While property investors focus on how to maximize their claims for deduction against the rental income derived from their investment properties, many neglect to keep track of their allowable deductions against the gains arising from the disposal of their investment properties, when they eventually sell their properties. This is probably because investment properties are meant to be kept for mid to long term, so if a property is sold after 5 years (under the current Real Property Gains Tax regime), any capital expenditure incurred on the property is of no consequence to the investor, since there will be no RPGT arising for disposal of properties after 5 years from the date of its acquisition. But what if a good deal comes along before that period and the offer is too good to resist?
For property investors, it would be interesting to know how Real Property Gains Tax (RPGT) is computed on the disposal of a property, so that the disposer could understand its components and the tax deductions which are available to the disposer.
The best way to understand the process is by illustrating the RPGT computation in its totality:
The starting points in this process is to determine the “acquisition price” and the “disposal price” of the chargeable asset. But let’s first take a look at what constitutes a chargeable asset
A chargeable asset includes:
- real property, which is defined as any land situated in Malaysia, including any interest, option or other right in or over such land; or
- shares in a real property company. A real property company (RPC) is a controlled company (as defined under the Income Tax Act 1967) having at 21 October 1988, or at any later date, real property and or shares in another RPC, the defined value (“market value”) of which is not less than 75% of the value of its total tangible assets.
Paragraph 4 of Schedule 2 of the Real Property Gains Tax Act (RPGTA) states that the acquisition price of a real property is the value of the consideration in money or money’s worth given on or behalf of the owner wholly and exclusively for the acquisition of the asset together with the incidental costs of acquisition (professional fees, cost of transfer and advertising costs). From this amount, the disposer will have to deduct the following receipts that may have been received for the real property:
- compensation for any kind of damage ir injury to the asset or for the destruction of dissipation of the asset or for any depreciation of risk of depreciation of the real property;
- sums received under a policy of insurance fro any kind of damage or injury to or the loss, destruction or depreciation of the real property;
- any sum forfeited as a deposit made in connection with an intended transfer of the real property.
The point that the reader should note here is that the items stated in the bullet points above MUST BE adjusted from the acquisition price, which most people neglect to do.
Para 5 of Schedule 2 of the RPGTA states that the disposal price of a real property is the amount or value of the consideration in money or money’s worth for the disposal.This amount is further reduced by:
- any expenditure wholly and exclusively incurred on the real property at any time after its acquisition by or on behalf of the disposer for the purpose of enhancing or preserving the value of the asset (ie. renovation, extension costs, etc.), being expenditure reflected in the state or nature of the asset at the time of the disposal; The important point to note here is that the the expenditure has to be to reflected in the state or nature of the asset at the time of the disposal;
- the amount of any expenditure wholly and exclusively incurred at any time after his acquisition of the asset by the disposer in establishing, preserving or defending his title to, or to a right over, the asset; and
- the incidental costs to the disposer of making the disposal (eg. professional fees, cost of transfer and advertising costs).