Property tax exemption a double-edged sword
14/04/2007 The Star CURRENT TAX MATTER By DR JEYAPALAN KASIPILLAI

While exempting property transactions from real property gains tax (RPGT) will provide a boost to the real estate sector, the move may also spur greater market speculation. In view of this, the Government’s move to exempt rather than repeal RPGT may provide a safety net over the long term.

THE Real Property Gains Tax Act 1976 (RPGTA) has not been abolished but exempted with effect from April 1. Effectively, the Government has exempted all persons from the provisions of the RPGTA on assets disposed after March 31, 2007. “Person” includes a company, a partnership, a body of persons, an executor of an estate and a corporation sole.

Therefore, all disposals occurring from April 1, 2007 will not only be exempted from the property gains tax but they are no longer required to file the forms referred to as CKHT 1 and 2 for any sale and purchase of property.

There are other monetary gains accruing to both disposers and acquirers of the assets. For example, no solicitor will now charge his client the fees for preparation and filing of the CKHT forms, which are fixed at RM300 and RM200 per form respectively under the Solicitors Remuneration Order 2005.

For over 30 years, RPGT was the only capital gains tax in Malaysia, charged on gains arising from the disposal of real property or shares in a real property company.

The term “real property” includes any landed property in Malaysia such as residential properties (apartments, condominiums and houses), commercial properties (factories, office buildings, shop houses) and land. This move to exempt such gains from tax would boost the real property industry in Malaysia.

The first legislation to tax gains from the disposal of real property was introduced via the Land Speculation Tax Act 1974 (LSTA) which came into force on Dec 6, 1973.

LSTA was introduced to discourage speculative activities in property as such activities triggered artificial market demand in the real estate market. The act provided for a single tax rate of 50% on chargeable gains in properties disposed within two years from the date of acquisition and if the disposal consideration was greater than RM200,000.

The LSTA was, however, repealed in 1975 and replaced by the RPGTA effective from Nov 7, 1975.

Resident individuals were taxed at rates of 0% to 30% depending on the holding period but companies had to pay a minimum of 5% even if real properties were sold after the fifth year. However, an individual who is not a Malaysian citizen or permanent resident will be charged at the rate of 30% of gains made from the disposal of the asset.

The construction sector will gain tremendously from the removal of RPGT as more foreigners will now be lured to purchase local properties.

Available data suggests that prices of properties, particularly condominiums located in the Klang Valley, have risen following the even more pronounced trend in Singapore.

On a positive note, higher property transactions would generate greater stamp duty collections. The revenue generated from RPGT in 2006 was around RM250mil, accounting for 0.4% of direct taxes. As such abolishing the tax is indeed timely.

There are downside risks in exempting RPGT. It is contended that in the absence of RPGTA, taxpayers would shift personal and business income into assets that could then be sold at an appreciated value, which would then appear to make the entire tax system unfair. In a booming property market, capital gains tax not only raises government revenue but more importantly improve economic efficiency.

The authorities had not taken into account inflationary effects when computing property gains tax and this led to inequities and inefficiencies because it may cause taxes to be paid on phantom profits. For instance, gains of real property disposals by a company after five years would attract a 5% tax but it is possible for the company to have incurred a loss after taking into account real and not nominal values. This was one weakness of the real property tax.

Nevertheless, many would argue against introducing indexation of capital gains tax to inflation on the grounds that it was administratively too complex and costly. The RPGT Exemption (No 2) Order was gazetted and published on April 1. To expedite the implementation of the announcement made by the Prime Minister, the Government may have taken this approach in issuing an Exemption Order rather than repealing the Act.

Since RPGTA has not been abolished, it would be easier for policy makers to re-introduce the Act when the need arises to stem unwarranted speculation and curb excessive rise in real property prices.

Dr Jeyapalan Kasipillai is a professor and chair of Malaysian Business at the School of Business, Monash University, Sunway Campus. He is also a council member of the Malaysian Institute of Taxation.