Tax shadow looms over Malaysian property sales

Source : Business Times – 4 Dec 2009

Sellers rushing to beat deadline face approval hurdle

PROPERTY sellers rushing to dispose of their real estate in Malaysia in order to avoid paying real property gains tax (RPGT) could find their efforts thwarted should their disposal require government consent.

This is because obtaining official approval could push the sale date to one after Dec 31 – the last day before the reintroduction of RPGT, a tax specialist said.

KPMG Tax Services executive director Tai Lai Kok told BT that many transactions involving property could require state approval.

Under the RPGT Act, where a contract for the disposal of an asset is conditional and the condition is satisfied (by the exercise of a right under an option or otherwise), the acquisition and disposal of the asset shall be regarded as taking place at the time the contract was made.

But there are two exceptions: where the acquisition or disposal requires the approval by the government or an authority or committee appointed by the government, the date of disposal shall be the date of such approval; and where the approval is conditional, the date of disposal shall be the date when the last of all such conditions is satisfied.

However, the RPGT Act does not define the term ‘government’ – whether it refers to the state or federal government. In any event, because land matters come under state control, a number of these transactions could invariably require state approval. ‘Lawyers would need to review the individual title to see what restrictions and caveats there are to ascertain if government approvals are needed.’

Lawyers said that the time taken for states to give their approval varies, some reverting in a month, and some up to six months.

‘If the property is already owned by a foreigner, it is likely the transaction would require state approval,’ Mr Tai said, adding that ‘conditional contracts’ had become an issue only because of the short ‘window period’ before RPGT is reintroduced.

He noted that the RPGT Act had introduced government approvals only in 2006.

Shortly after that, former prime minister Abdullah Ahmad Badawi allowed a blanket exemption on RPGT effective April 2007 to boost the sector, so the issue was not fully explored.

Moreover, the Finance Ministry and Inland Revenue Board had not come up with a clear indication as to how the conditional contracts apply. ‘There is a bit of a question mark there,’ Mr Tai noted.

The government is expected to rake in RM500 million (S$204 million) from RPGT next year when the tax is reintroduced at a flat 5 per cent, notwithstanding the holding period.

Because the tax was supposed to curb speculation, its across-the-board application has upset those who have held their properties for a long time – some for decades, some stretching a few generations – as the value of their assets would have greatly appreciated.

Property players have also criticised the government’s reversal in policy after less than three years as inconsistent and a deterrent to foreign investors.

This week, Gerakan – a component party of the ruling federal coalition Barisan Nasional – urged the government to scrap the proposal to reintroduce RPGT as it is ‘unfair and inappropriate’ since it would impinge on all transactions, including those not of a speculative nature.

‘In view of the serious consequences from the tax especially on the middle and low income groups, we appeal to the government to cancel the proposed 5 per cent RPGT under Budget 2010.’