In view that the Real Property Gains Tax rates will be increased substantially due to the Budget 2014 proposals, perhaps it’s time for the property speculator to rethink his strategy.
On 25 October 2013, our Prime Minister cum Finance Minister, Datuk Seri Najib Tun Razak, tabled the much-anticipated Budget 2014 proposals. Much-anticipated by many due to the expected adverse changes to the Real Property Gains Tax (RPGT) laws to curb property speculation and the announcement of the introduction of Goods and Services Tax (GST) in Malaysia.
Along that front, our PM didn’t disappoint us, as among other proposals, those changes were among the major highlights of revenue collection measures that became the talk of the town of late.
The proposed changes to the RPGT rates announced during the Budget 2014, which are to take effect from 1 January 2014 for disposal of real properties and shares in real property companies, are as follows:
Many, especially property speculators, complained that the RPGT rates doubling from its current position is very high and will adversely affect their property investment decisions.
There’s no need to press the panic button!
In my humble opinion, RPGT is only part of the equation as far as any property investment decision is concerned. No matter how high the RPGT rate is, speculation in properties will still occur so long as the return on investment is attractive enough. After all, real estate investment, after deducting RPGT at its highest rate of 30%, can still give attractive returns compared to any other form of investments which are available in the market.
Then again, are the proposed RPGT rates really that high?
It is interesting to note that the proposed changes to the RPGT rates are nothing more than, to a great extent, reverting the RPGT rates to its prior position in 1997. In 1997, the RPGT rate was 30% for disposal within two years after the date of acquisition of a property, which will now be extended to three years. A comparison of the RPGT rates for individuals (citizens and permanent residents) then and moving forward in 2014, is illustrated below:
The proposed RPGT rates don’t even come close to the highest RPGT rates that the country, in the history of the Real Property Gains Tax Act 1976, (RPGT Act), has experienced. When the RPGT Act was first introduced, the disposal of a property which occurred within two years after the date of its acquisition was subject to RPGT at a hefty rate of 50%!
So now that we are faced with the RPGT regime in 2014, property investors, especially the speculators, will have to better plan their taxation strategy in order to reduce their tax exposure on their property investments as best as they can, legally.
It must be remembered that there are TWO laws that govern property transactions in Malaysia and they are:
- The Income Tax Act 1967; and
- The Real Property Gains Tax Act 1976.
Under certain situations, where the badges of trade test is fulfilled (refer to my earlier article on ‘Taxation of Property Transactions: Income Tax or Real Property Gains Tax?’), a disposal of a property may be subject to Income Tax instead of RPGT.
So all I can say to the property speculators/flippers is this: you have to better plan your investment strategies now. You may have to own up to the fact that you are trading in properties and consider putting such properties in a Sdn Bhd or a LLP where the tax is lower, when assessed as a trading activity under income tax. By setting up a separate entity such as the Sdn Bhd or LLP, you will also shield the other properties legitimately held for long-term investments, from being exposed to income tax implications as well.u
Tax planning therefore starts even before you buy your property and not only when you decide to sell your property as you stand to save the most taxes when you develop a tax plan that best suits your investment strategies. With proper planning, property investors and speculators, can save themselves a considerable amount of money in taxes.
For my former students, you will soon have access to the graphical illustration of the income tax versus RPGT rates and the rationale on how to determine which properties should be included as a ‘trading activity’.
Do look out for my next article, which is strictly for members (ie. my students) only!
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