Continuation from Real Property Gains Tax 101 (Part 1)
Pursuant to Paragraph 2, Schedule 4 of the Real Property Gains Tax Act (RPGTA), an individual is entitled to an exemption of 10% or RM10,000 of the chargeable gain on the disposal of a property, whichever is higher. This exemption applies to each and every disposal of property that an individual makes. This exemption is only available to individuals, so for this reason, it is always more tax-advantage if a property is purchased under an individual’s name as compared to a company.
Previously, this exemption does not apply to a part disposal of a larger chargeable asset. However, with effect from 1 January 2014, an individual who disposes part of a chargeable asset may claim a portion of the exemption of RM10,000 or 10% of the chargeable gain from such disposal, whichever is higher, allowable under that paragraph proportionate to the part of the chargeable asset disposed of, as determined in accordance with the following formula:
A / B x C
where A is part of the area of the chargeable asset disposed;
B is the total area of the chargeable asset;
C is RM10,000 or 10% of the chargeable gain whichever is greater.
Private Residence Exemption
The above is not to be confused with the once-in-a-lifetime exemption given to an individual (citizens and permanent residents) for the disposal of a private residence. This exemption is like a ‘Joker’ that an individual can play at any time, but only once in a lifetime. Therefore, an individual has to decide when to claim for this exemption, as one can never foresee the possible huge gain that a person may make on a future disposal of property. Besides, looking at the past trend of RPGT rates, there is huge possibility that RPGT rates may be further increased over the next few years, so therefore claiming an exemption for private residence in future, may be more beneficial than if it were to be claimed now.
If you make a bad property investment and happens to suffer a loss on the disposal of your property, don’t despair. The losses that you suffer on the disposal of that property can be utilised to set off against chargeable gains of your subsequent property disposals until fully utilised. For individuals, you will still be given the RM10,000 or 10% of chargeable gains exemption first before the losses are utilised against the balance of chargeable gains.
The RPGT Computation
While it is convenient for the common man to remember the effective RPGT rates of 15% for disposal of real properties within 2 years and 10% for disposals after 2 years and up to 5 years, it is also interesting to know how the effective rates are arrived at. It is important to know that the RPGT rates as per the RPGTA since the year 1995 has been as follows:
Through a complex mathematical equation effected by the application of the Real Property Gains Tax (Exemption) Order 2012 on the existing RPGT rates per the RPGTA, we arrive at the effective RPGT rates of 15% and 10% as mentioned above. It is important for the reader to realise here is that if the exemption order were to be revoked in future, RPGT rates would then revert to their original position, ie. ranging from 30% to 5%, depending on the holding period of the property.