Will the increase in the Real Property Gains Tax (RPGT) dampen Malaysia’s property market? This article explores the new measure’s possible effects.
After Budget 2019 announced that RPGT will be increased in the coming year, many are speculating its impacts. Every individual (both Malaysian and foreigners) and companies alike will be liable to pay RPGT even after holding it for more than 5 years.
Here is a recap of the new RPGT rates, which came into force on 1 January 2019:
So, what’s the reason for the RPGT rate hike?
You may argue that you have bought a property and you have every right to make a profit on its sale without having to be taxed for it. Previously, homeowners who sell off their property after 5 years are free to do so without any tax implication.
The reasoning behind the rate hike is this: It has been reported in the media that the hike was an effort made by the government to help increase the country’s coffers, not to mitigate property speculation. The new government need all the revenue they can get to help settle the RM1 trillion debt left behind by the previous administration under Najib Razak.
How did Malaysian property owners react?
It goes without saying that the new rate, which translates to additional costs for home sellers, did not sit well with Malaysian citizens and permanent residents who own properties. The new 5% tax on the property’s chargeable gain, regardless if the sale occurs after a decade or three decades of ownership, is painful for genuine homebuyers but is an even bigger blow for upgraders (younger purchasers who plan to start a family/gained higher income) and those who inherit properties.
Chang Kim Loong, the National House Buyers Association’s (HBA) secretary-general, who relates to the sentiment of genuine homebuyers has slammed the new measure. RPGT was meant to curb speculation and property flipping. However, by imposing a 5% tax with no expiry date, RPGT now primarily serves to tax the public for their hard-earned investment gains.
Chang shared that HBA had previously suggested to the government to maintain the RPGT rate (of 0%) for property owners who sell off two properties or less and to only introduce a tax hike for those who dispose of their third and subsequent properties.
Many people can only afford to buy two properties at most; one for own stay and another for long term investment. By charging RPGT on people who had held properties for 5 years or more, the Pakatan Harapan government is effectively imposing a tax on inflation. – Chang Kim Loong, HBA –
When announced last year, the new RPGT rates also raised the concern of property owners who have bought and owned land dozens of years before 2000, as well as those who have inherited decades-old property as the next of kin. When disposing an old property/land, its market value would have appreciated significantly over the years, resulting in a pretty steep chargeable gain and the resultant 5% tx payment which have to be made.
Nevertheless, our Finance Minister Lim Guan Eng has recently cleared the air and assured property owners via a media statement, that the chargeable gains for RPGT will only be calculated from the valuation year of 2000, even if the land or building was acquired before that.
This announcement is just a small discount though. Many still feel that the RPGT should have instead been tweaked to address the issue of property speculation/flipping more effectively, where the government could have increased RPGT for the first four years of property ownership, rather than in the later years.
What are the impacts on foreign property ownership?
The new RPGT rate for non-citizens and foreigners which has been doubled to 10% (from 5%) further adds salt to a previous wound – under Budget 2018, it was announced that foreigners need to retain 7% of the deposit from sale of properties for the purpose of RPGT, whereas the deposit amount is only 3% for locals and Permanent Resident holders. On top of that, the stamp duty for properties costing more than RM1 million has been increased from 3% to 4% in 2019.
Some parties have highlighted that the high-end/luxury property market will be adversely affected as foreigners are the prime consumers of these properties considering their higher purchasing power and the fact that in most states, they can only purchase properties that are priced at least RM 1 million.
However, it should be noted that foreigners currently only own roughly 1% of properties in Malaysia, as revealed by Housing and Local Government Minister, Zuraida Kamaruddin during a Dewan Rakyat assembly on 13 November 2018.
How will the financial market be affected?
As highlighted in our previous article, Real Property Companies (RPCs) are subjected to RPGT too when they sell their shares. The conundrum here is that the share value increases due to the company’s performance, which is not only liable to real property but other non-property operations like manufacturing too. When the companies sell shares, they are valued at their market price.
Yeo Eng Ping, a tax expert at Ernst & Young shared her insight on the matter in a newspaper interview in November 2018 – she said that RPGT charged on profit from the sale of RPC shares is not only on their real property, but on the gross market value of the underlying subsequent properties. This is partially double taxation for RPC and may artificially vary the value of other unrelated blocks of shares. Now, this conflict is even higher with the increase in RPGT from 5% to 10% from 2019 onwards.
How will the property market be affected?
It is true that there is an oversupply of properties priced above RM500,000, but Bank Negara Malaysia has shared that these homes are only within the reach of 5.4% of the population or households earning RM15,000 and above. Thus as the investors’ interest in Malaysian properties wanes, the mid-range and higher-end property market might suffer, further worsening the current property overhang situation.
There is a possibility that prices of sub-sale homes will increase too. President of Malaysian Institute of Architects (PAM), Ar. Ezumi Harzani Ismail opined that although RPGT is intended to curb speculation, it affects the actual sub-sale transactions by home-owners upgrading to a better or bigger new home down the road.
Any renovation of refurbishment works done by homeowners inadvertently raises the values of sub-sale homes too. And RPGT which will be taxing on the increase of the property value upon sale may cause property price inflation to cover the tax factor. –PAM-
On the other side of the coin, several industry stakeholders believe that the RPGT increase is marginal and is too insignificant to have a huge impact on the property market. The reasoning is that since the owner already makes a handsome profit upon disposal, the 5% tax should not be any problem at all.
We would advise home sellers to make use of the available RPGT exemptions to minimise taxation costs as much as possible. Those who can hold off selling for a little while longer might want to wait for the next Budget announcement and hope for a more lenient RPGT in the coming year(s).
Edited by Reena Kaur Bhatt