Higher RPGT, Rakyat Sacrificed?
by LL Koong
Russell Street in Hong Kong’s Causeway Bay outstripped Fifth Avenue in Manhattan, New York for the first time in five years, to become the World’s Priciest Shopping Streets, according to a survey of retail locations released last year December by Cushman & Wakefield’s Main Streets across the World Report. On the contrary, the recent under performance of the Malaysian property market has left much to be desired. Perhaps, this has made me think of the controversy over the proposals in the Real Property Gains Tax which was announced in the 2019 Budget.
Since 2019 Budget was tabled, I have shared my personal views on the measures that were announced and its implications to businesses in talks, seminars, forums or media. Some grey areas, particularly on tax technical and practical issues that are faced by the industry, have been brought up and clarified during the dialogues with the Inland Revenue Board of Malaysia.
It is reassuring to note that certain feedbacks and suggestions, have been taken into serious consideration for adjustment by the authorities. However, despite many urges to abolish the new measurement of RPGT, it seems no positive changes have been implemented on the increase of 5% of RPGT for disposals after fifth year of acquisition.
Sustainability is a core platform for our property market as the existing RPGT rates have demonstrated its effectiveness to curb speculation activities in property Sector. However, the recent announcement of RPGT 5% as opposed to current nil tax on the gain from disposal of real properties for which the holding period exceed five years for Malaysian Individual may lead to quicker disposal upon the 5th year holding period as there is no carrot for longer term investment. There were also nationwide concerns over the “non-expiry” holding period between the date of acquisition and the date of disposal of such property.
Perhaps, we should first delve into how RPGT applies to the general public.
Real Property Gains Tax (RPGT) is a tax on chargeable gain derived from disposal of property 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. However, it was repealed in 1975 and replaced by the RPGTA, effective Nov 7, 1975.
In order to stimulate the market, RPGT was temporarily waived from 1 April 2007 to December 2009. It was then reintroduced in 2010.
In 2014, the RPGT for gains on properties disposed within the holding period of up to three years was increased to 30%, whereas for disposals within the holding period up to four and five years were increased to 20% and 15% respectively. For disposals made in the sixth and subsequent years, no RPGT is imposed on Malaysia citizens.
However, effective Jan 1, 2019, the RPGT chargeable on profit made from the disposals of properties in the sixth and following years by Malaysian individuals was raised to 5% from zero previously. It is nevertheless exempted for low-cost, low-medium cost and affordable housing priced at RM200,000 and below.
As per schedule 3 of the RPGT Act 1976, Malaysians will be given a once-in-a-lifetime exemption on any chargeable gain arising from the disposal of his/her private residence if he/she elects in writing for the exemption to apply to that private residence.
Before the national budget was unveiled, Prime Minister Tun Dr. Mahathir had acknowledged that new taxes will be introduced in order to raise our revenue to pay off the staggering debts left by the previous administration, and that we must expect hard times and make necessary sacrifices. Since then, markets have speculated the inclusion of Inheritance Tax, Capital Gains Tax and the Soda Tax implementation in 2019 Budget. However, I believed the government would not introduce the much-speculated taxes on inheritance and capital gains so soon as it needs an in-depth research and tax impact due-diligence study.
The Inheritance Tax was previously implemented in Malaysia and was subsequently repealed in 1991. This tax is designed to tax the wealthy, particularly properties above the legislated value included in the death estate left to a direct descendant, are subject to the tax.
Although there are no Capital Gains Tax or Inheritance Tax in the 2019 Budget, the imposition of a 5% RPGT for gains received from disposal of properties held beyond five years of owning them has a more significant impact on long term property owners. As this new measure does not have an expiry date, which implies this tax will forever be imposed irrespective of its holding period, it may be viewed similarly to the Inheritance Tax. In addition, in a situation where the properties are inherited from generation to generation, what will be the amount payable as RPGT?
As there were too many concerns on the cut-off date of RPGT, our Finance Minister clarified that RPGT would only be calculated from year 2000 onwards at Dewan Rakyat during his wrapping-up speech on 2019 Budget. This meant that all properties, regardless of when they were bought will apply year 2000 as the valuation year for the RPGT calculation.
However, the events of the 1997 financial crisis caused the crash of the Malaysian economy and house prices to fall sharply from 1998, and only recovered in year 2000. If the RPGT has to be calculated from year 2000 onwards, the disposal price from now is much higher than the price in year 2000.
Having said that, RPGT has now become a pure taxation instrument instead of a tax to curb speculation. This is in line with the government’s intent to increase its coffer, in order to meet the shortfall after the reintroduction of SST to replace GST. Malaysian individuals are now bearing the extra tax burden to contribute for national revenue, as stamp duty rate for property transfer worth more than RM1 million will be increased from 3% to 4% with effect from 1 July 2019 of which was announced by Ministry of Finance on 29 December 2018, while the annual income tax rate has not been reduced.
Therefore, it is hoped that the authorities will consider setting a cap for the year for disposal of property at 8-10 years of ownership, as the impending legislation is believed to be sufficient for the government to raise additional revenues fairly quickly.
In a “cash is king” world, although rising rate of 5% in RPGT is not a positive news to the market, it is not expected to create a long term negative impact, as some investors may not regard the 5% tax on profit as one of their foremost concerns in holding back the disposal of their property for their "cash-cow"!
As a matter of fact, the Malaysian property market decline stemmed from a vast range of factors, with the rejection rate from banks currently standing at a decade-high being one of the pivotal causes. Moreover, unaffordability and the mismatch between supply and demand of affordable housing, as well as the oversupply of properties priced above RM500,000, has caused home buyers to stretch themselves financially as these houses are only within the reach of 5.4% of the population of which households earning RM15,000 and above, according to the Bank Negara. Hence, what the property market truly lacks is affordable housing!
Frankly, although the government aims to increase home ownership, the lack of access to financing is a recurring problem. There are many new properties launched including affordable homes that remain empty despite the high demand, and we are now in a situation where banks are tightening lending requirements. Hence, more concrete measures should be introduced by the authorities to help to fix the issue by selling off the overhang houses and reducing supply-demand imbalances in the property market.
2018 has brought us a new hope as we have waited a staggering 61 years to see a change of government. As 2019 rolls around, I wish Malaysia to have a fresh beginning, and that all Malaysian shall be able to revel in the benefits of “Fund my Home” and ultimately “Fund for Home”！