Understanding the Real Estate Gains Tax
Whether you are a real estate investor, an owner simply looking to sell your current home to buy the home of your dreams, or a group of companies embarking on a business restructuring exercise, it is important to be aware of all of these. the costs associated with a real estate transaction, including the Real Estate Gains Tax (RPGT) in Malaysia.
RPGT is a form of capital gains tax levied on profits resulting from the disposal of real estate or shares of real estate companies (RPCs). Real estate is defined as any land located in Malaysia and any interest, option and other right in or on such land.
The effect of the definition of real estate ownership is that the RPGT can be levied on interest or property that amounts to less than full title to the land.
The RPGT law of 1976 has been amended several times over the years to meet the economic needs of the country. Currently, businesses as well as individuals who are citizens or permanent residents of Malaysia will be subject to the RPGT at the following rates:
> Elimination within three years – 30%,
> Disposal in the fourth year – 20%,
> Disposal in the fifth year – 15%, and
> Transfer after the fifth year – companies (10%), Malaysian citizens or permanent residents (5%). For non-nationals or non-permanent residents of Malaysia, the RPGT rate is 30% for assignments within the first five years and 10% for assignments after five years.
(Harvindar Singh explains that the RPGT exemption is also available for transfers of properties by Malaysian citizens in the sixth year or the following year after the date of acquisition when the consideration does not exceed RM200,000.)
Based on the short-term economic stimulus package or the Penjana package announced last year, Malaysian citizens are exempt from RPGT on gains from the disposal of up to three residential properties from June 1, 2020 to December 31, 2020. 2021.
The RPGT exemption is also available for transfers of properties by Malaysian citizens in the sixth year or the following year after the date of acquisition when the consideration does not exceed RM200,000.
The other main RPGT exemptions available to individuals are as follows:
> Exemption of 10,000 RM or 10% of taxable gain, whichever is greater,
> Malaysian citizens or permanent residents are granted a one-time exemption for the disposal of a private residence, and
> Donations between husband and wife, parent and child or grandparent and grandchild provided the donor is a Malaysian citizen. This exemption does not apply to transfers between siblings.
Transfers of real estate between companies of the same group for greater efficiency, or for the purposes of reorganization, reconstruction or merger could be exempt from RPGT if certain conditions are met and the prior approval of the Director General of Taxes is obtained.
For transfers of real estate that take place on or after October 12, 2019, the market value of the property on January 1, 2013 will be deemed to be the purchase price of properties acquired before 2013.
This would result in a higher cost base and lower profits, thus reducing the seller’s tax burden.
Incidental costs incurred in the disposal of property may be deducted in the calculation of taxable gains.
These would include fees for legal services, surveyors, sales commissions, etc. A common problem faced by many taxpayers is that RPGT returns are filed without considering ancillary costs, resulting in an increase in RPGT payable.
As a general rule, Malaysia does not levy any capital gains tax (Malaysia also does not have a capital gains tax regime) on the sale of shares, except for the resulting profits. from the sale of RPC shares.
A PRC company is a controlled company that owns real estate or shares in another PRC whose market value of real estate or PRC shares is not less than 75% of the value of the total tangible assets of the company.
As a result, shares of publicly traded companies are not considered to be shares of PRC because they are not controlled companies.
The incorporation of the RPC legislation into the RPGT Act 1976 with effect from 21 October 1988 was intended to fill a loophole that previously existed, according to which taxpayers could avoid RPGT by ceding shares in the company instead of selling the real estate owned to the society.
However, according to the RPC concept, stocks are considered taxable assets subject to the RPGT.
Some interesting anecdotes – in a decision of the High Court of Malaysia, it was ruled that the shares of a property development company would not be considered as PRC shares since the development land held by the property developer is subject to the income tax and not the RPGT.
The High Court ruling was based on the rationale for introducing the RPC concept, which was to avoid âmischiefâ by taxpayers to avoid RPGT.
The Court of Appeal overturned the High Court ruling, ruling that a real estate development company will be considered a PRC based on the literal interpretation of what constitutes real estate under the RPGT Act of 1976 , as real estate includes land located in Malaysia, notwithstanding that the development land itself is subject to income tax and not to RPGT.
In a merger and acquisition exercise that involves the transfer of shares, it is important to assess whether the transferred shares are RPC shares and subject to the RPGT.
There are a myriad of issues to be aware of when dealing with RPGT, an interesting area of ââtax law in itself.
Harvindar Singh is Managing Partner of Harvey & Associates. The opinions expressed here are his own.