Accounting Crash Course

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.”

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.”