iProperty.com gets some professional help in clearing out some GST uncertainties plaguing the real estate market from Fennie Lim (FL), Tax Executive Director of Crowe Horwath Tax Sdn Bhd and Vicky How (VH), Principal of Bloomland Property Consultants.
What has been some of the challenges that property developers faced in complying with GST rules, since its implementation?
FL: The GST has seen a few rounds of amendments since its initial announcement on 23rd October 2013. Most developers were hoping that after several rounds of amendments, the Royal Malaysian Customs (RMC) is able to provide some clarity on the GST treatment for property developers. Unfortunately, quite a number of uncertainties remain unclarified as at to date. In addition, the last guide for property developers was issued on 30th March 2015 and the revised version is yet to be released to the public. Property developers are facing the following challenges:
VH: For commercial properties, the invoices that are billed to purchasers will include a GST charge of 6%. In order to attract buyers, some developers absorb the GST cost themselves. Most developers usually make an approximate 20-25% net profit on the sale of a commercial development. Hence, some, if not most developers are looking at a lower profit margin post GST, as they rather absorb the extra 6% rather than not making a sale and any profit at all.
Even though the sale, purchase and rental of residential properties are exempted from GST, prices of primary residential properties have seen an increase due to additional costs for material, labour and fixtures & fittings. What was the knock on effect in the secondary property market and rental market, respectively?
FL: The indirect increase in the cost of new properties being built post GST has resulted in an increase in prices of secondary properties as well as in rental charges. Likewise, I foresee that there would be an increase in maintenance fees as well, as the joint management body of stratified properties are not allowed to claim input tax credit on certain expenses, such as cleaning, landscaping, general repairs etc.
In October 2015, the Customs Department amended the individual supply commercial property section, causing more individual property investors to fall within the sphere of a GST registrant. What is your advice for those looking to invest in commercial properties?
FL: There are two types of investors. The first are those who will invest for their own use and the second are for long term investment. Those who fall within the first group should not have any concern if their intention is to buy a commercial property for their own business use. In this case, they are able to claim back all the input tax credit incurred in acquiring of the commercial property if they are registered for GST.
For the second group of buyers, their decision for investing in commercial properties may be affected as most individuals try to avoid becoming a GST registrant. Nevertheless, it would be difficult to dodge the responsibility once they fall within the sphere of a GST registrant.
There is an option of buying commercial properties under a company. However, this method may prove more costly as the investor will have to bear the recurring maintenance costs besides having to pay a minimum of 5% Real Property Gains Tax (RPGT) after a 5-year holding period. A summary of the RPGT rates is listed below:
Hence, my advice is that whenever there is a taxable supply above RM500,000 (whether by selling off 1 or 2 units of commercial properties or generating rental income from the commercial properties), investors should analyse their situation and comply with the GST registration requirements accordingly.
VH: As commercial properties fall under ‘Standard Rated’ items, a 6%GST will be charged on a sale, even though the property’s selling price remains unchanged in the SPA. For instance, a shop house sold for RM2 million will include a GST tax invoice of RM120,000, which will be borne by the buyer. This would decrease the rental yield of the investor (buyer) unless he is able to secure tenants who are willing to pay higher rent. The tenant will be imposed an additional 6% charge, for instance, RM480 for a monthly rent of RM8,000.
Given so, investors are advised to review their leasing agreement so that it will include relevant GST clauses. Also, they should be careful in ensuring that the monthly rental charged is not too high as this would discourage potential tenants.
What are the advantages and disadvantages for commercial property owners/investors in becoming a GST registrant?
FL: Other than being a GST registrant where one can claim back the input tax credit for the purchase of the commercial properties, there is no other substantial advantage. A GST registrant would have to comply with all the GST laws and must remain as a registered person for at least 2 years if they are registered under voluntary basis.
On the flip side, it may be difficult for a person to qualify as a registrant as it is not easy to justify to the RMC that the individual’s business or commercial property would have a foreseeable taxable income that exceeds RM500,000 a year.
VH: Once you are a GST registrant, you have to be especially mindful of the pertaining rules and regulations. If you fail to do so, the fines can be quite heavy. Any general offence could result in a jail sentence of up to two years or a maximum fine of RM30,000.