Act. RPGT is to be collected through a withholding mechanism whereby the purchaser withholds the whole of the monetary consideration or 2% of the purchase consideration, whichever is the lesser ("Retention Sum") and pays the same to the Inland Revenue Board ("IRB") within 60 days of the disposal.
Under the previous regime, if the amount of RPGT assessed is paid, the DG may issue a Certificate of Clearance which would release the purchaser from his obligation to retain part of the purchase consideration.
Upon the amendments coming into force, Section 21B will no longer provide any exception to the purchaser's obligations to retain the Retention Sum and to pay the same to the DG. In other words, the purchaser must comply with his obligations under Section 21B even if the vendor has received a notice of assessment and paid the tax assessed or has received a Certificate of Non-Chargeability.
Similarly, the purchaser is required to pay the Retention Sum to the DG even if the vendor incurs a loss on the disposal. Failure to retain the Retention Sum renders the purchaser liable to the DG for the same as a debt due from him.
Given that the Retention Sum is to be paid within 60 days, the purchaser is likely to retain this amount from the deposit and the vendor will have to seek a refund of any overpayment under Section 24 of the Act. If the transaction is aborted after the Retention Sum has been paid to the DG, the vendor will have to return this amount to the purchaser (unless he is entitled to and does forfeit the deposit) and seek a refund of the Retention Sum from the DG.
As most property transactions take more than 60 days to be completed, it is not inconceivable that the DG will be inundated with numerous applications for the refund of excess Retention Sum paid.
Sub-paragraph 6(1)(c) of Schedule 2 of the Act will be amended to exclude as incidental costs any interest paid on capital used to acquire the asset. This means that interest paid on capital employed to acquire the asset (such as housing loans) will no longer be deductible from the chargeable gain.
Vendors who may have entered into agreements or who propose to execute sale and purchase agreements prior to the close of this year may feel rather smug that they would escape the imposition of RPGT. Vendors in such transactions which require the approval of the Government or any Government appointed authority or committee ("Regulatory Approvals") would feel rather less sanguine were they to be fully aware of the implications of paragraph 16 of Schedule 2 of the Act.
In cases of conditional contracts which are subject to Regulatory Approvals, paragraph 16 inter alia deems the date of disposal to be the date on which such approval is, or the last of such approvals are, obtained. The effects of Paragraph 16 are as follows:
(1) even if the contract has been signed before 1 January 2010, the proposed amendments will apply to the transaction if it is subject to Regulatory Approvals and such approvals are obtained after 31 December 2009;
(2) the time frame for compliance with Section 13 (Filing of CKHT Forms) and Section 21B (Purchaser's Retention and Payment Obligations) would commence on the date the Regulatory Approvals are obtained.
If existing sale and purchase agreements which are subject to Regulatory Approvals have not provided for compliance with the proposed amendments under the Finance Bill 2009, it will be necessary for the parties to execute supplementary agreements to address these issues if the Regulatory Approvals are unlikely to be obtained by 31 December 2009.
While the tax rate may not seem overly burdensome, what riles investors is its reinstatement less than 3 years after its suspension without advance warning. Foreign investors frequently decry the lack of clarity and consistency in policies affecting investment in Malaysia. This latest reversal would dampen enthusiasm for properties in Malaysia.
Double edged sword
The flexibility afforded by the mechanism of the ministerial order i.e. Exemption Order 2009 is a double edged sword. The Government could quite easily satisfy the concerns of investors and property owners by revoking it and replacing it with yet another suspension order. Given the Government's stated desire to broaden the tax base, what can also quite easily happen is that Exemption Order 2009 could be revoked, heralding the return of the staggered tax rates of 5% to 30%.
A stated objective of the reinstatement of RPGT is to curb speculation in properties in Malaysia. However, the removal of the exemption for disposals by individuals in the 6th year after acquisition and thereafter has led to a public outcry. House owners argue that anyone who has held his property for more than 5 years cannot be described as a speculator. Increases in values of properties could be due partly to inflation and therefore rather illusory.
1Malaysia 1Principal Residence?
Another criticism of the current RPGT regime is that an individual is allowed to claim RPGT exemption for a principal residence only once in his lifetime. Many are of the view that this is insufficient and unrealistic as a person is likely to change his principal residence more than once in the course of his life.
There is much that we can learn from Singapore which does not tax gains from the sale of Singapore properties which are considered capital in nature unless the seller is deemed to be trading in properties. The Singapore Inland Revenue Authority would determine in each case whether the gains are taxable based on a set of criteria known as “badges of trade” such as frequency of transactions of selling and buying properties, reasons to acquire or sell, financial means of holding the property for the long term and the holding period.
Like Singapore, the best solution is not to reinstate RPGT but rather, to tax trading transactions to curb speculation.
Looking Further South
With regards to the argument that the Act is not fair to owners who have held their properties for a long time and cannot be regarded as speculators, the IRB could look at Australia which uses the indexation method for properties acquired before 21 September 1999. For these properties, the Australian Taxations Office’s method of indexation of capital gains takes into account movements of the Consumer Price Index (CPI). In short, this method recognizes the effects of inflation on the value of the property over the years since the property was acquired. The capital gain is calculated by applying the relevant indexation factor to increase the cost base thereby reducing the capital gain.
To address the position of owners moving their principal residence more than once, the situation in Australia is once again instructive. In Australia, main residence exemptions are given for one’s main residence. Unlike Malaysia, the exemption can be claimed more than once.
The following factors (with varying weightage given based on an individual's circumstances) are to be taken into consideration to determine whether a dwelling is a person's “main residence”, namely whether the person and his family reside in it, whether his personal belongings are in it, whether it is the address to which his mail is delivered, whether it is his address on the electoral roll and whether services (such as telephone, gas and electricity) are connected.
There is also a special rule applicable when an individual moves from one main residence to another. Both dwellings are treated as an individual's "main residence" for an overlapping period of up to 6 months if certain conditions are satisfied.
It is a misconception that all domestic problems can only be solved through imported solutions, undertaken after extensive and costly "rombongan lawatan sambil belajar" (study tours). Some of the issues highlighted above can be solved through home-grown innovation. The problems with conditional contracts can be resolved through the issue of an order by the Government to clarify that all disposals pursuant to agreements entered into prior to 2010 are to be exempted from RPGT regardless of whether the agreements are subject to Regulatory Approvals.
Second, to avoid allegations of shifting goalposts, major decisions on policies affecting investments should be implemented through amendments of the relevant legislation, after consultation with stakeholders, and not through ministerial orders.
On 4 November 2009, the Deputy Minister of International Trade and Industry Datuk Mukhriz Mahathir remarked that RPGT could be adjusted depending on the feedback and the effect on the property market.
The feedback has been negative and the Government cannot wait until the effects are apparent. If the Government cannot, or will not, suspend RPGT yet again, they should at least address the concerns raised above as its reinstatement in the proposed form will certainly result in less gain and, in all likelihood, cause more pain and hassle to property owners.
DATO' PHILIP CHAN (