The new RPGT ruling has created some dissent in the market. Many feel that the tax system should have been fine-tuned to address property speculation/flipping more effectively. Samuel Tan shares a few suggestions for improvement which are worth exploring.
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Real Property Gains Tax (RPGT) 2021-2022 in Malaysia
RPGT in Malaysia: A brief history, latest exemptions and calculation
Earlier this year we learnt that Malaysian homebuyers will have to start paying a 5% tax should they sell off their property even after 5 years of ownership. The new tax rate did not sit well with numerous parties as it has one major drawback.
RPGT was first introduced to curb property speculation and flipping. However, the imposition of the 5% RPGT from the sixth year and onwards in perpetuity, means that residential owners are now being treated as commercial owners. In other words, the RPGT now primarily serves to tax the public for their hard-earned investment gains.
Moreover, Samuel explains that the new tax adversely impacts long-term property investors rather than short-term speculators who take advantage of certain loopholes to gain from flipping. These property flippers operate in such a way where they purchase a unit – and before the Sale and Purchase Agreement is signed/finalised or before the transfer of ownership (on the house titles) from the developer takes place – the speculator would immediately secure a potential buyer who is willing to pay the much higher resale price.
Sometimes, this “resale” could be settled even before the developer launches a project. Speculators are able to profit from the current banking system which is sometimes biased towards high-income earners – most banks will accept a much higher Debt to Service ratio (DSR) of up to 150% if the home loan applicant’s salary exceeds a certain amount! The DSR is a measure of a borrower’s creditworthiness and is usually is benchmarked at 60-70% for the typical homeowner.
In retrospect, speculators are not breaking any laws, but scrutiny on bulk purchases is necessary as they could create price fluctuations and trigger artificial housing demand. Worse still, they deprive ordinary house-buyers of equal purchasing opportunities.
The impacts of this new revision are further discussed here.
In light of the inexhaustible list of impacts, it will be pertinent to consider some other alternatives or a hybrid of them to help take the load off genuine homeowners:
#1 Differential exemptions
Local individuals/Permanent residents (PR) should be exempted from RPGT after 5 years while resident companies will be levied at 10%. As for non-citizens and foreign companies, they will be taxed at 5% and 10% respectively after the 5th year.
#2 Higher RPGT exemption ( Tax relief )
Currently, an exemption of 10% of the profits or RM10,000 per transaction (whichever is higher) is allowable for individuals and companies. This should be tweaked to a higher amount or per centum.
#3 RPGT effective date
To avoid any retrospective effect, the new RPGT rates as announced under Budget 2019 should be applicable only for properties acquired after December 31, 2018. This will serve as a caveat to new investors without being punitive to existing property owners.
#4 Treatment on bulk purchase
Bulk purchase deemed by the Inland Revenue Board (IRB) to be speculative in nature should be treated differently from other purchases. Obviously, the definition of ‘bulk purchase’ should be defined and the tax treatment on such activities must be clearly and fairly spelt out.
#5 Better credit system mechanism
An indirect way to control speculative activities is to draft and implement better banking policies and credit systems. Admittedly, many initiatives are already in place but these could be improved further.
#6 Tax calculation date
Currently, the calculation for chargeable gains applies from the date of signing the SPA. Usually, it takes 2 to 3 years to hand over the keys to the new house owners. By then, 2 to 3 years of holding would have already passed. Effectively, owners need to hold the property for another 2 years before reaching Year 5.
An alternative is to establish the handover date as the date of acquisition rather than using the date of signing of the SPA. This would mean the chargeable gains will begin from the date of hand over, and it shall remain chargeable until 5 years later.
#7 Holding period for low-cost and low-medium cost housing
Low or medium cost housing priced below RM200,000 is exempted from RPGT. These properties are usually built for the Bottom 40% income group (B40) and their interest has to be protected more so from speculative elements.
One way to avoid speculation in this price category is to impose a mandatory holding of at least 5 years before the owners are allowed to dispose of such properties. Unless valid reasons are given and subject to the approval from the relevant authorities, the resale of these houses shall not be allowed.
#8 Longer holding period
The government can consider a new tax structure whereby the 5% (for individuals) and 10% (for companies and non-citizens) tax on property owners shall be exempted from RPGT if they hold the properties for more than 10 years.
#9 Inflation index
A tax taking into account inflationary pressure can be created in the likes of an index structure. This will be more equitable to long term investors.
The RPGT 1976 is a necessary evil to curb excessive speculation. This way, house prices will be more reflective of the actual supply and demand, resulting in accurate market prices. Although various changes were made over the past years, these were meant to reflect the dynamics of the prevailing market.
The latest revisions as per Budget 2019 is seen to be inequitable and will lead to various adverse impacts. It is high time that we consider the effectiveness and equity of said changes.