Capital gains are generally not subjected to income tax in Malaysia. However, the real property gains tax (RPGT) is charged on chargeable gains arising from the disposal of real property situated in Malaysia, or of interest, options or other rights in or over such land, as well as the disposal of shares in real property companies.
Effective 1 January 2013, gains from the disposal of residential and commercial properties are taxed between 0% and 15% depending on the holding period of real properties as follows:
Of importance is the fact that RPGT applies when property ownership is seen to be long-term capital. Where ownership is speculative, the Inland Revenue Board (IRB) may view the disposal as revenue and seek to levy income tax instead. Income tax is levied at 25% for companies and up to 26% for Malaysian individuals. Of course, compared to income tax, the RPGT is preferable.
However, defining which one is capital and which one is revenue can be subjective and may depend on property ownership and the taxpayer’s profile. For example, the sale of a residence after 5 years of ownership is more likely a capital transaction. On the other hand, the sale of an empty plot of land that has just been subdivided for a project is likely to be treated as revenue.
Another scenario involves active property transactions; for example, a person who buys and sells more than 2 properties in 2 years. His property investment profit may be treated as a business income and he is imposed with an income tax of up to 26% instead of 15% of the RPGT.
Kevin Cheong, managing director of Acescube (M) Sdn Bhd, said, “Under the current market conditions, such as the softening market, uncertainties of the United States and Eurozone economy, and the uncertainties of our politics, I urge property investors to reserve sufficient cash flow, especially those who are active in property ‘trading’. Every property transaction incurs legal fees, stamp duty, bank loan interest, administrative cost, commission, quit rent, assessment and miscellaneous costs.”
The following case study shows the actual gain from a residential property investment for a period of 2 years (assuming a rental collection of 2 years) at 80% loan at Base Lending Rate (BLR) – 2.2%.
Hence, the important lesson here is to factor in every expense of the property investment and sell it at a profit. A selling price of less than RM300,000 for the aforementioned property is a deficit investment return.
Cheong said, “I asked my friends and clients why they did not take any loan for all the recent purchases they made while they work at high-income jobs. Their reply was that they did not like paying interest to the bank. They were also afraid of the interest rates going up, just like what happened during the Asian currency crisis of 1997/98. Their goal was to retire debt-free”.
In actual fact, while it may take the average person 5 to 10 years to save RM100,000, it takes less than 1 month to borrow the same amount for property investments. Hence, why wait to save when you can start investing now using borrowed money. You will be able to get rich quicker by starting your investment journey that much earlier.
More importantly, you can now slash your loan tenure and interest comfortably by 50%. All you need to do now is to keep track of the fluctuation of the BLR and make accurate monthly repayments accordingly. Accurate repayment in this case is defined as the right repayment amount calculated based on the loan principal and interest calculation of the month with your decided tenure to settle your loan.
Cheong explained, “I have been studying the principal and interest rate of our housing loan/bank practice for the past 16 years. The major factor that is ‘killing’ many of us is the fluctuation of the BLR. Many of us are not aware of the borrower’s rights and responsibilities. Hence, we always ignore the fluctuation of the BLR and continue to pay our loans with the incorrect amount of repayment. This will end up adding another 50 to 100 extra months of loan repayment subject to the actual loan tenure.”
He added, “In my previous article (published in the October 2012 issue), I pointed out that when the BLR increases 0.5% for a RM300,000 loan after 12 months of repayment with reducing principal, the costing or interest increases by another RM106.60. The additional interest payment is not RM106.60 for the balance of the tenure, but is compounded throughout the balance of the tenure.”
What if the BLR increases by another 2% or more? In the past 20 years of the BLR’s history, its highest record was at 12% p.a, while the average payable interest is 8% p.a. Currently, the BLR is at 6.6%. As such, Bank Negara Malaysia has implemented a responsible lending guideline to guide every loan borrower in properly managing their loan to avoid unending loan repayment.
The only solution is to fully settle the loan, however, the majority of our income does not permit us to do that. If you are actively buying and reselling property (defined as more than 2 transactions in 2 years), you may be imposed with an income tax of 26% instead of 10% of the RPGT. If so, you are not the biggest winner of the investment.
This article is contributed by AceScube, which provides training in loan calculation, banking and finance knowledge and other business and communications know-how for entrepreneurs. For more information on starting a business with them, you may drop them an email at firstname.lastname@example.org to find out more about BLR Management.